Netflixed — Book Review & Quotes

Review

My first job out of undergrad was working at an investment firm called Technology Crossover Ventures (TCV). One of, if not their most successful investments was an early investment in Netflix. There was always a belief in the power of enabling access to content. What I don’t think even Netflix saw in their future was the ability to kick off the revolution of consumers paying for access instead of ownership in a digital world.

Highlighted Quotes From The Book

“The official story [of Netflix’s founding] is simply more elegant and useful [than the truth], and everything at Netflix, from its 2,180 corporate employees (who turn over at an annual rate of 20%) to the scripts followed by its executives on quarterly conference calls, must serve the company’s goals or be eliminated. After all, discipline and focus account for how a tiny, broke Silicon Valley company slew three giants of the $8 billion movie rental world (the Blockbuster, Move Gallery, and Hollywood Video chains), warded off Amazon, and forced movie studios into the digital age.”

“Hastings seemed to guide his company by stars invisible to others, often abandoning solid revenue sources or related businesses to pursue the one thing he was determined to do better than anyone — rent movies online.”

“Here Randolph learned that overnight delivery coupled with superior customer service translated into increased sales and better retention. He partnered with up-and-coming overnight shipper Federal Express and targeted zero tolerance for shipping errors. At the end of each day his customer service workers called to apologize to people whose orders had not shipped. ‘Every customer you get, you’re never going to lose them’ was Randolph’s mantra.”

“Randolph was acutely aware of the importance engaging consumers’ emotions, and he wanted the site to be a personal experience, as if each customer opened the door to find an online video store created just for him or her.”

“Hastings would often say in interviews years later that he had had the good fortune to remedy at Netflix the mistakes he made as a young CEO of Pure Atria. Those lessons included ruthlessly weeding out bureaucratic habits that slowed agility and focusing on one or to core competencies, but it apparently did not extend to treating his employees with more care.”

“His new colleagues at Netflix observed that, along with his brilliance and much needed decisiveness, Hastings brought an uncomfortable level of process and formality that began to wither the little company’s spontaneous creativity and cheerful disorder.”

“Antioco had an almost languid demeanor that could be misread as inattentive, until he pulled one of his startling, bet-the-ranch moves. He was a gifted storyteller and a good listener, the latter a quality that won him tremendous loyalty from his employees and the customer bases of several major U.S. corporations he had turned around by the time he landed at Blockbuster at forty-six.”

“But less than a year later — after completing a three-month trial — the companies broke off the joint venture, with EBS complaining about the quality and selection of the movies and saying it wanted to pursue its own offering. It turned out that EBS’s infrastructure did not exist.”

“McCarthy sat steaming in Netflix’s conference room. The earnings call he had just presided over had ended, and the Netflix team had clicked onto Blockbuster Online’s beta test as soon as it was over. The site was practically identical to Netflix.com. They had copied it all — the user interface, the back-end functions, even the Queue. McCarthy had to hand it to them — no one at Netflix had perceived Blockbuster Online as a threat. But Netflix was not competing against bloated, slow-moving technologically inept Blockbuster. Netflix was competing against itself — its own patented business model had been turned against it.” — ala Facebook and Snapchat

“‘Whenever a competitor says that next year they’ll have a better offering, to me that’s a sign of weakness, because you’re telling competitors what you’re going to do, and you don’t have the service to offer consumers,’ Hastings said a few days later.”

“Evangelist set the tone for their work ethic and attitude: They were not Blockbuster crushing a smaller company; they were a startup trying to catch a technologically superior and far more experienced competitor.”

“Intellectually he knew the brand was damaged each time a customer got into an argument with a Blockbuster cashier over unexpected late fees, especially as it frequently happened in front of a long line of customers waiting to check out. But the idea of wiping out an important source of revenue when store sales were declining made his gut churn.” — How do you burn profitable boats in order to focus?

“McCarthy announced that he would abandon his plan to leave Netflix at year’s end. He would instead stay on as CFO for at least two more years, and possibly indefinitely, until Netflix had weathered the competitive squall. ‘There are very few challenges as exciting as the one we face, if in fact Amazon enters the marketplace,’ McCarthy said. ‘This is going to be epic, and it will be part of the lore of Silicon Valley. Besides,’ he added later, ‘you don’t leave your friends in the middle of a knife fight.’”

“Netflix’s data also showed that an online service had to maintain a minimum level of marketing to attract enough subscribers to replace those who cancelled. Cut advertising and public awareness campaigns below that magic number and the base would melt away.”

“During the second earnings call, Ross and Swasey kept a tally of the number of times Hastings mentioned Blockbuster — nearly three dozen — and compared it to his mentions of Netflix which came in at about half that number. They showed him the scorecard at the end of the call, and Ross remarked, ‘A leader doesn’t do that.’ It was the first and only time he had to tell Hastings to focus on selling his own brand.”

“But Hastings was a great interview, simply because (to Swasey’s chagrin) he readily answered every question put to him clearly and succinctly, and he was better informed than many tech executives about his own business and the industries touching it.”

HackingNetflix — Hacking has more of a negative connotation, but it would be interesting to have a place where people could go to deconstruct the businesses they love or hate. In its heyday HackingNetflix was like Stratechery for just Netflix

“As the online rental price war heated up, Kaltschnee wanted a way to communicate directly with Netflix to answer the hundreds of questions, comments, and tips he was getting about the competing services. The trouble was, Netflix wasn’t interested. He couldn’t even get on its media list. At first he took the rejection in stride, noting that the company’s press materials were available from other sources. In mid-2004 he again approached the company, asking for information for a proposed Ask Netflix column he was putting together for his now ten thousand monthly visitors. He also asked for a tour of a Connecticut distribution center, promising ‘to keep this friendly (I do like you guys).’ The company’s response was three lines long — again turning him down and wishing him luck with site. After much soul-searching, Kaltschnee shared the emails with readers. ‘I know I’m not alone,’ he posted a day or two later. ‘It’s hard to get companies to take bloggers seriously. I really like Netflix, but they are slowly withdrawing, closing themselves off from their customers (they recently removed their phone numbers from the site.) Instead, companies should be embracing these online communities, comprised mostly of the highly desired ‘early adopters’ that evangelize products to the general population.’”

“Hastings admitted to reading HackingNetflix, but he cautioned his executives against taking it too seriously. It overrepresented people with a passionate interest in Netflix, he said. While this was probably true, Kaltschnee thought it was a mistake for the company to discount feedback from its most loyal followers; the way they used the Internet had a way of amplifying things until they were impossible to ignore, as Netflix’s subsequent attempts to cancel two popular Web site features showed.”

“When people are really passionate about something, you have to sell them the story of why you’re taking it away, and how that will make their lives better someday,’ he told Swasey.”

“Was Hastings learning anything from the extraordinary access he had to his customers through forums like HackingNetflix? He hoped so, but he was starting to doubt it.”

“Movie Gallery chairman and CEO Joe Malugen made it clear in an earnings conference call in August that he had no interest in entering the overheated online space. ‘The online delivery model requires patience and days of planning and waiting. We know that the online model does not meet the needs of most of our consumers, because for most, renting a movie is not a carefully planned activity,’ Malugen told analysts. ‘I continue to believe that online rentals are a niche business that will appeal to only about 5 percent of the market.’” — Confusing current behavior for changing behavior

“Antioco described the bricks-and-mortar rental industry as ‘in the tank,’ and agreed that movie studios had a legitimate cause to worry, that the disastrous year for both theatrical and home rental revenues portended an upheaval to come.” — feels like Antioco saw the writing on the wall but wasn’t able to execute against activist investors, etc.

“Hastings and McCarthy watched the download services rise and implode, believing that a well-functioning, inexpensive streaming service could win against them but convinced that several fatal flaws had to be worked out before digital delivery could succeed.” — build a business on trends and rapidly advancing technology

“Analysts generally liked the timing of the new offering as an answer to Total Access, but tech writers whined that tethering viewers to the Internet to watch a movie made Instant Viewing of limited value. And they brought up a valid point: How many subscribers would want to watch something as long as a movie or TV show on a small screen?” — crazy how wrong most people are

“Over the years, Hastings had augmented his software engineers with mathematicians, to improve the algorithm, and had tinkered with it extensively himself. The idea of boiling down human behavior and tastes to a set of equations fascinated him: Was it really possible to capture so much chaos within the confines of numbers?”

“The Cinematch algorithm represents the marriage of marketing and technology that conferred such extraordinary success on Netflix. Because consumers found what they wanted among a limited DVD library, they left the video store and followed Netflix online. The trust they placed in the company — fostered by Randolph’s intuitive user interface and peerless customer service and coupled with Hasting’s beautiful algorithms — allowed it to smoothly shift the movie rental paradigm to streaming, where so many others had failed.”

“Hastings had derided Blockbuster Online as ‘technologically inferior’ to Netflix in conversations with Wall Street financial analysts and journalists, and he was right. But the young, hard-driving MBAs running Blockbuster Online from a Dallas warehouse had found the one thing that trumped elegant technology with American consumers — a great bargain.” — the magic of ‘good enough.’