Interview with Netflix co-founder Marc Randolph
Netflix’s first CEO talks about ideas validation, taking on an entrenched competitor, and the future of video
Marc Randolph is a veteran Silicon Valley entrepreneur, advisor, and investor. As co-founder and founding CEO of Netflix, he laid much of the groundwork for a service that’s grown to 150 million subscribers and fundamentally altered how the world experiences media. He also served on the Netflix board of directors until retiring from the company in 2003. Marc is the author of the national bestseller That Will Never Work, which tells the real-life, totally improbable story of Netflix’s early days.
Marc spoke with Storius, reflecting on his approach to business ideas validation, starting a business in a crowded market, and the future of the film industry.
STORIUS: In your book, you recall going over countless company ideas with Reed Hastings back in 1997. Before one of these ideas became Netflix, you had gone through options like personalized shampoo and customized dog food. What do you think is the key for starting with such a broad set of potential businesses and zeroing in on something as viable as the idea of Netflix?
The point of starting out broad and narrowing in is that at first, every idea seems equally good. It’s only by researching and testing each one that you find its flaws, its strengths, its opportunities. And when we came up with the idea of video rental by mail — the precursor to the Netflix you know today — we had no idea if this was a viable idea or not, so we did the only thing we could think of: we tried it.
DVDs were impossible to come by in the spring of 1997, so we bought a used music CD, stuffed it in an envelope, put a 32-cent stamp on it and mailed it to Reed’s house. The following day, Reed picked me up for the drive to work with an unbroken CD that had gotten to his house in less than 24 hours for the price of a first-class stamp. That’s when we knew that this idea might actually work.
STORIUS: One of the fascinating stories you share in the book is how a false positive played a key role in the decision to build Netflix. When your test CD arrived intact, you concluded that mailing was safe. It wasn’t until months later that you learned that the local mailing process was much gentler than the out-of-town one. A disc mailed to another ZIP code could have arrived cracked, and Netflix might never have been launched. In light of that example, what are your thoughts on striking the right balance between data and gut feeling when evaluating the viability of business ideas?
I’ve learned that when you’re doing something totally new (and DVD-rental-by-mail certainly met that definition), you can’t really use data to tell you what to do. But you had better be using data to know after the fact whether the thing that your intuition suggested you try is actually any good. The process toward finding a solution to a hard problem is not randomly throwing darts; it’s an intuitive process where each new hunch is informed and guided by the tests that went before it. As to the false positive on the DVD test … well, that mostly speaks to how big of an ingredient luck can be in the success of any company.
STORIUS: When it comes to building a new business or product, what do you consider the key characteristics of a strong and inspiring vision?
I’ve always preferred that the guiding principle of a start-up be solving a problem because that’s such a wonderful north star to follow. Your journey is equal parts understanding the problem more thoroughly and various approaches to solving it. Ideas come and go — but problems are there forever.
STORIUS: What’s your advice to entrepreneurs trying to start a business in a crowded market with some very strong dominant players (the position Netflix found itself in at the beginning)? What aspects of building a business should they focus on in order to increase their chances of success?
I think the key is finding your niche. If you consider our competitors “at-home entertainment,” then yes, we were going against Blockbuster and all the family-owned video stores across the country who owned the market share. But that’s one of the reasons we chose to start as DVD rental (rather than VHS). We knew that by focusing on DVD only, it would give us a lengthy window before Blockbuster or any other rental companies made the decision to start stocking DVDs.
If you’re going to go up against an entrenched competitor, you had better choose a segment that your competitors are overlooking, or even better, be offering a product or service that they are unwilling or unable to provide. You’re going to get so many things wrong in those early years that you need to have a tremendous market advantage in your niche to allow you to survive while you figure things out.
STORIUS: What’s your perspective on striking the right balance between a long-term vision and fast changes? Where do you draw the line between the essence of a company and its business strategy?
It’s important that an entrepreneur is able to do both at the same time. Doing a start-up is like driving down a rocky dirt road, with potholes, false turns, trees across the road, cliffs on one side, and no guardrails … so you had better be holding tightly to the wheel and looking intently at the road in front of you. But every so often you do need to lift your eyes up and look toward the horizon and ensure that you’re steering toward a place you want to go. Quite frankly, I don’t really think there is much of a difference between the essence of a company and its business strategy.
STORIUS: You mentioned that you and Reed Hastings received over a thousand rejections as you tried to get investors interested in Netflix. Your idea was met with skepticism, dismissal, and, in one case, barely contained laughter. Two decades later, Netflix is generating over 20 billion in annual revenue. What made you believe so strongly in your idea and not give up on it despite all the rejections?
We never imagined that Netflix would achieve the size, scale, and success it has. We were just trying to solve an interesting problem. We were lucky that even when we did have setback after setback, those setbacks were always balanced with just enough success for us to feel like we were making progress. There were certainly discouraging times, but in many ways, that just made us fight even harder. Certainly, every entrepreneur gets to a point where they have to take a hard look and decide if it is worth continuing the uphill battle, and for us it always was.
STORIUS: Another thing that has changed 20 years later is Netflix’s competition. After pioneering streaming for years, Netflix is now facing plenty of strong competitors, from Amazon Prime Video to the recently launched Disney+ and soon-to-be-launched NBC’s Peacock. At the same time, switching from one content provider to another — or finding other entertainment options — has never been easier. What do you think are the key factors that will determine the winners and losers in this race to capture consumers’ attention?
The great thing about the “streaming wars” is that there really are no winners or losers. Consumers are excited to have so much content at their fingertips, especially right now. There doesn’t need to be one “winner,” instead we are seeing a handful of companies creating really great content. The more companies that we have in the space, the better for the consumer.
Ironically, the more people there are in the space, the stronger it makes us because competition forces everyone to be on their toes and to make sure they are delivering what customers want, whether that’s great content, a great app, great pricing, great customer service, etc.
The real competitor here — for all of us — is linear TV. Netflix is still less than 200 million subscribers, which seems like a lot until you consider that there are multiple billions of internet-enabled households out there.
STORIUS: Netflix began as a content distributor and later became a producer. At the same time, companies such as Disney are making the opposite move. Essentially, regardless of the starting point, the key players in the streaming space seem to gravitate toward a direct-to-consumer model with high-quality original content and powerful personalization as its foundation. How do you think this trend will play out? Does it mean that the days of pure distributors are numbered? Could this change result in any negative effects on consumers?
Only time can tell what effect direct-to-consumer streaming models will have on pure distributors. One thing that history can teach us though, is that if you haven’t adapted your business model to accommodate the new way that customers are viewing content, then you aren’t likely to keep up.
We saw this with Blockbuster — they refused to adapt to the new way that consumers were excited to get their content, and it ended up bankrupting them. It’s pretty clear to me that internet TV is the future of content, and if cable companies and television networks aren’t willing to go all-in on this new model, they are likely to face serious financial consequences. This shouldn’t affect the consumer too much in the long-term, as just like the transition from brick-and-mortar to online, it has been slow enough to where many consumers have already adapted to a post-cable world.
STORIUS: One of the side effects of the ongoing coronavirus crisis is that people are spending more time at home and avoiding public places. Even those who prefer moviegoing are now more likely to watch movies at home. Do you think this adjustment in consumer behavior may result in even more dramatic changes in the film industry, dethroning the box office and making streaming a viable release channel for new releases?
If you are a studio, there aren’t many things that can focus your mind quite the way losing 100 percent of your revenue overnight can do, and we’re already seeing the studios reacting in a number of interesting ways.
They are postponing releases, which we saw with the Bond thriller No Time to Die, which was moved to November. They are moving things up, which we saw with Frozen II, which Disney+ released to streaming a full three months ahead of schedule. But perhaps the most dramatic change is a shattering of the traditional three-month US theatrical window which preserved the “best” content for a theatrical release. For instance, The Invisible Man was getting ready for a long theatrical run, and now it’s available to rent only way ahead of schedule.
It will indeed be interesting to see if post-COVID the studios return to their old model, or whether consumers, having seen the brave new world, will ensure that these new models remain into the future.
STORIUS: Your book has been receiving praise from readers and reviewers alike. Any plans for a new book?
As I’m fond of saying, “Nobody knows anything.” I have a few big things in the pipeline, but your readers will have to follow me on social media to find out what they are. We’re not quite ready to announce anything yet!
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