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- Unheard Roots of Netflix (PT.3) 🍿
Okay, so far you know how the Netflix founders met, how they came up with the idea, and how they built Netflix V1.
Now it’s time to cover the war with Blockbuster, how Netflix beat a giant’s ass, and how it ended up killing a part of its business to focus.
If you haven’t yet, you better read Part 1 and Part 2 first.
Breaking Even, IPO, & War with Blockbuster ⚔️
So in 2002 Netflix finally managed to break even between how much it was earning and spending.
They immediately decided to IPO with Paypal and another tech company in the same week and went public for 7 bucks a share.
The IPO put Netflix on Blockbuster’s radar and in 2004 Blockbuster started coming after the DVD market.
“Blockbuster realized after we went public that we were going to be a real threat. And they geared up an effort. They launched in 2004 and from 2004 to 2007 we had a fun, scary epic battle with Blockbuster.”
This terrified the Netflix guys as they had no idea how to fight against a company with deeper pockets and a bigger brand.
“They [Blockbuster] had a huge advantage, they were you know 15 or 20 times larger than us.”
The Art of War 🎯
The Netflix team did everything to stay alive during the war.
They even broke their business down to the molecules of their envelopes to ensure they had superior service.
“It took us you know, years of working on the red envelope that you now see [Quote is from 8 years ago]. Went through, you know, 50 different variations of the red envelope and scale testing. We learned more about polycarbonates under stress than you ever want to learn.”
The only thing that really made Netflix special was its fulfillment rate, which was 98% compared to the 89% of Blockbuster. But this was too abstract for consumers.
So the Netflix team also decided to expand their features to give themselves a competitive advantage in the war with Blockbuster.
They found 4 ways to go about differentiating Netflix from Blockbuster:
Turning movies at festivals into DVDs to sell
Building a social network only for Netflix customers
Selling second-hand DVDs
Placing ads on the Netflix website
Winning the war 🏆
Why did I spend this much time talking about the war with Blockbuster?
Because there is a huge lesson for all small startups here who are fighting against larger competitors.
Remember the four things that Netflix did to differentiate itself? Well, that was a horrible idea.
“We went through these waves of battles in 06 and 07 and in the end we won and they [Blockbuster] ended up closing down their online thing and two years later going completely Bankrupt. But we looked back and none of those four efforts made any contribution to our victory.”
They ended up shutting all of them down and those efforts wasted precious time & effort.
“One by one we had closed them down along the way. Every single one of those four. And so in hindsight, we realized when attacked we should retreat to do the core better and not try to broaden the surface of attack”
Getting into streaming đź’»
Good news? Blockbuster had lost. Bad News? Now the DVD business was being disrupted.
Youtube had launched its MVP in 2005 and online streaming was now affordable and accessible.
Netflix founders decided to venture into online streaming in 2007 and never looked back - they were sure it was the future.
One of the craziest things they ended up doing was shutting the DVD side of their business side despite it generating 40~50% of revenue for the company.
“In terms of business it’s a really courageous thing that many times we were willing to walk away from one business model to jump to a new one because we saw the writing on the wall that you had to go where the customers wanted to go.”
Key Lessons from Netflix đź“š
F*ck the MVP, build a minimum unviable product*
Marc Randolph absolutely hates the idea of an MVP or long trials, he is a huge fan of testing something as cheaply & quickly as possible.
“It doesn’t make a difference how crappy it is [your product] because if it’s a bad idea then these perfectly crafted two month tests aren’t gonna make them into good ideas. But if you’ve got even a glimmer of something that is going to resonate with a customer then they don’t care how bad it is.”
Your product can be as crappy as possible, if it fulfills a genuine demand it will get the attention of customers.
“They [the customers] will reboot the site over and over again, they’ll keep trying the links, they’ll phone you, they will find your unlisted address and knock on the door and they will tell you as clear as day this is what’s working and this is what you need to fix. And you never discover those things without trying hundreds of things”
Commit to deliberate iterative & break-through testing
Marc Randolph learned there are two types of tests when he was a direct marketer.
“There’s really two kinds of tests you need to do. There’s an iterative test and there is breakthrough testing. And you need to be doing both of those at the same time.”
Iterative Testing: Changing one thing a little bit each and every time to see if the tweaked version does better or worse (i.e. changing the color of the envelope from blue to red).
Can usually be reversed and isn’t much of a risk.
“You begin to get an inkling of what might work and you’re constantly tweaking it and that kind of testing comes from I need to sign people up and now I’m trying to figure out ridiculous things. Should I have two screens for asking for their address and credit card or should they each be on different screens.”
Break-through Testing: Trying something completely new (i.e instead of renting DVDs, allowing customers to buy them).
Bit of a risk and might do permanent damage if it goes wrong
“But at the same time, you got to be doing breakthrough things. You gotta be trying brand new approaches because the wonderful thing about internet testing, the wonderful thing about direct marketing is that you can test a million different things and the wonderful thing is you know exactly that the blue envelope does better than the red envelope.”
Some of the early testing & trials in Netflix consisted of iterative trials like buy two get one free campaigns, punch cards, etc.
But at the same time, they were also trying crazy breakout ideas (which ended up helping them build Netflix V2 because one of their breakout ideas was hopping on the internet streaming wagon in the early days of streaming)
Don’t be afraid to balance family life with startups
“I knew I didn’t want to be on my 6th startup and 6th wife.”
Marc made intentional effort to always go on a date night with his girlfriend when he was building Netflix.
He would leave the office exactly at 5 pm every Tuesday and not respond to any calls because he was going on a date with his girlfriend.
“I was stubborn you know I said listen if there is a crisis we’re going to solve it by five and if you absolutely have to talk to me we’re gonna have to talk to in the way of the car.”
You might think he is crazy for doing this in the early days.
“But the cool thing is that after a few months of being an absolute hard ass about this it stopped happening which is people realized Marc is serious about this and they stopped asking.”
It worked! And Netflix turned out to be fine despite Marc taking time for his family in the earliest days.
Just one more thing…
You might be wondering where the heck I’m getting this information and quotes from.
Here is a playlist I made with every single interview I could find of Reed Hastings & Marc Randolph
These videos are my only sources.