SANTA CRUZ, California -- Long before binge-watching, the streaming wars and “Netflix and chill,” there were two guys barreling down Highway 17 — the California roadway that connects Santa Cruz to Silicon Valley — trying to come up with the next big thing.
One was Marc Randolph, an entrepreneur and marketing specialist who had co-founded a startup, Integrity QA. The other was Reed Hastings, then the head of the software company Pure Atria.
It was 1997. Randolph, whose startup had been acquired by Pure Atria, did most of the pitching. Customized dog food, customized baseball bats, customized shampoo — all sold over the internet and delivered by mail.
Hastings was the one with the cash and the ability to shoot down ideas without worrying about hurt feelings.
They flirted with the notion of challenging Blockbuster Video with a mail-order videocassette business, only to decide that mailing VHS tapes would cost too much. Finally, they thought they had something: DVDs, sold and rented online and delivered to customers by mail.
Although few people had DVD players at the time, they forged ahead, with Randolph as the chief executive and Hastings as the chairman backing the operation. Possible names for the company included TakeOne, NowShowing and NetPix. Finally, they settled on NetFlix, which later became Netflix.
The tale of how the company managed to take on Blockbuster Video and survive the bursting of the dot-com bubble is the subject of Randolph’s “That Will Never Work,” a book to be released on Tuesday by Little, Brown.
Part memoir, part guide for the budding entrepreneur, it’s the story of Netflix as scruffy startup, from those brainstorming sessions to the height of its red-envelope days, before it spent billions on original content and had 151 million subscribers worldwide.
“That Will Never Work” also does away with the handy origin story that has been mythologized by Netflix since its inception: that Hastings founded the company out of frustration over the $40 late fee charged by Blockbuster for his return of “Apollo 13.”
“People want me to be mad at Reed’s story,” Randolph said in an interview, “and I go, ‘No, not at all, it’s a good story.’ I’m sure it’s the same as Newton, who didn’t really come up with gravity when an apple fell on his head.”
On a warm summer day, he was on the porch of his house in Santa Cruz, part of a 50-acre estate with its own vineyard. Seated with him were his wife of 32 years, Lorraine, and a spirited black lab, Indi. The Audi Q7 in the driveway has a vanity plate that reads NTFLX, and the Toyota Tacoma in the garage has one that says NETFLIX.
Randolph, 61, left Netflix in 2003, five years after Hastings had taken a hands-on role. In the book he says his skills were more suited to a company’s startup days than its period of success.
“Unlike me,” Randolph writes, “Reed is not only a phenomenal early-stage CEO — he’s as good (or better) as a late-stage CEO.”
Employees at Netflix in its early days had no set hours and no vacation allotments. The same is true today. There was also a corporate culture of “radical honesty” that also perseveres. Employees evaluate one another and are encouraged to weigh in on strategic decisions. Salary information is transparent.
Randolph went to Silicon Valley in the 1980s after growing up in Chappaqua, New York. His father was a nuclear engineer-turned-financial adviser. His mother ran her own real estate firm. Marketing was in his blood. His great-uncle is Edward Bernays, a nephew of Sigmund Freud and a man often called “the father of public relations.” Bernays is Randolph’s middle name.
Randolph describes an evening in 1998 when he got a big dose of Netflix’s radical honesty. It happened after a botched investor pitch and a promotion deal with Sony that went horribly wrong. Hastings asked to see Randolph alone and subjected him to a PowerPoint presentation detailing the reasons he was no longer fit to remain chief executive.
In the book, Randolph describes what he said in reaction to the surprise presentation: “‘There is no way I’m sitting here while you pitch me on why I suck.’”
Hastings closed his Dell laptop. By the end of the talk, Randolph was bumped down to president, and Hastings was the new chief executive. As part of the demotion, Hastings persuaded Randolph to give up some 650,000 stock shares, which reduced his Netflix stake to 15 percent.
“Doing it with a PowerPoint perhaps wasn’t the most empathetic gesture,” Randolph said with a laugh. “But he was right.”
The episode, as described in the book, helps form a portrait of Hastings as someone whose bluntness results more from a sure sense of what a business needs than from an inner ruthlessness.
“What I really want from the book is to paint Reed as a real person,” Randolph said. “I hope it comes through that I have this tremendous respect and affection for him, as opposed to bitterness. Most people wouldn’t have had the strength to say that. But he recognized it was the right thing for the company.”
Hastings declined to comment for this article, beyond this statement: “Marc’s a terrific writer and storyteller and he was an even better co-founder and partner.”
Randolph also devotes many paragraphs to an in-house catchphrase at Netflix, “The Canada Principle,” which he and others invoked whenever the company seemed in danger of getting distracted from its main focus.
The principle stemmed from an early decision not to mail DVDs to Canada. Randolph and others argued that the effort would be more of a headache than it was worth, partly because of complications brought on by having to deal with two currencies.
The Canada Principle also figured into the company’s later decision to scuttle DVD sales, although they were profitable, in favor of rentals, which seemed like the future. It came into play once again in 2000, when Netflix stopped allowing non-subscribers to rent DVDs.
Today the principle seems to have guided Netflix’s reluctance to give in to the demands of major theater owners, who demand exclusive rights to the movies they show for roughly 90 days. Last month, Netflix showed that it was keeping its focus on its subscribers when it decided to release one of its biggest films, Martin Scorsese’s “The Irishman,” in independent theaters and those run by small chains, a move that enables the company to stream it 3 1/2 weeks after the movie’s premiere.
“It fits with that pattern of saying you pick what you’re good at and you focus on that,” Randolph said. “You pick what your customers want, not what your entrenched business model may require you to do.”
Randolph no longer has any connection to Netflix. He still owns some shares, mainly for sentimental reasons, he said, and he pays a monthly subscription fee just like everybody else. He said he’s partial to “Ozark” and “Narcos,” and insisted that he had no opinions on Netflix’s relationship to Hollywood, its debt load or its path to profitability.
His estate, which he bought for under $1 million in 1997, according to his book, now serves as the informal headquarters for his corporate coaching business, allowing him to keep a hand in the next possible big thing. Seven years ago, he joined the Santa Cruz data analytics firm Looker as employee No. 3 with the title ABC — Anything But Coding. In June, Google bought Looker for $2.6 billion.
Does he ever miss the old job?
“Probably the way you miss being on vacation in Hawaii,” he said. “There are elements you are extremely fond of, but if you had to do it all the time, you might say, ‘This isn’t exactly what I dreamed about.’”
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