Netflix's Early Years

you know. In the previous episode, I covered the founding of the company and the challenges that they face just getting it up and running, going from the ideation of what Netflix would be to building an actual working business, and today we're going to continue that story. Less than half a year after Netflix's website went live in the spring of the company was making about a hundred thousand

dollars in revenue per month. Now that's not profit, that was just revenue, but it did push Netflix into being, at least in theory, a million dollar company. You know, if they bring in a hundred thousand dollars per months, you multiply that by twelve months, you realize, oh, that's one point two million dollars. That's pretty impressive. And the

company wasn't even six months old yet. The model Netflix used meant customers would rent films for four or five dollars per title, and then they would keep them for a week. They could also opt to purchase a title that they liked. They could end up buying it for a thirty PC discount and just keep the DVD. The company had rented out about twenty thousand DVDs in the first four months alone, so things were going pretty well. The development team was hard at work building new features

for the company. The big one was what would become called the Q as in the line, the que that would order titles customers had expressed interest in but had not yet rented, so they could create a list of titles that they were interested in and even prioritize that list, put a movies they more they wanted to see more towards the front of the queue and the ones that they wanted to see, but there wasn't as big a

sense of urgency towards the back. That would be something that the development team would work on for a couple of years before it was really ready to roll out in full form, but it became a foundational element of what Netflix would be, and that The work on the queue dates all the way back to the late nineties.

Right after Netflix was founded. Programmer Eric Meyer built in features in search that would lead users to movies that were in stock, and it would exclude movies that were either not yet in Netflix's library and that they didn't have a copy of that DVD yet, or they were in Netflix's library, but we're currently rented out to all customers.

So that way, when you come to Netflix and you start searching around for a movie, not a specific film maybe, but maybe a movie featuring a specific actor or actress or directed by a certain person, you would get results

back that only reflected available films. On the business side of things, Netflix began to feature older films and uh that was far more prevalent than new releases, and this was largely because the company wasn't able to yet negotiate with movie studios for DVD prices, and new releases tend to cost the most money. So while the prices for DVDs were significantly lower than what it would cost to

buy the same title on vhs. Remember DVDs when they came out, they were priced typically between fifteen and twenty dollars. VHS tapes if you were buying a copy for a rental place like like a Blockbuster or something, those tended to be between sixty five and eighty dollars if you didn't have the leverage to ask for a lower amount

and do sort of a royalties approach. So building out an inventory at scale was prohibitively expensive if you wanted to go with all new releases, so Netflix opted to go for deeper cut films that weren't typically listed at

full price. Then they would run promotions on the website that would feature these deeper cuts and leverage those titles, and they would tie it into things like holidays or news events, or maybe it's an actor's birthday and they say, to celebrate so and so's birthday, why not rent this movie? And that helped keep the business going even when they weren't able to have all the latest new releases in stock.

The programmers built out a feature that would group similar film buffs together in mentor groups through a process called collaborative filtering, and the idea was that these users with similar tastes might end up directing each other to new films that fit those shared interests. So you might say, oh, you really like, uh, you know, martial arts films, Well, have you seen Fatal Flying Guillotine here? You should check

it out. Netflix has it that kind of thing. Netflix also began building out a larger inventory of foreign cinema titles speaking of Fatal Flying Guillotine, particularly Bollywood films, Chinese movies, Japanese movies. It became a place where you could get

hold of this foreign cinema much more easily. And in California, where you had a lot of immigrants from countries like China, Japan, India, it was very popular, and of course that's where Netflix was based, so it ended up being a very uh lucrative or at least a very active part of Netflix's library. The one genre Randolph decided not to carry was hardcore pornography, and that was more out of a business concern than

anything else. It wasn't that he was necessarily morally opposed to that content, but rather he was worried about it from a political standpoint. The complicated nature of obscenity laws in the United States meant that it would be very difficult to make sure that Netflix was complying with laws on a state by state basis, because what is permitted in one state might be against the law in another state.

And when you are a company that is trying to have a uh, you know, a country wide presence, a nationwide presence, it just didn't make any sense to carry

that kind of content. On the marketing side, Netflix reached out to early Internet influencers like Harry Knowles, who was the founder and still is the founder of Ain't Cool dot com or Ain't It Cool News, And in those days, Ain't It Cool was growing beyond being a niche film fans site where you know, it kind of started out as a bunch of a place where a bunch of film geeks would get together and argue about movies and read various articles about upcoming films and rumors and things

like that. And at this point it was growing beyond that. It was getting attention from directors and movie studios because the industry, the film industry had seen that Knowles and his staff that we're writing for and it Cool had enormous reach, and so for a relatively modest investment on the part of the studio, those companies could get a lot of marketing benefits. It was like a lot of word of mouth marketing through this website. So just by doing a little bit of investment in the website they

could get a big payoff. So Netflix followed suit and invested money in and at cool dot com, and in return, Noels and his crew would frequently mention the service. Another clever move that Netflix made early on was they negotiated with DVD manufacturers to include a coupon for a free Netflix rental with new DVD players. So if you went out you bought a DVD player back in those days, inside the box would be a little coupon that would

allow you to get a free rental off Netflix. So these promotions were drawing attention, but they were also costing Netflix money. The company was losing cash on every transaction. For one thing, the labor costs were very high, and the promotions were also cutting into revenue. They also had made a pretty terrible rookie mistake, so they didn't spend the money to build out a way to handle unique

coupon codes. They had no system in place to create a sequential coupon code so that each code was unique and could only be used once, so they shipped out coupons that did not have unique identifiers on them. That meant that if you were unscrupulous, you could duplicate those coupons and use coupons multiple times, because you could just keep making copies and said each coupon appeared to be legitimate.

Netflix would ship out rentals each time they got a coupon, so people were essentially scaming Netflix, and Netflix was losing money in the process. In August, Randolph was able to secure six million dollars in venture capital to keep the company afloat, but that would only managed to save Netflix until the end of ninety eight. Something else was going to have to happen. The one part in Netflix's business that was doing fairly well was in DVD sales, not rentals.

There weren't enough customers who would return to rent a DVD after they had used up their free rentals they go through, They'd rent a couple of top titles for free, and then they wouldn't use the service anymore. So that was not really a revenue starter, but the sales were working better. However, that was a short term win, and

Randolph knew it. He knew that it was not going to be long until you saw other big companies, established companies things like Amazon dot Com get into that space ace and start selling DVDs, and the retail business would be very crowded and Netflix, being a small time player, would be unable to uh to compete in that space, so he knew that that was not a way to build the future of a business. In early Read, Hastings began to become more involved in Netflix. Remember, up to

that point, he had largely been hands off. He had provided the initial seed money for the company, and he had brainstormed with Mark Randolph when they were first talking about what Netflix would be and how it would be the Amazon dot Com of video rental, but apart from that, he really hadn't beencome very involved. Not long after Read, Hastings decided he was going to get his hands dirty

and Netflix. He announced that he and Randolph would become co chief executives of the company, a move that apparently didn't please Mark Randolph very much. Hastings immediately set the tone for his style at this meeting, as he then fired the brand new HR manager, Lisa Battalia Rice. He announced that he was going to bring in his own

HR manager, Patty McCord. And McCord had previously worked with Hastings at Pure Atria to run the human resources department there, according to the book Netflix, which was a great resource. This may have been because McCord was seen as someone who could act as kind of a liaison between Hastings and staff, because Hastings took a very engineering approach to problems and was very blunt and could be quite critical, so she would sort of soften the edges a little bit.

According to again people within the company, Randolph in Hastings were very different kinds of leaders. Mark Randolph was more empathetic and more outgoing. Read Hastings was more concerned with efficiency and performance, and if you weren't performing to expectations, you were alerted to that fact pretty quickly. Hastings was

more quantitative, Randolph more qualitative. Hastings was said to have an engineering approach to pretty much any problem, including people problems, whereas Randolph was more about allowing people to explore creative approaches to challenges. And Hastings was a big hit over on the software engineering side of the business. Mark Randolf was more of a hero on the marketing and public

relations and business plans side. By the end of the year, Read Hastings would assume the position of Soul CEO and bomp Mark Randolf down to president. Then a little later, Read Hastings would also take on the role of president and Mark Randolph became an executive producer. Hastings was also the chairman of the board. Mark Randolph had a position on the board that Read Hastings originally wanted to free

up to UH to grant to an investor. Mark Randolph refused, said he absolutely insisted on maintaining his seat at the board, and Read Hastings relented at that point. Now, in part, Randolph kind of accepted this fate because he knew that Read Hastings was important. He knew that he needed Hastings in order to keep Netflix afloat. Because investors knew who Hastings was. Hastings had founded Pure Software. Pure Software had merged with a company called Atria, and the company Pure

Atria was a huge success for investors. It got acquired for a massive deal that netted investors a huge amount of money. So Hastings was really popular with these guys. They said, this guy has made me money before, and if he says this company is worth investing in, I'm going to pay attention. So I gave Netflix a better chance at getting investment money if Hastings was the one

in the spotlight. Hastings made a couple of controversial decisions in those early months, he declared that Netflix would stop selling DVDs and would have to find a way to make renting DVDs online profitable or the company would just have to close up shop. Then he reached out to Amazon dot Com and he suggested that Netflix direct customers to Amazon if they were interested in buying a film, and in return, Amazon dot Com would display ads for Netflix.

So this was a deal that was struck up, and some of the folks over at Netflix, over in marketing, thought this was a colossal mistake because they thought that Netflix was effectively handing customers over to a competitor. Netflix also had early meetings with Hollywood Video and Blockbuster, the two big names in video rental VHS rental, and they were kind of feeling things out to see if either

company might be interested in purchasing Netflix. Because again, one way that startups make a lot of money is not through creating a sound business plan, but by getting acquired by a larger company. Uh. Now, if those companies were at all interested in acquiring Netflix, it certainly wasn't at

the price that Hastings and Randolph were willing to entertain. Uh. They were asking for a price much higher than what either company would be willing to to meet, and neither companies seemed particularly interested in any sort of collaborative efforts. Both companies turned down Netflix's offer. At the end of Netflix posted a loss of eleven million dollars and there were tons of free redual coupons still out there to do more damage to the company. So something was going

to have to change. What was it? I'll tell you in a minute, but first let's take a quick break to thank our sponsor Read Hastings was able to keep Netflix going largely by getting investments from venture capitalists. Over the year and a half period, he would raise more than one hundred million dollars in investments. At the same time,

he was changing the corporate culture. They company had started as sort of this chaotic creative environment with all these different people trying to figure out, how can we make a business plan that makes sense, how can we market it, how can we attract customers, how can we actually create the infrastructure that will allow it to happen. And it was uh sort of a crazy but really energetic place to work, and Hastings was changing things and buttoning things

down and making it more hierarchical. Many of the founding team members for Netflix left the company in including Jim Cook, the the finance and operations director, Christina Kish left, Terse Smith left, and more. Joining the company was a guy named Tom Dylan, who took over operations from the outgoing Jim Cook. Dylan had actually worked at a company called c Gate, and he headed up an international operations division magnitudes larger than Netflix, huge h division compared to what

Netflix was doing. Uh. Netflix presented a new challenge at a tiny scale in comparison, but Dylan needed to do some dramatic changes to really turn things around for the company. When he came on board, it cost Netflix six dollars to as symbol and ship and order. Now, most orders would actually include three discs at a time, so it

wasn't just six dollars per disc. It was six dollars per order, but still was not an efficient system if you think like four dollars per disk, and so that's like twelve dollars per order and it costs you six dollars to send the order out. That's not great. So Dylan wanted to get the order cost down to a third of what it was. One thing he did was to change the shipping process so that each envelope would

hold only one disc at a time. And that seems counterintuitive if you think, wait, if it costs six dollars to fill an envelope, but this actually cut down on costs. For one, it would let Netflix send out disks when they were available, instead of holding an order for all

three discs to be ready at the same time. So if a customer is waiting on three different titles, then you can at least send one title out ahead while the other two are either coming back to Netflix or haven't yet been processed, and you can get orders in people's hands faster. Secondly, it brought the cost down on individual shipping. The individual envelopes were cheaper to send than the larger ones that would hold three disks, and he included a barcode system to help sort orders in the

warehouse and increase efficiency. The next bit is particularly interesting to me. Dylan and his team discovered that people living within a one day delivery zone were far more likely to recommend the serve as to friends. So if you live someplace where you would get your order a day after you ordered it, you were more likely to be a loyal customer and to bring other people into the fold.

So this helped with customer attraction and retention. And so Dylan got hold of a c D that held information about US Post Office delivery data for ZIP codes across the United States, and he headed up the creation of software that could identify the ideal locations to establish a distribution center in various regions across the US. And that way, he would say, all right, well, we see that there's a very dense population in let's say New York City.

Where can we put a distribution center where we can guarantee one day delivery to as many people in that region as possible. And so they started taking all these data points and they started to look at maps, and they started to actually plan out the physical locations where distribution centers should be to be able to get one day delivery to the largest number of potential customers for

any given region. Dylan also figured out that in order to support a distribution center, each center would need about fifteen thousand customers two to justify the existence of that center. So using these different points of data and this data analysis approach, they were able to point out a map and say here's where we need to build our next distribution center, and then they could guarantee one day delivery to customers in that region and build up the base

of users they would need to generate regular revenue. And it's that kind of data analysis that I find really interesting. It's a very innovative approach to figuring out where to put your operations as a company. In the summer of Netflix began to experiment with a couple of different business models to get away from the per title rental approach

the company had been using up to that point. So remember, up to this point, if you wanted to run a moview in Netflix, you're paying on a per title basis. It might be four dollars per title. It might be five dollars per title if you're running three movies, and that's twelve bucks or fifteen bucks, depending on you know, how how expensive each title was, and they were looking

at alternatives to this approach. One of these was called the home Rental Library, So for twenty dollars per month, customers would be able to rent up to six movies at a time and keep them for as long as they wanted. There'd be no late fees, so if you kept them for three months, that's fine, and when you return them, and if you're paying the membership fee month to months, then you could get six more movies. The

other approach was called serialized delivery. Now, in that version, a customer would first receive whatever the next available film is in his or her Q. I talked about the queue in the previous episode. That's the list of movies you've expressed interest in. And the more interested you are in a movie, the higher up you should put it in your queue. And so what would happen is you get a film, you'd watch your movie, you return it to Netflix. Netflix would scan the returning disk, they would

register that you had returned your movie. They would look at your queue, and whatever the next available title in theory was that was on your queue, they would send that one to you next and uh. Then these both

were really popular. Hastings ordered actually, that both serialized delivery and the home rental library and the new queue feature should all be tested at the same time, which drove marketing nuts because they wanted to be able to isolate these different approaches and to measure them against each other. It turned out the customers loved all three features, so Randolph decided that they should combine them into a single offering. Customers would pay a monthly subscription fee. This was an

alter her native to the per title rental fee. It was not mandated originally, it was an alternative. These subscriptions would be in tears different levels that would allow customers to choose how many DVDs they could rent at a time, and each tier would cost a different amount. You know, the more movies you wanted to be able to check out at once, the higher you would pay per month.

Then there would be no late fees, and upon returning titles, you would get the next available DVD from your queue that would be the next one to be sent along again. In theory, it's probably from this point that Hastings decided to go with the version of Netflix's history that was passed around as gospel for several years, and that was the version that I talked about in the last episode where he had said he got the idea for Netflix after he got a late fee for keeping Apollo thirteen

from a blockbuster for too long. In reality, Netflix didn't go with this no late fee approach until it was about a year and a half old, so that was not a a key part of Netflix from day one. It was well after they had begun to do business that they adopted that philosophy. The new model that they

used would debut on September. The plan would allow a customer to receive up to four titles simultaneously for the monthly subscription rate of fifteen dollars and nine cents, which I think is too low to qualify as a princely sum, but the rollout was targeted. Most visitors would not see this offer at all. They would just see the normal per title rental structure. But a few people did see the offer, and the people who saw it tended to

sign up, so it's proven to be a hit. It was if a customer were presented the opportunity to use that particular model, they were more likely to do so, and so it became pretty clear that this was a solid business plan. In late September and Netflix rolled out this new plan at large, so everyone had a chance to see it and enroll in it. But they still also offered up the a la carte approach as an alternative,

so they didn't get rid of that yet. But the new subscription model was much more popular, pushing the number of weekly shipments up to one hundred thousand discs per week. Now that didn't mean the company was magically profitable. In fact, it would close out nine with a twenty nine point

eight million dollar loss. Good thing Hastings had gotten all that venture capital earlier in the year, they were running into new challenges, and one of those was that the subscription models were making it difficult to keep titles in stock. For one thing, Netflix was getting a lot more customers, and for another, those customers could keep movies for as long as they liked. Not everyone was watching a movie and then immediately returning it, some of them were holding

onto the movies for a long time. If you talk to anyone who was a Netflix customer who rented DVDs back, you know there's still people who do, but back when that was more common, you could ask them what's the most expensive DVD you ever rented? Because if you rented a DVD and it arrives and it just sits on your table and you never watch it, you're still paying the monthly subscription fee month to month to month. There's

no late fee. But if you think part of this monthly subscription is just going to the fact that I have this DVD in my possession even though I've never watched it, then those prices would rack up pretty high. Um, I want to say that Kiss Kiss Bang Bang was a really expensive one for me for a while. Anyway, that that was an issue, And because that was an issue, it meant that no one else could rent that particular copy of the movie because it was not in Netflix's hands.

It was in some Yahoo's hands like myself, so that complicated matters. Meanwhile, Hollywood Video was taking an even bigger loss after supporting a competing format. There was actually a format that Netflix had entertained carrying for a short while. That format was out of circuit city. It was called Divis d I v X. The Divis format was super heavy on the d r M front, So the concept was that you could rent a movie on the Divis format. So it's essentially an optical disc, very similar to a DVD.

But these discs had heavy encryption on them, so if you put them in your Davis player and you did not have authorization to watch the content, you couldn't actually see anything. So the reason the way this works is that your player would actually have to have a modem connection.

It would connect back to a home computer home base computer like a server essentially, and it would check to make sure that you had that authorization, that you had paid a rental fee to watch that particular content, and if you had, it would decrypt the signal and you would actually be able to watch whatever it was you had rented. And then once your rental agreement expired, maybe it's like for three days, then you would no longer be able to decrypt that information on your player and

you wouldn't be able to see it anymore. Randolph had actually decided not to support that particular format, mostly because it wasn't logistically feasible for Netflix to stuck every title in both the DVD and the DVICS format, and they had already committed to the DVD format, so they were kind of they had pushed their chips into the DVD hot but since dvis as a format essentially died, in turned out that Netflix had backed the right horse, that

it was a good thing they didn't do this. Hollywood Video, however, had really gone in on DVICS and they took a huge bath when that format lost support. In January two thousand, Netflix rolled out a new feature called cent a match, and the idea was to find films that would please couples who were trying to figure out what films they should rent based on their own individual likes and dislikes.

So the company had found it challenging to build out algorithms that could suggest movies to users that people actually wanted to see. They thought at first that this was going to be easy, right that you just look at somebody and you say, oh, well, they really like movies that feature horror and they like slashers, so we're going to send them, uh, the you know, Friday the Thirteenth series, and it turns out that the person doesn't like that at all. That was that was that seemed to fly

in the face of the cold logic approach. Right, you like X, so you must like why because Why has stuff in it that X also has. That turned out

to not be as reliable. So Cinematch was more about sorting people into like minded groups, groups of users who had rated movies in a similar way, and then looking at their various histories behind the scenes, not sharing that out in the open, but making recommendations based on that, and those seemed to be much more um successful than the algorithm based approach that had previously been in place.

Cinematch also took into account the films and Netflix's inventory before making any recommendations, so it wasn't about to recommend a movie that was not in stock, because that would just become a frustrating experience. The board of directors was starting to get itchy. They wanted to move toward an initial public offering to take the company public, but at that point the company was still losing money. So read

Hastings had a big decision to make. I'll explain more in a second, but first let's take another quick break to thank our sponsor. On Valentine's Day two thousand, Netflix officially ditched the alakrt rental model and went to subscription only. Hastings had argued it was the only way toward profitability.

In addition, the cost of a subscription increased to nineteen dollars cents per month, so it went up by four bucks per month, with the first month of rentals being free, but customers would have to submit their credit card numbers

to get that free month. That was a strategy that would help protect Netflix in the case of DVDs never getting returned, but it also made it easier to convert people into full members from trial to full members because they had already inserted their credit card information, you weren't asking them to do that after the month was over. That would have acted as another barrier to entry. So by ripping off the band aid right at the very beginning, you were more likely to keep people on as a

as a subscribed member. In the spring of two thousand, Hastings hired on Leslie Kilgore to become part of the marketing department, and Mark Randolph, the co founder of Netflix, saw his role decrease yet again. Kilgore tackled redesigning the

company logo and colors. She also campaigned successfully to have the marketing and public relations departments consolidated into a single entity, and Hastings would say in an executive meeting that he considered kill Gore a potential successor to the position of CEO in the future, which more than ruffled a few feathers among executives at Netflix who had hopes of one

day maybe getting that position. She's the one who kind of led the way to redeveloping Netflix's logo so that it would have that red and black and white appearance, so the color read the theatrical color. That's largely due to her her leadership. Something else was going on that created an existential threat to Netflix, and that was the infamous dot com crash, when the speculative bubble that formed

around the dot com industry imploded. Startups that had tons of investment money but not much to show for it apart from some flashy offices and ridiculous recruitment strategies began to fold as investor confidence would collapse around them. The stock market took a huge bump, and employees who on paper were millionaires before the dot com crash because they had received ginormous numbers of stock options, suddenly had to deal with a reality where those same stock options weren't

worth the paper they were printed on. It became a point where everything when you're when you're awarded a hundred thousand stock options, but then every stock option is worth less than a penny, it suddenly is not that big

of a reward. Netflix had luckily secured additional investments just before this dot com collapse, and they were doing so in anticipation of holding their own initial public offering, but they held off on that obviously because the dot com had so destabilized the market that it was not the right time to try and to clear going from a private company to a public company, but it did have

enough money to get through this initial slump. It was around this time that Hastings and a couple of executives, including Mark Randolph, met with Blockbuster executives, and this was the infamous meeting during which Blockbuster had the opportunity to acquire Netflix. Netflix's asking price was somewhere in the fifty million dollar range, and that was considered way too high

by the executives over a Blockbuster. They said, there's no way you haven't demonstrated that you have this value, especially in today's market where we're seeing internet companies go belly up left right. So John Antiocho, the CEO of Blockbuster at the time, said, no, Dice, you don't have the staying power. You probably won't even be in business in a year, and so Blockbuster walked away from that deal. Now, while that was a setback for Netflix, the team decided

to push even harder to get to profitability. The customer retention numbers were looking promising, and Hastings said in interviews that he expected by the end of two thousand one, that Netflix would have five hundred thousand paying subscribers and that they would become cash flow positive as a result,

they ended up being a little ambitious. The executive team also made some other big predictions, some of which have sort of proven to be true, but in a different way than what they had necessarily intended back in two thousand one. One of those predictions was that Netflix will become such a popular platform that independent filmmakers would use

Netflix as their production studio. Essentially, they would create films meant to go straight to Netflix's service and bypass studios and movie theaters entirely, to go a different direction than what typically you would see in the industry. And you could argue that we're seeing a lot of that today, only now we're looking at it from digital delivery, you know, broadband delivery as opposed to DVDs, but the same principle seems to apply. So it was a very forward thinking prediction.

The web designers. Meanwhile, we're working to identify ways to make the online experience more intuitive for new web users, because up to this point, Netflix's customer base consisted primarily of technologically savvy young men, it was not a diverse group, but more and more Americans were getting online, more people were getting computers, more people were getting Internet service providers or online service providers like a O L Online, and

so the potential to reach a broader audience was there. So research was looking into ways to make the process easier for newbies to navigate the website. Meanwhile, Hastings and the executive team decided one way to make Netflix look like a legit player in the space would be to pick a fight, and so they began to compare Netflix favorably against Blockbuster, which was the big dog and home

video rentals. Hastings would say that Netflix's inventory was many times larger than even the biggest Blockbuster store, saying, we have more titles in our inventory then you'll find in any Blockbuster location. Now, granted, you're looking at two different things, right, because Blockbuster as a whole, if you looked at all the different stores, had way more copies of way more

titles than what Netflix had. But on an individual shop basis, if you lived in a community that had one and only one Blockbuster, you would have greater variety if you went to Netflix. That was hastings argument and the team really hammered home the idea that there were no late fees, something that was one of the chief revenue generators for Blockbuster. But it was clear that Netflix wasn't going to make the goals Hastings had originally said he wanted to hit

in two thousand one. There was little chance for an I p O in that time, and to look viable in investors eyes, the company was going to need to cut costs and prove that the subscription based model was a viable one. So to do this, Hastings would cut about forty percent of the workforce at Netflix. In September two thousand one, the remaining members of the original founding team of Netflix were either laid off or they chose

to quit. With the exception of Mark Randolph, the co founder of Netflix, he was the only one of that initial team who would put Netflix together to remain at the company after September two thousand one. Profitability would have to wait, because at this point Hastings was focused on getting the company lean and nimble enough to gain the confidence of investors and finally have that initial public offering.

He and his executives spent late two thousand one and early two thousand two, laying the groundwork for this I p O, and they were able to hold it on May twenty three, two thousand two. Mark Randolph had resigned from the board of directors before that point, but he did remain with the company, and the fact that Netflix had survived the dot com crash when so many other companies had folded helped Netflix quite a bit. There was a message saying, we don't have the same problems as

those other companies had. We are going to stick around. So the idea was a success. It raised more than eighty million dollars and shares were trading at around fifteen dollars apiece. Mitch Lowe started testing out an idea in two thousand two called Netflix Express. He and Mark Randolph landed a pilot program. They talked to a chain of grocery stores called Smith's and they got the agreement to put in a video rental kiosk in a Las Vegas

grocery store. Now, unlike the vending machine style kiosks low had wanted to create, this one actually had an employee who would fill customer rental orders manually. And the test went very well. But Hastings wouldn't get on board with it.

He didn't see this as being a viable business, and he had his sights set on the future of digital distribution and anticipated that such a move was going to require a substantial investment on the part of Netflix to make it possible, and that creating a new means of renting out DVDs would require an investment on the company that would take away from the money he saw as being necessary to pursue this digital download or digital rental experience in the future. So he said, that's going to

be a distraction. We're not going to do it. So Mitch Lowe wouldn't end up leaving Netflix. In January two thousand three, he met with an executive from McDonald's who had previously expressed interest in a partnership with Netflix, but Hastings had nixed that idea, so this negative. A guy named Greg Kaplan had a similar vision too, low and together they ended up heading a new venture that would

be called red Box. As for Mark Randolph, when that Kiosk experiment was deemed unworkable by Hastings, he bowed out he left Netflix. In fact, he and Hastings had already discussed severance conditions before the Kiosk experiment began, the message being if this doesn't work out, you should probably just pack up and leave. So in two thousand three, Mark Randolph would leave the company he had co founded. He

had been the original CEO of Netflix. It was his ambition to become the Amazon dot Com of something, and while Netflix's biggest days were ahead of the company, he would no longer be a part of them. So what is Randolph up to these days? While he sits on the boards of numerous companies, he's also a frequent speaker at technology, business and leadership conferences. He acts as a mentor to entrepreneurs, so he's still doing pretty well for himself.

As for Read Hastings and Netflix, their journey was just beginning. In our next episode, we'll look at the following adventures of Netflix, especially it's massive battle with Blockbuster Online. If you have any suggestions for future topics for me to cover in episodes of tech Stuff, send me an email. The address is tech Stuff at how stuff works dot com, or you can drop me a line on Facebook or Twitter.

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