“IT’S YOUR TURN.”
After this proclamation, Lorraine rolls over and folds the pillow over her head.
It’s two months after launch. I lie in the dark, squinting at the clock radio, waiting for the onslaught. Already it’s starting: There’s a faint rustling coming from somewhere down the hall, then a series of soft ploomphs. Hunter is greeting the morning, hurling his stuffed animals over the bars of his crib. Soon he’ll wedge his feet in the bars, grab the rail, and swing himself up and over, onto a landing pad of plush tigers and elephants.
Who needs an alarm clock?
I dress in the weak light, and when I step into the hall, Hunter is there to meet me, a well-loved zebra dangling from his hand by one dingy, furless ear.
“What’s up, little man?” I ask as he follows me sleepily down the stairs. In the kitchen, he lifts his arms over his head and lets me hoist him up into his chair. I ritually mix cereal, bananas, and milk in a bowl and set it in front of him. He plunges his hands into the bowl and starts to eat, just as the coffee machine gives three beeps and sputters the last drops into the pot.
I sit across from Hunter and open my laptop. The morning monitors are already in my in-box.
In the weeks since launch day, we’ve learned to take full advantage of the data we can gather through The Store. Our website never misses a thing. Every night, just after midnight, the Netflix servers—which number twenty-four by now—systematically begin grinding through the previous day’s business in order to get ready for the next. They balance accounts, adjust inventory, and reconcile payments. They read every one of the previous day’s transactions from the production servers and add them to a log, creating a data warehouse. Unlike the overcrowded vault, there is nothing physical about the data warehouse. The entire thing fits onto a single hard drive.
Every customer. Every order. Every shipment of a DVD. Our data warehouse knows where every customer lives, how and when they joined, how many times they’ve rented from us, and how long, on average, they keep their discs. It knows exactly what time someone visited the site, where they came from, and what they did once they got there. It knows which movies they looked at and which ones they chose to put in their cart. It knows whether they completed checkout—and if they didn’t, it knows where they gave up. It knows who was visiting us for the first time and who is a repeat customer.
One hard drive knows almost everything.
With so much data to consider, it’s easy to get overwhelmed. That’s where the monitors come in.
Monitors are data summaries: short, clear, and easy to digest. The top ten movies in both rentals and sales, how many new customers we’ve acquired over the previous twenty-four hours, how many orders we’ve received, how many of those were rentals and how many were sales. That sort of thing.
This morning’s monitors—which I scan with one eye, the other trained on Hunter’s slowly emptying bowl—contain good and bad news. The good is in the left column: Sales are up 50 percent over May, our first full month in business. Monthly revenue has just passed $94,000 for the month of June. With twelve months in a row like that, we’ll hit one of those magic startup numbers: a million dollars of annual revenue. I make a note to myself to bring that up at our company meeting at the end of the week.
The bad news is one column over: Rental Revenue.
I wince when I see that it is still in the four digits.
And that the first digit is a 1.
We have $93,000 in DVD sales. Barely $1,000 in DVD rentals.
“Shit,” I murmur to myself. Hunter looks up at me for a moment, then goes back to his cereal, oblivious to anything that isn’t a banana.
I pour a second cup of coffee and ponder the numbers. One reason for the great disparity between sales and rental revenue is pricing. Customers pay $25 for a DVD but only $4 for a rental. We make six times as much selling a DVD as we do renting it once. Of course, you can only sell a DVD one time. You can rent it hundreds of times.
The problem is, no one is renting from us. And when we are able to convince someone to rent a DVD, they almost never come back for a second one.
I methodically lay out bread, peanut butter, and marshmallow fluff, and construct sandwiches for Logan and Morgan. They love it when I make their lunches, because unlike Lorraine, I let them eat garbage. I just have to balance it out with something healthy. Hence the carrots I’m slicing, my mind a million miles away now, pulling up mental images of each of our current round of promotions—imagining how I might be able to tweak the words, the graphics, or the offer itself to make a difference. To make people rent.
I barely even notice when Lorraine glides into the kitchen, an efficient hurry of noise and activity. She herds Logan and Morgan, already dressed and ready for the day, ahead of her and to their places at the table, simultaneously dishing out cereal and yogurt, shoving the lunches I’ve made into lunchboxes, squeezing Hunter into pants and a shirt, rounding up soccer shin pads, preschool projects, sweaters, and bathing suits—and then, seemingly within seconds, she’s swept three children out the kitchen door, strapping them into their car seats in the big maroon Suburban, with a quick kiss good-bye to me.
Talk about efficiency. Talk about project management. Lorraine is a genius.
Christina is scribbling at the whiteboard when I walk into the office. Six months ago, we used the board to brainstorm possible company names. On launch day, it was filled with journalists’ questions. Now, it looks like a DVD magazine marketing department got drunk and tried for a rebrand.
- DVD Watcher?
- The Digital Bits
- DVD Express
- Surround Freak
- DVD Resource
- Short Cinema Journal
- DVD Insider
“What’s all this?” I ask, squinting to make out the names and numbers that follow each entry. “Does Digital Bits really have seven hundred readers?”
“Pretty sure,” Christina answers, rubbing the side of her hand across one of the entries. We lost the eraser long ago. “But they’re far and away the biggest. Some of these are…pretty small. DVD Insider has about a hundred readers.”
“Let me show you something,” Christina says, putting down the dry-erase marker and swiveling to her desk. She flips open her computer, types for a moment, then slides the screen toward me. “Check out all the engagement!”
The screen is filled, top to bottom, with back-and-forth web forum conversations. She points with her marker at a post halfway down the page, from a name I don’t recognize: Hamilton George.
Just curious. Anyone try out that new DVD by mail company yet? Netflix? Looks like they have 100s of DVDs. Prices are pretty good, too.
“That’s one of Corey’s,” Christina explains. “He’s one of the most active members of this group.”
Corey’s black-ops tactics haven’t stopped, post-launch. He has seventeen different personas, each of them engineered for a different site, and now that Netflix is a go, he can keep track of who is actually visiting the site and ordering from us.
Before launch, he was our pusher. Now, he is our spy.
Christina scrolls through Hamilton’s comment history, reading the responses.
“People love him. Or… ,” she hesitates. “They love Hamilton, anyway.”
I’d asked Corey once where he came up with the names for his personas.
“Celebrities,” he said. “I just invert the names.”
Hamilton George = George Hamilton.
Meet our spy: the perpetually suntanned star of Love at First Bite.
I spend the morning in my office, going over the terms of a revised coupon deal with Toshiba and calling dry cleaners in the Santa Cruz area, because I’ve forgotten where, exactly, I dropped off my “New Media Outfit.”
Let me explain. To understand the New Media Outfit, you need some background on one of the biggest issues we faced as a young company. Essentially, it’s a version of the chicken and the egg.
How can we market a DVD rental service to people if hardly anyone owns a DVD player?
In direct marketing, if you’re trying to reach a group of people, you contact a list broker and rent a list. “Give me two million DVD owner addresses,” you might say, and then you do a mailing to that list. But in the case of a brand-new technology, there is no list yet. Because there are hardly any DVD players.
The big consumer electronics companies that make DVD players are in the same boat as we are, but they’re rowing in the opposite direction: it’s hard to convince people to buy a $1,200 DVD player when there are hardly any DVDs.
Back in January, I’d sensed an opportunity. We needed a way to reach people who owned DVD players. The manufacturers needed a way for their new customers to access DVDs. What if we could come up with a promotion that would link our interests?
In January, I’d flown to Vegas for the Consumer Electronics Show. At that time the largest trade show in the world, it made VSDA—which to me had seemed like an acid trip—look like Sunday school. Every major consumer electronics company was there. They rented out entire hotels to house their employees. The booths were the size of football fields, and they were filled with hi-tech gadgetry. Think 3-D. Think robots. Think PlayStations. Think 3-D robotic PlayStations. All months before their release dates.
In addition to Mitch, my companion through this foreign land was Kirby Kish, Christina’s husband, who worked in consumer electronics and had volunteered to act as a so-called jungle guide—someone who could make introductions and show me how to navigate the complex hierarchies of the multinational conglomerates we’d be dealing with. “It’s a different world, man,” Kirby warned me before we stepped off the plane at McCarran International Airport. “Buckle up.”
It was a true East-meets-West moment—not just because most of the companies were headquartered in Asia, or because their American offices were all on the East Coast, in suburban office parks in New Jersey. It was a difference in culture. Employees at Sony or Toshiba went to work in suits. They parked their cars in front of anonymous office parks in Secaucus or Wayne or Park Ridge and entered drab, sterile buildings with thousands of other people. They obeyed a rigid hierarchy, in which each employee had clearly delineated responsibilities and tasks to accomplish. They answered to their superiors along vast and complex chains of command. They worked from nine to five every day and got paid overtime if they stayed late. Once a month, they came to work in khakis and polos for casual Friday. But only once a month.
In other words, the ethos of a consumer electronics company was about as far from the startup mentality as possible.
That was understandable, though. Consumer electronics companies were selling products with an incredibly long lead time. From research and development to packaging to marketing to shipping, it took years to roll out a new TV, VCR, or CD player. There were quite literally hundreds of thousands of tiny decisions that had to be made, and they all had to be made in concert. Coordinating these decisions across a multinational company with tens of thousands of employees and hundreds of products took time, and more than a few product managers. We had one Christina. Sony must have had thousands.
A major challenge that the consumer electronics companies were facing was how to standardize the technology behind the DVD. Details like storage space, dimensions, and user-facing functions were still different from company to company. To simplify things—and to prevent a format war—representatives from the three biggest companies formed an uneasy alliance, agreeing to a set of specs for the nascent technology. They called it the DVD Video Group.
The 1998 CES conference was one of the first public appearances by the DVD Video Group, and I’d been there for it. The occasion was not exactly auspicious. In contrast to the gaudy displays of the rest of the conference, there was just a small area, about the size of my kitchen at home, surrounded by a velvet rope. Inside of it, a couple of dozen people milled around, among them representatives from each of the major manufacturers: Toshiba, Sony, and Panasonic. The whole event had a kind of Yalta Conference feel—three uneasy allies, unaccustomed to collaborating with each other, circling with tiny plates of cheese.
I was angling to meet three people: Mike Fidler from Sony, Steve Nickerson from Toshiba, and Rusty Osterstock from Panasonic. Between the three, they controlled roughly 90 percent of the DVD player market. I knew that if I wanted to cut any sort of deal, I’d have to get my foot in the door with one of them.
Easier said than done. After all, I ran a seventeen-person startup that hadn’t even launched yet. Nickerson, Fidler, and Osterstock worked for corporations so large they needed their own phone books. I was a gnat. They were elephants whose tails I wanted to ride.
Still, I was confident. For one thing, I was wearing the aforementioned New Media Outfit. I’d bought it for IBMs (Important Business Meetings) outside Silicon Valley—for times when I needed to wear something nicer than jeans and sneakers. I thought it was important to never be seen wearing a tie, and to also look like I could navigate entertainment circles. To that end, I’d bought a pair of greenish khaki pants, a blazer with a fluorescent glow, and a shirt with a subtle geometric print that a salesperson told me was “moiré.”
It was absolutely hideous. When Lorraine saw me trying it on for the first time, she couldn’t stop laughing. “You look like a chameleon,” she said.
In a way, that’s exactly what I was. I needed to be able to adapt to a number of different environments—media, consumer electronics, tech. Wearing the New Media Outfit—or NMO, as I sometimes called it—gave me a way to blend in with companies and entities far larger and more powerful than my own.
That afternoon I sweated through my NMO many times over. I gave every one of the manufacturers the same pitch: What if I could, in one fell swoop, eliminate their biggest obstacle to selling more DVD players? What if they could assure every one of their customers that if they bought a DVD player, they would have immediate access to every DVD available?
And then the real heart of the pitch: What if every new player they sold came with a coupon offering three free Netflix rentals?
We’d get traffic to our site, and they’d help grow the DVD user base. Sounds good, doesn’t it?
I got polite demurrals from all three.
“This sounds interesting,” Mike Fidler said. He was a California guy. Easygoing, well dressed, and with a better haircut than most of the other suits at CES, he exuded confidence. And why shouldn’t he? Mike worked for Sony, the industry leader. He told me it would be a hard sell but that he’d think about it.
Rusty Osterstock, who was in charge of the DVD operation at Panasonic, turned out to be a short man in a blue oxford shirt who looked older than his thirty-five years—one of those men who has looked like his dad since age twelve. He was noncommittal.
“Hmm,” he said, maybe just because he’d seen me talking to Fidler five minutes prior. “Let’s set up a call.”
Steve Nickerson sounded the most interested. A former college lacrosse player, he was dressed in a style I recognized from my preppy East Coast upbringing—conservative and obviously expensive suit, glossy wingtips, a class ring from Drexel. His entire bearing was athletic and animated. I pegged him as a risk-taker.
“Let’s talk,” he said.
I left CES that afternoon with a pocketful of business cards, a DVD swag backpack with ten DVDs, and a head of steam. When Mitch said he had some friends he wanted to say hello to before dinner, I thought nothing of it—until we were outside, walking to a different corner of the Las Vegas Convention Center and into a parallel universe.
“Hi, Mitch!” giggled a beautiful young woman in a halter top.
“Mitch! It’s been so long!” said another, pressing her impossible curves into Mitch’s chest for a hug.
He just beamed. “Meet Helen,” said Mitch. “And Juliet.”
That’s when I finally looked around me. All around, buff, suspiciously tan men walked arm-in-arm with peroxide blondes wearing a lot of makeup and not much else. A huge sign over the check-in desk read, in seductive cursive letters the color of lipstick: AVN.
AVN stood for Adult Video News, the trade publication for the porn industry. We were at the Adult Entertainment Expo—held, every year, the same week as CES.
Mitch, it turned out, was a veteran attendee. Years running a chain of successful video stores meant that he was well-acquainted with the porn business. He knew all the major players and was as at home here as he had been at VSDA. Over the next four hours, as I nervously stammered out my name and made copious eye contact—all the while brainstorming ways to explain the whole thing to Lorraine—Mitch glad-handed, greeting studio heads, major distributors, directors, and on-screen talent like old friends. The executives here didn’t look that much different from their counterparts at CES. If it weren’t for the scantily clad women flocking to Mitch, I would have thought we were still back with the suits at Sony.
“You know everybody,” I said a couple of hours later, as we headed back to our hotel. My DVD backpack had a couple of new titles in it.
Mitch just grinned. “Pays to have friends in high places,” he said.
As January turned to February and then March, I hadn’t heard anything from Fidler or Osterstock. And to be honest, I wasn’t all that surprised. It was a hard ask for them. Companies like Sony and Panasonic had years-long product development timelines. To put a sticker or a coupon into one of their boxes would require months of negotiation with dozens of different project leaders. Going by the normal processes, to have any chance of getting our coupon into a Sony DVD box, you’d need to start about a year ahead of time. To jump into the middle of a new release, as I was hoping, you’d have to really stick your neck out. It was a big risk for them. And CES companies didn’t usually reward risk.
I still don’t really know why Steve Nickerson called me. I think it was because he saw—even in the risk-averse field he worked in—an opportunity for a big risk to have big rewards. Yes, it would be a nightmare to navigate the chain of decisions. Sure, if it backfired his job might be in danger. But if a promotion with a new company called Netflix helped him connect with DVD customers, it could grow the base for a new, fledgling technology.
Plus, Nickerson worked for Toshiba, the perpetual second banana. In the CES world, Sony was the undisputed king. They didn’t need to take risks. But for a company like Toshiba, always vying for market share, a risk or innovation could help set the company apart.
Whatever his reasoning, I’m eternally thankful to Steve Nickerson for taking the plunge. In my estimation, he’s one of the single most important players in the Netflix story. Without his help, there is absolutely no way the company would have succeeded.
I’d flown up to New Jersey, the NMO in tow, and over the course of a few days in April, Steve and I had settled on a deal. In every DVD player Toshiba sold, they’d allow us to include a small promotional flyer, offering three free DVD rentals through our site. All a customer would have to do would be to visit Netflix.com and enter their DVD player’s serial number, and they’d have three free DVD rentals.
It was a win-win. We got direct access to DVD player owners, at precisely the moment when they needed us most. And Toshiba solved its biggest problem: convincing reluctant buyers that they’d actually be able to find something to play on their new machine. The promotion was advertised right there, on the outside of the box: 3 FREE RENTALS WITH PURCHASE!
But it was more than a win-win. It was a revelation. You see, a startup is a lonely place. You are working on something that no one believes in, that you’ve been told time and time again will never work. It’s you against the world. But the reality is that you can’t really do it on your own. You need to enlist help. Bring others around to your way of thinking. Let them share in your enthusiasm. Give them the magic glasses that will let them see your vision of the future.
Steve Nickerson had glimpsed and believed. And it was already paying off. Within days, we’d seen an immediate uptick in traffic, and we knew where it was coming from. Corey, using his moniker Damon Matthews, had been listening to the chatter on the Toshiba message boards, and it seemed like our promotion was resonating with their customer base.
So why, once they used their three free rentals, weren’t they coming back?
After making a few small changes to our agreement with Toshiba—minor stuff—I call Michael Dubelko, from DVD Express. I’ve spent countless hours trying to convince him that we can help each other.
“It just doesn’t make sense, Marc,” he says. “We sell DVDs, too. Why would we partner with a competitor?”
“We just need you to push rentals,” I said. “Different ball game.”
The conversation doesn’t really go anywhere. It often doesn’t. Sites that sell DVDs don’t really want to do business with a site that could chip away at their market share.
I understand, I tell him. But I know it’s possible. As I hang up the phone with Mike, I think about Steve Sickles, administrator of DVD Daily, one of the largest DVD sites, whom I’d convinced to do a deal with us over raw yellowtail at Nobu in New York City. Every mention of a movie on his site would now be a link to Netflix. I think about Bill Hunt, of Digital Bits, who, in a hallway of the gaming industry trade show in Atlanta, had agreed to pump our service in his editorials provided we gave him an online shout-out now and then.
Maybe the key is meeting in person.
I’m leaning back in my chair, brainstorming new places to wear the NMO—I’ve just tracked it down to Mission Dry Cleaners in Santa Cruz—when Eric pops his head in. “You almost ready? I’ve got Ishaan and Dev out front. They’re ready to go, but they’re both really nervous.”
“Nervous? Why? Am I really that intimidating?”
Eric shrugs and tilts his palms up. “Not to me,” he says. “But those guys are freaking out about everything here. They don’t know what to expect from lunch with the CEO.”
Nearly a year after Reed and I had mailed that Patsy Cline CD, the company is growing beyond its founding team. When it comes to hiring, I’m not just hitting my own Rolodex anymore—which means new faces. To ensure that we remain a tight-knit group, I’ve instituted the monthly ritual of taking all new employees out to lunch. This serves a number of purposes. At a minimum, it’s a chance to get to know everybody. I’m present for nearly all of our job interviews, but it’s hard to get past someone’s nerves and ambitions in an interview setting, and a lunch allows me to see past all that.
More importantly, though, lunch is a chance to start imprinting culture: to explain the most important aspects of working at Netflix, what we expect of people, and what they can expect of us.
In today’s lunch, though, “culture” is going to take on a different meaning. That’s because I’ll be eating with two of our newest engineers.
Two months in, hiring engineers is shaping up to be a bigger problem than we’d imagined. In Silicon Valley, the fight for engineers is always intense, with hundreds of companies competing for top talent. I have some experience in the recruitment fight, and over time have recognized a key truth: For most engineers, it’s not about the money. That’s a good thing for Netflix, since our pile of chips is quite a bit smaller than the more established companies’.
Most engineers can choose where they want to work, and the way they make their decision boils down to two questions:
1) Do I respect the people I’m working for?
2) Will I be given interesting problems to solve?
We have an answer for question #1: Eric Meyer, a certified genius who commands respect. And if you ask me, the answer to question #2 is a resounding Yes.
Pre-launch, I’d also counted on another recruiting advantage: Location. About 19,000 people per day commute from Santa Cruz “over the hill” to tech jobs in Silicon Valley. Probably 18,997 of them hate it. (And I can’t imagine what those other three are thinking.)
I’d assumed that there would be plenty of local engineers so fed up with their commute that they would jump at the chance to take a job closer to home. I’d been so confident about it that I’d run pre-movie advertisements—HELP WANTED—in the Scotts Valley movie theater.
But I’d made a deep miscalculation. I had assumed that we would need a lot of “front-end” engineers—people with the skills to build web pages designed for e-commerce. But it turns out that what we really need is help with “back-end” problems—processes having to do with order processing, inventory management, analytics, and financial transactions.
And if you want engineers for that kind of work, no amount of pre-movie advertising in Scotts Valley will do the trick. Most of the good back-end engineers live near San Francisco, and despite Eric’s reputation (and my powers of persuasion), it is virtually impossible to convince someone to drive 75 miles each way to work.
Eric has come up with a solution, though. Forget engineers from 75 miles away. How about engineers from 7,500 miles away? Turns out, there’s a large population of recently arrived Indian engineers in Silicon Valley, looking for work and eager to join a fledgling startup. With Suresh’s help, Eric has hit the cultural centers and cricket fields of Silicon Valley, recruiting talented immigrant programmers like Dev and Ishaan, who are waiting for me now. As I rush out to say hello, I’m already thinking about what I can say to make them more comfortable in their new life, how I can ease the transition to the United States, and how I can ensure that their job is rewarding.
And what I’m going to order at Zanotto’s, the Italian restaurant across the street.
When I get back from lunch, I see that Lorraine has called to check in. I’m not looking forward to talking to her, because I’m pretty sure I know what’s coming. Financial worries. Morgan is getting ready to start kindergarten in the fall, and we are planning on having her join Logan at the private school down by the water in Santa Cruz. And kindergarten at a private school is much more expensive than preschool.
“How are we ever going to afford this?” Lorraine starts in when I finally reach her. In the background, I can hear kids, and what sound like seagulls.
“Are you at the beach?”
“I’m with a bunch of Logan’s school friends. I know Morgan’s really excited about going to Gateway, but I think we’re making a big mistake.”
She pauses, and I hear the crash of a wave, followed by a child’s delighted squeal.
“We should sell the house,” she says.
This is a common refrain. Almost as common as a reminder that Montana—and my dream life as a postman—beckons, should everything go south with Netflix. It has gotten more frequent lately. It is as close to an argument as we usually get.
“We’re going to be fine,” I remind her. Through the glass I can see Dev and Ishaan ripping open boxes containing brand-new Gateways. Eric is watching them, a smile on his face.
“I just want you to be realistic,” she says. “We can do without a lot of stuff. Maybe we should think about cutting back more.”
“We’re making great progress here,” I tell her. “As of today, we’re officially a million-dollar company.”
I don’t tell her that we’re a projected million-dollar company, or mention how concerned I am about where that money is coming from. I just say we can talk more about it at dinner—as usual, I’ll be there.
“Are you off the phone?”
Without waiting for an answer, Te swooshes into my office. As always, she knows the answer to her question before she even asks it.
“We’re trying to finalize the press announcement for the Sony promotion.” She pauses, pushing her lips together in an exaggerated pout. “It’s going to be almost impossible to get them to approve our release.”
Sony hadn’t really given me the time of day when I first approached them about a coupon deal. But once they’d seen that we were working with Toshiba, they felt like they had to keep up with the Joneses. You see this all the time in business and in sports—a younger upstart tries something new, and when it works, the industry leader co-opts. Why? Because they can.
Plus, their own promotion—bundling a free copy of James Taylor in Concert with every DVD player—hadn’t really moved the needle. James Taylor is a Sony artist, so it had cost them almost nothing. But they should have known better. It’s 1998, a full twenty years after “Fire and Rain.” Sweet Baby James isn’t really all that enticing to tech geeks.
Te spreads a sheaf of papers out across my conference table.
“Look at this mess,” she says, shaking her head so hard that I get a whiff of hairspray. “I don’t know how they ever get anything done. There doesn’t seem to be anyone with the power to make decisions. I’m starting to think we should just say screw it and announce, whether they approve the release or not.”
“That’s a terrible idea,” I say, coming around from behind my desk and bending over the pages. “I’ve spent weeks trying to get them comfortable trusting a startup. If we go Wild West on them now, it’ll screw everything up.”
But she isn’t lying about their nit-picking. The draft of the announcement is spattered with revisions and cross-outs. “What are they having a problem with now?”
“Everything!” Te throws up her hands, then grabs the release and stabs at it with her bright red pen. “Everything we bring up—the growth of the DVD market, the number of movies coming out, even how excited we are, blah, blah, blah—everything needs to go through about six layers of approval. And that’s not even talking about legal.”
“I’ll call Mike,” I answer. But I’m not optimistic. Mike Fidler is famous for delivering “the smiling screw”: asking you for a deal point that will be brutal, expensive, and difficult, all with a big smile on his face. That’s exactly what he did to me three weeks ago. He’d caught wind that Toshiba was interested, he said, and he thought we could work together, too. But he didn’t want three free DVD rentals: He wanted ten. And that wasn’t all. In addition to the free rentals, he also wanted five totally free DVDs.
This had been an enormously expensive proposition for us. Five free DVDs from our library was essentially a hundred dollars. So, under the terms of his deal, we were basically paying Sony a hundred bucks just for one person who owned a DVD player to visit our site. And that was on top of the cost of fulfilling the five free rentals. Worst of all—I’d promised exclusivity to Toshiba.
But the opportunity to work with Sony, the largest player in the game, had been too good to pass up. It was worth it. I’d given Mike what he wanted.
Pushing him now might piss him off. But calling Mike to argue about the language of the press release would be a lot easier than calling Steve Nickerson, tail between my legs, to admit that I’d been cheating on Toshiba with its hot older sister. Now that is a call I’m dreading making.
“Give me twenty minutes,” I say to Te. “Let’s see if I’m any good at the smiling screw.”
Crisis averted. No hard feelings. Just promises from Mike.
“We’ll try to be a little speedier, a little more proactive,” he says to me. “We’re being careful on this because we think it can really work.”
Music to my ears.
Now, I just have to figure out some way to get people to rent when it isn’t free. It’s taken all day, but I finally have a moment to pull up the data from the morning and begin digging.
Turns out, it’s even worse than I thought. We aren’t just stagnating. We’re losing ground.
Don’t get me wrong—it’s great that we’re doing so much business, two months in. The $100,000 coming in every month from DVD sales not only pays a few of our bills, it demonstrates to our suppliers and partners that we’re real. It gives Eric and his team a chance to stress-test the site under the load of real customers, not projections. It gives our operations team the thrill of seeing real packages going out the door each day. It gives the entire company a sense of momentum.
But it’s a sugar high.
Right now, we’re the only game in town. But it won’t be long before Amazon expands into selling DVDs. And after Amazon, there will be Borders. Then Walmart. And then virtually every other store—online or brick-and-mortar—in America.
When you get down to it, selling DVDs is a commodities business. Looking at the figures, I know that once everyone is selling the exact same thing, pretty much exactly the same way, it will only be a matter of time before our margins shrink to nothing. It might not happen next week, next month, or even next year, but it is inevitable. And when it happens, we’ll be toast.
DVD rental, on the other hand, has real potential. It’s hard to find places to rent DVDs in person, much less online—and it might be a while before that changes. As we’ve found out the hard way, renting DVDs online is operationally difficult, which means that it will be difficult for potential competitors to figure it out. We have at least a year’s head start. Plus, the margins are higher, since you can rent the same disc dozens of times.
The monitors show that we’re selling a lot of DVDs. We just can’t convince anyone to rent from us. And doing both rentals and sales at the same time is really hard. It’s complicated for our inventory: there are some titles that, legally, we can both rent and sell, but others we can only rent, or only sell. Our warehouse and shipping procedures have to accommodate some movies that go out and come back, while others go out and stay out.
Offering both DVD sales and rentals is confusing for our customers, who arrive at Netflix.com unsure of what, exactly, we do. We have to explain on our home page that users can either buy or rent most titles—and a general rule of web design is that if you have to explain something, you’ve already lost. The checkout process is cumbersome, too.
Everything is harder than it needs to be, I think, leaning back in my chair. We have to focus.
But on what?
Should we focus on selling DVDs, which is bringing in 99 percent of our revenue, but will slowly—inevitably—evaporate as competitors crowd the field? Or should we throw our limited resources behind renting DVDs—which, if we can make it work, could be a hugely profitable business, but at this point is showing absolutely no signs of life?
There’s no easy answer.
As I pull into the driveway, I can already hear the murmur of kids in the kitchen, and before I’ve even gotten up the steps to the porch, Logan is running out the door to throw himself into my arms.
“Did you bring home the bacon?” he asks, with a big grin, six years old and in on the joke.
When I carry Logan inside, Morgan looks up from the tiny toy kitchen that she likes to set up while her mother busies herself in the real one. Lorraine is heating up a frozen lasagna, and Morgan appears to be scrambling eggs. “Did you climb the ladder?” she asks, as she always does, knowing by my smile that there is something funny about it, but not exactly sure what.
Lorraine turns away from the oven, blowing a strand of hair away from her face. She kisses me on the cheek and winks. Whatever anxiety about money and the future she was feeling earlier in the day seems to have calmed—money worries and private school tuition can wait. I set Logan down and pick Hunter up out of his high chair, feeling applesauce on my neck as he snuggles himself against my collar.
For the moment, Netflix seems very far away.
The only light in the office spills out of the open door to the “warehouse”—even two months in, we’re still storing all the DVDs in the safe. When he hears the front door open, Jim steps out, a piece of pizza in one hand and a grease-stained paper plate in the other.
“We’re in trouble,” he says, wiggling his arm in a way that signals I should grab the manila folder tucked under his arm. He puts down his pizza, wipes his hands on his jeans, and grabs the folder back. He pulls out a page and points to a column of numbers. “You’ve seen this before, but it’s getting worse.”
All our budgets are based on a 32-cent postage stamp. That’s what you need for a one-ounce letter in 1998. That’s what we’d been aiming for when we designed our mailers. But Jim’s latest analysis shows that only a handful of the previous month’s rentals had made the one-ounce cutoff. Worse, more than half of our mailings had clocked in at two ounces or more.
“It gets worse,” Jim explains, pulling another page from his folder. “Look at our packaging costs.”
My eyes scan the numbers. We are wildly over budget. Our original test—that Patsy Cline CD, stuffed into a greeting card envelope—had been the guiding force behind our budget, but it is clear now that as we moved from concept to scale, it had been a gross oversimplification.
Although I’m upset, I’m not entirely surprised. The second your dream becomes a reality, things get complicated. You simply can’t know how things are going to behave until you’ve actually tried them. Go ahead and write up a plan, but don’t put too much faith in it. The only real way to find something out is to do it.
We’d been lucky that the CD had arrived unscathed at Reed’s house. But when you ship thousands of DVDs across the country, you can’t rely on luck. To protect the DVD from scratches, fingerprints, and other general abuse, the disc needs to be in some sort of sleeve. The plastic sleeve we’ve decided on is sturdy, reusable, and transparent. But it is also expensive and heavy. And it has gotten even heavier (and more expensive) with the addition of a 3″ × 3″ paper label for the movie info and unique serial number.
The mailing envelope has evolved from a simple pink greeting card envelope into a total chimera, made up of disparate parts and scraps. We’ve moved from paper to heavy cardboard, adding a third layer of paper that doubles as the return envelope. The current version, in stacks in the vault behind Jim, has two adhesive strips, and has grown in size (and weight) to accommodate multiple DVDs if needed.
Jim gives me a sheepish grin. “Just one more thing to worry about,” he says, picking up his pizza and turning back to the safe.
I grab one of our mailers, walk across the office, and settle into one of the aluminum lawn chairs that Eric Meyer uses as his “guest chair” next to his desk. Above me, cables snake down through a crack between two ceiling tiles. “There has to be a better way to do this,” I think to myself, idly passing the mailer from hand to hand, opening and closing the flaps.
The flaps. Maybe they could be a different shape. I rifle through Eric’s desk, pulling open a drawer to look for scissors or a knife, or anything I can use to make cuts in paper. No dice.
But I have an idea.
Out in the parking lot, I open the back hatch of the Volvo and grab the beach bag tucked behind the rear seat. Lorraine and I call it the “restaurant bag.” It’s stuffed with all the distractions needed to get through a meal in public with three children under the age of seven: crayons, coloring books, scissors, tapes, modeling clay, pipe cleaners, construction paper, and cardboard. Lots of cardboard.
I tuck the bag under my arm and head into my office, ducking briefly into the warehouse for another handful of mailers. I pour the contents of the restaurant bag onto the conference table, find the cardboard, pull out some scissors, and get to work.
Jim is still bent over the workstation, stripping DVD cases of their cellophane, pulling out DVDs, inserting them into sleeves, adding labels, and neatly hanging them in tight rows on the Peg-Board. A pile of discarded DVD cases lies at his feet. He’ll take them out to the Dumpster at the end of the night—there’s no room for them here, and no reason to keep them.
Jim looks up as I drop my cardboard mock-ups on his desk. “Meet Frankenstein’s mailers,” I tell him. “Or the turducken, if you’re still hungry.”
The new mock-ups are crude: flaps torn off, taped into new positions, new folds made, windows roughly cut, crayon markings—but they’re enough for Jim to go on. He can use them to have some real mock-ups made, weighed, and priced.
I’d had an afternoon espresso and a cup of coffee after dinner with Lorraine, but by now my eyes are drooping, my brain fried. It’s time to go home. I hadn’t even meant to work on the mailers when I returned to the office. But that’s how things are—there is always so much to do that making plans and to-do lists is a waste of time.
Before I leave, I catch Jim walking over to the back of the office. Suresh is there, printing packing slips—I hadn’t noticed him earlier. Next to him is a woman wearing a Salwar kameez and headphones, watching DVDs on a portable player. I’ve encountered her before—she’s Suresh’s wife. A month before launch, Suresh had surprised Eric by saying that he needed to fly back to India to get married. Ever since then, when Devisree, his wife, knows it will be a late night, she keeps him company in the office, sometimes sleeping on one of the couches near his workstation.
True love, startup style. It makes me smile.
I’m lucky to have a much shorter commute to see my family. I drive back home, winding my way up the hill and down the long driveway until the house comes into view. Lorraine has left the porch light on for me. It casts light on the new orange trees I’ve planted in the back, near where I think a garage might eventually go. But all that is far, far in the future.
I sneak inside, taking my shoes off at the door. The house is quiet—the kids are asleep, the kitchen is clean, and Luna, the useless guard dog, is curled at the foot of the stairs. I step over her and skip the fourth step, which always squeaks. Still, Lorraine stirs and opens her eyes as I climb into bed. “How did it go?”
“Making progress,” I say as I put my arm around her. I’m drifting off. But suddenly I have a premonition: Hunter in his crib, in less than six hours, throwing animals over the bars and onto the floor. I nudge Lorraine.
“Your turn tomorrow,” I remind her.