“JESUS, REED, WHERE ARE you taking us?”
The street we were walking on looked like a movie set of skid row. There was trash on the sidewalk, broken glass in the window casements. Most of the businesses were closed, or if they were open, it was hard to tell: Liberty Loans Pawn Shop. Fair Hair Wig Store. And then, a few doors down, a plain doorway with a red awning reading ADULT ENTERTAINMENT CENTER.
“Joy said 1516 Second Avenue,” Reed replied, squinting down at the map he’d printed out that morning. “Should be right around the corner.”
I glanced toward a group of shabbily dressed young men huddled in the doorway of a large building. The sign on the window read DEPARTMENT OF PUBLIC HEALTH—NEEDLE EXCHANGE PROGRAM. “Somehow I think I expected something a little more…I don’t know, modern?”
“There it is,” Reed said, pointing to a run-down four-story brick building across the street. The windows were dusty and streaked. A faded sign over the front door said COLUMBIA. Maybe this building had once housed a world-changing company, but it was clear that if so, it had been many years in the past. “See! 1516.”
We crossed the street and Reed stepped up to the door. He seemed unsure now, less certain—despite what his map told him—that this could actually be the place. I leaned in toward one of the tall glass windows that made up the front of the building. If I cupped my hands around my eyes, I could just see into the dimly lit lobby. On the wall, behind a faded wood desk, was a large sign reading AMAZON.COM.
Reed had gotten the call a few days earlier from Joy Covey, Amazon’s CFO. She wondered if we would be interested in coming up to Seattle to meet with her and Jeff Bezos, Amazon’s founder and CEO. She didn’t say why she wanted to meet, but she didn’t need to. It was obvious.
Although Amazon was only a few years old, and still strictly a place to buy books, Bezos had decided early in 1998 that his site wouldn’t just be a bookstore. It was going to be an everything store, and we knew that music and video were going to be his next two targets. Although it was unlikely that Jeff would be interested (or foolish) enough to rent DVDs, it was clear that he was soon going to start selling them. And once that happened, we’d be out of business. Fast.
We’d also heard from our VC connections that Bezos planned to use a good chunk of the $54 million raised during his company’s 1997 IPO to finance an aggressive acquisition of smaller companies. That’s normal—most companies looking to enter a new business arena do what’s called a “make-or-buy analysis,” in which they consider the cost, timing, and difficulty of starting a new business from scratch, then evaluate whether it would be cheaper, faster, and better to simply buy another company that’s already doing it.
With that in mind, it didn’t take us long to figure out why Jeff and Joy wanted to meet. Netflix was in play.
I’d be lying if I said that the feeling—although thrilling—wasn’t also a little bittersweet. In the summer of 1998, we’d finally gotten the engine to turn over, and we were just starting to pick up some speed. I wasn’t quite ready to put it in park and hand over the keys.
But when Amazon calls, you pick up the phone. Even if it’s 1998, and Amazon is nowhere near the powerhouse it is today.
The building we were winding our way through certainly didn’t look like it belonged to a powerhouse. The stairs to the second floor were warped and creaky. The reception area was cluttered and dusty. Piles of Amazon boxes were pushed into the corners. The chairs against the wall were mismatched. On the desk was a telephone with a printed directory of numbers under a piece of glass. Reed leaned over, squinted at the glass, and dialed a number.
Within seconds, Joy swept into the lobby, giving Reed and me huge smiles, like we were long-lost friends. Pretty and athletic, with shoulder-length dark-blond hair falling over a string of huge pearls, Covey was younger than either of us. But she was already a respected and successful businesswoman, a dynamo who had taken Amazon public just twelve months ago, convincing skeptical investment bankers that a company that wasn’t remotely profitable—and didn’t plan to be anytime soon—was worth $20 billion.
Joy was sharp. She reportedly had an IQ of 173. She’d dropped out of high school at fifteen, bagged groceries to pay her bills, gotten her GED, and then graduated from Cal State–Fresno in two and a half years. After a brief stint as an accountant, she’d gotten dual master’s degrees from Harvard, in business and in law.
When Bezos had recruited Covey to Amazon, she’d casually mentioned that after college she had managed to get the second-highest score in the country on the CPA exam—a test taken by nearly seventy thousand other aspiring accountants. When Bezos had teased her—“Really, Joy? The second-highest?”—Covey had shot back, “I didn’t study.”
As Covey led us back into the warren of cubicles that made up the Amazon offices, it was hard for me to believe that this was the company reinventing e-commerce. The carpeting was stained; the partitions used to separate the cubicles were dirty and torn. Dogs roamed the hallways. There were multiple people per cubicle, desks under the stairs, desks pushed to the edges of hallways. Almost every horizontal surface was covered: by books; by gaping Amazon boxes; by papers, printouts, coffee cups, plates, and pizza boxes. It made the green carpeting and beach chairs of the Netflix offices seem like the executive suite at IBM.
We could hear Jeff Bezos before we saw him. He-huh-huh-huh-huh. Jeff has a…distinctive laugh. If you’ve seen any video of him speaking, you’ll have heard a version of it—but not the true, untamed thing. In the same way that he’s definitely hired a personal trainer since the late nineties, I think he’s also worked with someone to tame his laugh. Now it’s polite, a little giggly. But back then, it was explosive, loud, hiccupping. He laughed the way that Barney Rubble laughs on The Flintstones.
He was in his office, just hanging up the phone when we walked in. His desk, and the desks of the two other people he shared the office with, were made of doors that had been mounted atop 4 × 4 wooden legs, braced with triangular metal pieces. I suddenly realized that every desk I’d seen in that office was the same: all made from doors, all on top of simple repurposed 4 × 4s.
A short man, Bezos was wearing pressed khaki pants and a crisp blue oxford shirt. He was already well on his way to being completely bald, and the combination of the huge forehead, a slightly peaked nose, a shirt that was a little too big for him, and a neck that was a little too small all had the effect of making him look like a turtle that had just popped its head out of its shell. Behind him, hanging from an exposed pipe in the ceiling, four or five identical pressed blue oxford shirts fluttered in the breeze provided by an oscillating fan.
After the introductions had been made, we filed into a corner of the building where enough space had been cleared to fit a bigger table with eight chairs around it. This table, too, was made from recycled doors. I could clearly see where the holes that used to hold the doorknobs had been neatly patched with circular plugs of wood.
“Okay, Jeff,” I said, grinning. “What’s with all the doors?”
“It’s a deliberate message,” he explained. “Everyone in the company has them. It’s a way of saying that we spend money on things that affect our customers, not on things that don’t.”
Netflix was the same way, I told him. We didn’t even provide chairs.
He laughed. “It’s like this building. It’s a mess. We barely have room to turn around in it. But it’s cheap. I’ve held out as long as I can, but even I admit that we need more space now. We just signed a lease on what used to be the Seattle Pacific Medical Center. It’s huge—but we got a great deal, because no one else wanted it.”
I wasn’t surprised to hear any of this. Bezos was notoriously frugal—even cheap. He was famous for his “two-pizza meetings”—the idea being that if it took more than two pizzas to feed a group of people working on a problem, then you had hired too many people. People worked long hours for him, and they didn’t get paid a lot.
But Bezos inspired loyalty. He’s one of those geniuses—like Steve Jobs, or like Reed—whose peculiarities only add to his legend. In Jeff’s case, his legendary intelligence and notorious nerdiness mix into a kind of contagious enthusiasm that pushed him headlong into every challenge. He didn’t look back—or, as he put it, he “evaluated opportunities using a regret minimization framework.” He showed Reed his wristwatch, bragging that it updated itself thirty-six times a day by picking up the radio signal from the national atomic clock in Fort Collins, Colorado. A Star Trek fan, Bezos had spent his entire childhood acting out scenes from the show with his friends. His pals would play Kirk or Spock. Jeff was always the Enterprise’s computer.
When he spoke, I noticed that unlike me, Jeff didn’t gesture with his hands. Instead, he used his head for emphasis, lifting his chin up for questions, dropping it down suddenly for emphasis. Twisting his head at a 45-degree angle meant he was curious. At thirty-four, his demeanor still retained a strong dose of “gee whiz” enthusiasm, but all the childlike delight in the world couldn’t mask the analytical and ambitious brain constantly at work behind his unblinking eyes.
As I started to bring Jeff up to speed about Netflix, detailing the efforts we’d made to get the site off the ground, he peppered me with questions. How could I know that I had every DVD? How could I forecast expected turns? What did I expect the ratio of sales to rentals to be? But it was clear to me that what he was most excited about were the stories about launch day—particularly, the story of that ringing bell.
“That’s fantastic!” he exclaimed, so excited that he almost moved his hands. “We had the exact same thing! A bell that rang every time an order came in. I had to stop everyone from rushing over to the computer screens to see if they knew the customers.”
We traded beta names: he laughed at Kibble and told me that Amazon had originally called itself Cadabra, which he had thought evoked the sense of magic that online shopping could produce. “The problem is that Cadabra sounds a little too much like cadaver,” Bezos said, barking out a laugh.
Although Amazon was still relatively small in 1998, they already had over 600 employees and were doing more than $150 million in revenue. They were a real company now, with real pressures, but as Jeff and I chatted about our launch days, I could see in his face and hear in his voice that in many ways he missed those simpler, more exciting times.
Reed, on the other hand, was obviously bored. Forget “regret minimization framework”—Reed has never been someone who dwells, at all, on the past, so these stories of early struggles and frenetic launch days were of little interest to him. His placid stare had turned stony, and he was impatiently jogging his leg up and down. He wanted, I knew, to direct the conversation to the topics at hand: what Netflix was doing, how it could potentially fit with what Amazon was doing, and how some kind of “arrangement” could be a win-win situation for both parties.
I was just finishing bringing Jeff and Joy through my professional résumé, and was about to brief them on Christina, Te, and other key members of our team, when Reed decided he’d had enough.
“We don’t need to go through all this,” he said, exasperated. “What does this have to do with Netflix and Amazon and possible ways we can work together?”
Everyone stopped. It was quiet.
“Reed,” I said after a few seconds. “It’s obvious that Amazon is considering using Netflix to jump-start their entry into video. Our people would be a huge part of any possible acquisition, so it’s entirely appropriate for them to want to understand who we are.”
I was relieved when Joy jumped in to help. “Reed,” she suggested, “can you help me understand a bit better how you’re thinking about your unit economics?”
This was exactly what Reed wanted to hear, and with obvious relief that we were finally on topic, he began running Joy through the numbers.
An hour later, after the meeting was over and Bezos had headed back to his office, Joy lingered behind to wrap things up. “I’m very impressed with what you’ve accomplished,” she started, “and I think there is lots of potential for a strong partnership to jump-start our entry into video. But…”
Now, let me interject something here. I’m not a “but” man. Nothing good ever comes of that word. This time was no exception.
“But,” Joy continued, “if we elect to continue down this path, we’re probably going to land somewhere in the low eight figures.”
When someone uses the term “eight figures,” they are referring to digits. Eight figures translates to tens of millions of dollars. When someone uses “low eight figures,” that means barely eight figures. That means probably something between $14 million and $16 million.
That would have been a pretty good outcome for me, since at the time, I owned about 30 percent of the company. Thirty percent of $15 million is a pretty nice return for twelve months of work—particularly when your wife is broadly hinting that it might be time to pull the kids out of private school, sell the house, and move to Montana.
But for Reed, it wasn’t enough. He owned the other 70 percent of the company, but he’d also invested $2 million in it. And he was fresh off the Pure Atria IPO. He was already an “eight-figure guy.” A high-eight-figure guy.
On the plane ride home, we discussed the pros and cons. The pros? We’d find a solution for our biggest problems: We weren’t making any money. We didn’t have a repeatable, scalable, or profitable business model. We were doing plenty of business, most of it through DVD sales, but our costs were high. It was expensive to buy DVDs. Expensive to ship them. Expensive to give away thousands of DVDs in promotions, hoping that we’d convert onetime users into return customers.
And of course there was the bigger problem. Which was that if we didn’t sell to them, we would soon be competing with them. So long, DVD sales. So long, Netflix.
Selling to Amazon now would solve all those problems—or at least it would hand them off to a larger company with deeper pockets.
We were also on the brink of something. We had a working website. We had a smart team. We had deals in place with a handful of DVD manufacturers. We had figured out how to source virtually every DVD currently available. We were unquestionably the best source on the internet for DVDs.
Amazon’s entry as a competitor would undoubtedly make things more complicated and difficult. But we had a bit of time. And it still didn’t seem like the right moment to give up.
“Listen, Marc,” Reed said over airline peanuts and ginger ale, as we watched Mount Rainier scroll by outside the window. “This business has real potential. I think we could make more on this than on the Pure Atria deal.”
I nodded in agreement. And then, for some reason, I chose that moment to tell Reed that we should abandon the only profitable part of our business. I think it was the afternoon with Bezos—seeing Amazon in the flesh, dingy office and all, just reinforced for me that we could never compete in the DVD retail sales market. Better to focus on what made us different and unique.
“We just have to figure out some way to get out of selling DVDs,” I said to him. “Doing rental and sales is confusing for our customers and unnecessarily complex for ops. And if we don’t sell, Amazon will destroy us when they enter the field. I think we get out now. Focus on rental.”
Reed arched his eyebrows.
“Kinda puts all our eggs in one basket,” he said.
“That’s the only way to make sure you don’t break any,” I replied.
That’s true, by the way. One of the key lessons I learned at Netflix was the necessity not only of creative ideation, or of having the right people around you, but of focus. At a startup, it’s hard enough to get a single thing right, much less a whole bunch of things. Especially if the things you are trying to do are not only dissimilar but actively impede each other.
Focus is imperative. Even when the thing you’re focusing on seems impossible. Especially then.
But Reed agreed with me. “You’re right,” he said, throwing back a few peanuts. “If we get funding this summer, that’ll buy us some time. It’s a difficult problem.”
He frowned, but I could tell he was pleased to have something new to chew on.
“What percentage of revenue comes from rental right now?”
“Roughly three percent,” I said, signaling to the flight attendant for a much-needed gin and tonic.
“That’s horrible,” Reed said. “But sales are a Band-Aid. If we rip it off…”
“Then we have to focus on the wound,” I said, squeezing my lime into the drink.
We went back and forth like this for the rest of the plane ride, and it was only when we landed that I realized we hadn’t actually formally decided not to take Bezos’s offer. We’d just naturally gone back into our carpool-on-17 mode, lobbing ideas back and forth and shooting them down. Without deciding, we’d decided: we weren’t ready to sell.
Before we landed, we agreed that Reed would let Amazon down lightly—and politely. We’d be better off having Amazon as a friend, not an enemy. And once they entered the DVD sales business, there might still be a way to make it work.
In the meantime, we needed to figure out a way to get people renting from us.
When an opportunity comes knocking, you don’t necessarily have to open your door. But you owe it to yourself to at least look through the keyhole. That’s what we’d done with Amazon.
As the weeks went by that summer, that glimpse started to look a lot more enticing. Because not all the meetings I attended with Reed went as well as the one with Bezos.
Our number one problem, after launch, was money. We had taken on an additional $250,000 just before the launch from Rick Schell, an old colleague of mine from Borland, but that had quickly been absorbed by the steadily increasing pile of DVDs that we were shoehorning into our warehouse. We still had cash in the bank, but we were rapidly approaching the point where we’d need more. That money was definitely not coming from our own profits—it was still far too early for that. But to raise our Series B round of funding, we were going to have to convince some people that our business wasn’t just shiny and new, but that it had the potential to be profitable. Massively profitable. And fairly soon.
We weren’t approaching friends and family this time. We were approaching professional investors. Real venture capitalists. And they would need more than a sincere look communicating how hungry I was. They needed data.
Sounds easy, right? Wrong.
Flash-forward to my Volvo station wagon idling in a parking space in front of the Sand Hill Road offices of Institutional Venture Partners, a prominent Silicon Valley venture capital firm. In just twenty minutes, we will be ushered into an opulent conference room, where we’ll make the case for why IVP should invest in us. We’re asking for $4 million. I’m freaking out, and even Reed, who normally isn’t one to show emotion, is visibly concerned. It is obvious to both of us that my numbers aren’t adding up.
For the previous three nights, the lights have stayed on late in our small conference room. Duane Mensinger—the interim CFO who isn’t even confident enough about the numbers to come on full-time—and I have burned the midnight oil coming up with multiple financial scenarios, trying to make the numbers show that, with just a nominal investment, we can get our company to a place where we could actually make money.
But it’s not looking good.
Reed is hunched forward in the passenger seat, looking at the numbers for the first time and seeing clearly what will also become evident to the IVP partners just a short while later: that without some tectonic change in the market landscape, our company won’t make it.
“Okay,” I say, flipping open my laptop and rehearsing my pitch. “As you can see, our user growth has exploded in the weeks post-launch. Site traffic is up three hundred percent, with at least half of all visitors to Netflix.com trying the service out. We expect that, pursuant to our deals with Toshiba and Sony, we’ll see a two hundred percent uptick in user acquisition by the New Year, when DVD player sales…”
“These numbers don’t make sense, Marc,” Reed interrupts. “You still aren’t capturing enough revenue from each new user to cover the expenses of the promotion. It’s like a taxi driving all the way to another state just to pick up a four-dollar fare.”
He’s right. Our promotions with Toshiba and Sony are reaching new DVD owners, but they’re enormously expensive. We are spending a lot of money up front to get people in the door. Factoring in two-way shipping, the mailer, the labor, and the DVD, each of those three-free-DVD rentals is costing us more than $15, and the Sony deal—with its ten free-rentals—is even more expensive.
None of this would be so bad if every free trial eventually turned into a return renter (read: paying customer), but most of our free-trial users are only tire kickers. In fact, only about 5 percent of them actually return and rent again. That means that we have to subsidize twenty freebies (at $15 apiece) for every actual customer we get out of the deal. Do the math: every paying customer is costing us $300. We call that CAC. Pronounced kack, it stands for “cost of acquiring a customer.” It’s also the noise you make when you realize that you’ll never be able to make enough money to justify CAC being so big.
I pivot, laying the charm on thick. “We’re seeing a thirty percent increase, month over month,” I say, pointing to a graph, its columns growing, April to July, like an in-progress skyscraper. “That number will only increase, as the format grows more popular. Already, DVD players are half as expensive this year as they were last year. People are buying the technology—and when they do, Netflix is one of the first things they see. Christmas this year will be huge.”
“It won’t matter if Santa Claus himself rides into Scotts Valley,” Reed says, “if we’re just giving away the house on promotions.”
“I know,” I say, frowning. I’ve been so focused on the launch, on growing the company, on making it exist at all, that I’ve lost sight of the reason we’re doing this in the first place: to create something real that can stand on its own.
I’ve missed the forest for the trees.
Reed looks at me curiously, cocking his head, then shaking it. He’s not accustomed to seeing me this rattled. Historically, I’ve been the one to help him out with presentations, with pitches. I’ve helped him soften his message, helped him pivot from inconvenient problems. I’ve tried (mostly unsuccessfully) to teach him to lighten tension with a joke. The key to these pitches is to read the room, sense what they want to hear, and then give that to them—without lying, obfuscating, or distorting the truth. In a pitch, perfection isn’t always the goal: projection is. You don’t have to have all the answers if you appear to be the sort of person to whom they’ll eventually come.
I am not that person, sitting in the parking lot. And Reed can see it.
“Come on,” he says, opening the door. “Let’s go.”
I sit for a while, clicking through the slides one more time, chugging a few last gulps of coffee.
“Get your shit together, Marc,” Reed says. Then he shuts the door.
The pitch did not go particularly well. Though they didn’t question my slides the way Reed had, the firm seemed dubious. And within a few days, one of their analysts was calling the office, asking questions that I didn’t have great answers for yet.
Eventually, they decided to fund us. But that had less to do with my pitch than Reed’s presence. Reed was a known quantity, venture capitalist catnip. He’d orchestrated major deals, he’d appeared—reluctantly—on the cover of USA Today next to his Porsche. People with money trusted him because he had a track record of making them money. Even in 1998, he had around his head the halo of Silicon Valley success: when Pure went public, well before the merger with Atria, he made a lot of people rich.
More importantly, he had a track record of solving seemingly unsolvable problems. Investors and VCs knew this even then. They definitely know it now. That’s why the second he walks into a room, people whip out their checkbooks. They know that what he does isn’t teachable, isn’t reproducible—hell, it’s barely even explicable. He’s just got it.
That’s what great entrepreneurs do, in the end: the impossible. Jeff Bezos, Steve Jobs, Reed Hastings—they’re all geniuses who did something that no one thought was possible. And if you do that once, your odds of doing it again are exponentially higher.
IVP funded us not because our forecast was good, or our pitch was perfect, or because I’d wowed them with my slides and enthusiasm. IVP funded us because, despite how impossible things looked, Reed was a miracle worker, and Reed was on board.
I was thankful for that. And I was thankful, too, that even though Reed was still running TechNet that summer, he had started taking a daily interest in what we were doing in Scotts Valley. But in retrospect, I can also now see that that’s when everything started to change.
One of the paradoxes of memory is how it distorts time. If you’d asked me, before writing this book, how long the truly early days of Netflix lasted—the days of lawn chairs and pathetic Christmas parties, heated arguments and hash browns at Hobee’s—I would have scratched my head and said a year and a half, two years.
Really, it was about a year. But those eleven or twelve months were crucial. They exist in a kind of peaceable vacuum, set apart from what came before and what came after. Before we almost sold ourselves to Amazon, we were just trying to make something happen that no one else had ever done. We were working independently of competition. We were, in a sense, protected by the walls of that bank vault. We had a stinky, green-carpeted place to dream.
The ancient Greeks had a term for this: halcyon days. I won’t bore you too much with the mythology, but essentially, they referred to the seven days each year when the winds were calm and Alcyone, a kingfisher, could lay her eggs.
The halcyon days of Netflix ran from the summer of 1997 to the summer of 1998. There wasn’t a moment, that fall or afterward, when I realized that they were over—transitions rarely work like that. When change is incremental, it’s hard to put your finger on the end point. The ironic thing is that change is what you wanted all along. It’s the point of any startup, and it’s what we worked so hard to have happen. But that doesn’t make it any easier when it does.
Still, with the benefit of hindsight, I can pinpoint a high-water mark, and tell you that the halcyon days of early Netflix were at their apogee in June, during our summer company picnic at Hallcrest Vineyards. I remember it so clearly: picnic tables topped with pizzas, an open field surrounded by redwoods, glasses of wine in all our hands. Luna and a pack of other people’s dogs ran free in the grass, and all our kids were shooting each other with brand-new Super Soakers, bought for the occasion. With Reed’s help, we’d just raised $6 million to get us through to the end of the year, and we were expanding daily, hiring new engineers and web designers, building our inventory, and acquiring thousands of new customers per month. I’d given a toast to our employees and bored kids, and at the end of it, Mitch Lowe had proudly presented me with a NETFLIX vanity license plate. I was holding it with one hand, and with the other I was holding a glass of Pinot Noir, looking down into the Valley and thinking, You know, this is going pretty well.
A year, maybe a little more. Doesn’t sound like a lot. But those twelve months or so determined so much about the company’s culture, direction, and ethos. Netflix today wouldn’t exist without them—or if it did, it would look a hell of a lot different.
Netflix also wouldn’t exist today without what happened after. That’s the thing about halcyon days: you need them, but if you want your egg to hatch and the bird to fly away, you need a little wind.