ALISAL RANCH MIGHT NOT be at the end of the earth—but you can see it from there.
If you want to see for yourself, head to Santa Barbara. Then drive thirty miles north, up the 101. Veer east when you reach the town of Solvang and its rows of faux-Danish storefronts. Leave the quaint markers of civilization behind, and continue on a single-lane secondary road, through brown bunchgrass meadows dotted with California oaks. Kick up clouds of dust for what seems like hours. And just when you think you’re really and truly lost, you’ll find yourself coming around a sharp bend and there it will be: the Alisal Guest Ranch. Ten thousand acres of rolling California foothills in the middle of nowhere.
I don’t know what we were thinking—or even who was thinking it—but the Alisal Ranch is where, in September of 2000, right as the last bit of air was streaming out of the dot-com balloon, we decided to have our first corporate retreat.
There was plenty for us to retreat and talk about that September. Earlier, in the spring, we’d raised another $50 million in financing—our Series E—bringing the total amount of money invested in Netflix to more than $100 million. The share price for the Series E had come in at nearly $10 per share. And since I still owned a shitload of shares, I was now worth an absolutely obscene amount of money…at least on paper. Since I couldn’t sell any of my stock, it was just imaginary—funny money. Still, it reduced the frequency with which Lorraine brought up the idea of selling the house and moving to Montana.
Netflix now had more than 350 employees, and we had long since passed the point where I knew everybody. We’d continued on our streak of making major talent hires—the most recent being Leslie Kilgore, whom Reed had convinced to leave Amazon to head our marketing efforts as CMO, and Ted Sarandos, who now managed our content acquisition.
Since walking away from à la carte rentals, our no-due-dates, no-late-fees program had steadily built up steam. Users loved Cinematch, our recommendation engine. We did, too. It kept our subscribers’ queues full—and nothing, we found, correlated more to retention than a queue with lots of movies in it. We were now approaching nearly 200,000 paying subscribers. Our other metrics were looking pretty impressive as well. We now carried 5,800 different DVD titles and shipped more than 800,000 discs a month, and our warehouse was packed with more than a million discs. Tom Dillon was making headway on a method to ensure that users could get access to those discs within a day of ordering them.
Earlier in the year, at the height of the dot-com boom, we’d seen the bankers circling us like vultures with briefcases, and had even flirted with going public. More than flirted, really. We’d chosen Deutsche Bank to manage the offering, had hired accountants to go over our books, and had drawn up an S-1 (also known as a registration statement), the document laying out to the Securities and Exchange Commission a summary of our business: what we did, how we did it, and what our risk factors were.
We’d even started changing Netflix’s identity to appeal to risk-averse banks and their customers. The big trend, in the late 1990s and early 2000s, was for internet companies to be portals—entry points on the internet for a specific niche. The popular wisdom at the time was that if you wanted to be a successful website, you had to be all things to all people—if you wanted to chase money, you had to chase traffic first. That meant that Netflix couldn’t just be a rental service aimed at helping people find the DVDs they’d love—it had to be a place for movie lovers of all stripes.
The VCs on our board had told us that if we wanted to go public, we needed to think big: Movie showtimes. Movie reviews. A monthly column by Leonard Maltin, king of the video guides. Etc. We’d done all of it, but I’d been unable to shake the suspicion that we were getting distracted, salivating over dollar signs and eyeing possible valuations.
Then the bubble had burst. From its high in March, the Nasdaq stock exchange—which is where most technology companies are listed—had entered a period of steady decline, punctuated by a terrifying 25 percent drop the week of April 14. That was the exact week that we filed our S-1 with the SEC, asking permission to go public. Over the following months, as the market continued to slump, Deutsche Bank had continued to project false enthusiasm, offering steadily weakening reassurances that we would be okay.
By the fall, though, it had become obvious to everyone that the numbers we’d been excitedly bandying back and forth as the solution to all our problems—$75 million? $80 million?—had evaporated into thin air. I’d gotten the call that Deutsche Bank was pulling the offering one rainy Saturday morning in September, while I was shopping with Lorraine in Carmel. Needless to say, we didn’t buy anything.
At the time, not going public had felt like a major blow. But in retrospect, it was possibly one of the best things that ever happened to us. If we’d gone public in the fall of 2000, we would have been tied to the portal idea and to the unrealistic financial expectations that we had built around it—and that would have been a disaster. We never would have been able to make any money as an all things to all people site. Becoming a “movie portal” was the complete opposite of the Canada Principle. It didn’t allow for the rigorous focus that set us apart—and which ultimately provided us with the business model to succeed on our own terms.
We quietly started abandoning most of our portal-oriented efforts. If the people who wanted movie showtimes and in-depth critics’ reviews and top-ten lists were just the banks and their customers, and the bank didn’t want to take us public, then why keep them?
So by September, we were back to where we started. We didn’t have $75 million in our pockets, and we were losing money—lots of money. Up until now, with Reed at the helm, we’d been able to find funding fairly easily, and we had long reassured ourselves that as long as we could continue to use Silicon Valley money to support our growth, we would be okay. But in a post-bubble era, getting it from our usual VC sources would be hard. Really hard.
I worried about how the bursting of the dot-com bubble would affect Netflix’s finances. But I have to confess that I wasn’t sad to see some sort of adjustment coming down the pike. All of the dot-com hype had seemed crazy to me. Watching the Super Bowl with Lorraine back in January, I’d kept a running tally: No fewer than sixteen companies with dot-com in their names had advertised during the game, spending upward of $2 million for each spot. That was more money out the door per spot than Netflix had spent its entire first year.
At the height of the dot-com boom, the prevailing attitude at many companies had been spend now, worry later. It had become routine for companies to spend lavishly on parties, promotions, and facilities. No one put it better than Stephan Paternot, CEO of TheGlobe.com. After his 1998 IPO, he famously said, “Got the girl. Got the money. Now I’m ready to live a disgusting, frivolous life.”
That wasn’t us. Netflix had long since outgrown its card tables and beach chairs, but we were still pretty frugal—when we moved to Los Gatos, we’d bought used cubicles and secondhand furniture. The only nod to lavish decoration was a popcorn machine in the main atrium, and even that didn’t work most of the time. I’d never understood what companies were thinking when they spent tens of thousands of dollars on carpeting or bought thousand-dollar Aeron chairs for every employee. Frankly, I don’t understand it even now.
It had been an age of decadence, in other words. And like all decadent eras, it hadn’t lasted. By the time we were headed to Alisal Ranch, there wasn’t much decadence left. Boo.com, the online clothing e-tailer, had filed for bankruptcy after spending more than $175 million in only six months. The rumor mill had Pets.com on the verge of collapse after the company spent more than $150 million in the first half of the year. Webvan’s stock would fall from $30 per share to 6 cents per share after the online grocer spent nearly a billion dollars on expansion. Drkoop.com, the online portal founded by 82-year-old retired surgeon general C. Everett Koop—which had managed to go public with not a single penny in revenue—was losing tens of millions of dollars every quarter.
Reed and I viewed these failures with—I have to admit it—a little bit of schadenfreude. One of our pastimes that year was scrolling through entries on Fucked Company, the cynical website of record for troubled and failing dot-coms, thinking that could have been us, even when reading about obviously mismanaged and doomed-from-the-start entries.
But we were especially concerned to read about the troubles of Kozmo.com, an urban delivery service that had launched in 1999 promising to deliver a huge range of products—including DVDs—to customers’ homes within an hour. In 1999, we’d worried that Kozmo would enter the rental market and use its one-hour delivery to crush our slower service. But as Kozmo floundered through 2000, first squandering the $280 million it had raised from investors (including a $60 million investment from Amazon!), and then canceling its planned IPO, we found ourselves wondering if the company’s prominent failure would doom everyone else in their category—no matter how tangentially.
Fortunately, unlike Dr. Koop, Boo.com, or Webvan, we actually had a business model that made sense. A subscription to Netflix cost a user $19.99 per month—on average, $4 more than it cost us to actually provide the service. We made money on every transaction. Basic economics.
We had a different problem than the Dr. Koops or Webvans of the world: we were successful, and success is expensive.
In fact, we were drowning in our own success. The faster new customers poured in, the faster money poured out. Our business model was hard to explain to potential customers, but we knew that if people tried our service, they’d be hooked. That’s why everyone who wanted to try Netflix got their first month free. That was expensive.
What’s more, we were a subscription service. Rather than charging our customers an annual fee when they signed up, we charged them a smaller amount each month. So when you added it up, we were in a perpetual cash crunch: we had to pay the full cost of every free trial all at once, up front. But the money we could use to pay it all back dribbled in slowly, month after month. The faster we gained customers, the more these up-front payments outweighed the much smaller amount we collected in monthly charges.
Basic economics again. And unfortunately, not so favorable to us. Our company was successful, but it had a voracious appetite for cash in an environment where cash was hard to come by. After the dot-com bubble burst, venture capital—which had once been comically easy to acquire, if you had a “.com” in your name—had become not just hard to get but almost completely unavailable.
It was time to seek strategic alternatives.
Sound like jargon? That’s because it is. Silicon Valley is full of nonsense phrases just like it. For instance, when someone says that he’s leaving to spend more time with his family, what that really means is my ass got fired. When someone says this marketing copy just needs some wordsmithing, what they really mean is this sucks and needs to be completely rewritten. When someone says we decided to pivot, what they really mean is we fucked up, royally.
And when a company decides to seek strategic alternatives, what they’re saying is: We’ve got to sell this sucker. And fast.
We’d come a long way since declining Amazon’s hazy low-eight-figure offer. The company had totally revamped its business model, undergone enormous growth, and become synonymous with online rental of DVDs. So the obvious strategic alternative this time wasn’t Amazon but our biggest brick-and-mortar competitor: Blockbuster.
Blockbuster had been the brainchild of Wayne Huizenga, who in the late 1980s saw an opportunity to “roll up” the still mostly mom-and-pop video stores that dotted the country. Rapid expansion in the 1990s—at one point, the company was opening one new store every day—had given them a near monopoly on video rental and had made them one of the most ubiquitous brands in the country. They were king of the world in 2000, but we had no idea if they even knew who we were. Or if they cared.
As big a deal as we were online, we did a fraction of the business they did. We were on track to do $5 million in revenue in 2000—Blockbuster was aiming for $6 billion. We had 350 employees—they had 60,000. We had a two-story HQ in an office park in Los Gatos—they had 9,000 stores.
They were Goliath. We were David.
But we knew that e-commerce was the future. If Blockbuster wanted to survive, it needed to develop an alternative to brick-and-mortar stores. If they recognized that, they might want to do what larger companies always did when faced with an upstart competitor—buy it. Eliminate the competition and save money on development, all in one fell swoop.
Reed had asked Barry McCarthy to reach out to his contacts at Blockbuster to try to get a meeting. We’d asked our VCs to tap into their networks. We’d done whatever we could to try to get Blockbuster’s attention. But as of the corporate retreat that September, we’d heard nothing. Not even crickets. Silence. It looked like we would have to get out of this on our own.
It’s common knowledge that things in Silicon Valley are pretty casual. There’s not a lot of room for suits, ties, that sort of thing. People have come to understand that it’s a sign of great respect if I shave for a meeting.
I think the reason the Valley is so casual is because, unlike most industries, tech is about as close to a true meritocracy as you can get. In many disciplines, being a smooth talker or a snappy dresser can grease your ascent to the executive suite. But in Silicon Valley the only thing that really matters is the quality of your work. It’s a programmer’s world, with a programmer’s ethos. Every programmer is accustomed to having their code subjected to peer review, in which fellow coders evaluate its brevity, elegance, cleverness, simplicity, and ultimate effectiveness. It’s all there in black and white. It matters not at all what you look or dress like; what you talk or smell like. You don’t need to speak English. If your code is good, you’re in. If your code sucks, it’s immediately apparent to everybody.
In a place where you’re evaluated solely on the quality of your work, no one really cares about your appearance. That carries over, too. Even those of us who wouldn’t know a line of code if it wrapped itself around our necks and sang the national anthem still get to take advantage of the fact that some fraction of the company shows up each day in shorts, Birkenstocks, and stained Star Wars T-shirts.
If things are that relaxed during the regular workweek, you have to really work at it when you go on a retreat. Here’s what I packed for three days and two nights at Alisal:
- Two pairs of shorts
- One Grateful Dead tank top
- One tie-dyed T-shirt
- One pair of flip-flops
- One Life Is Good baseball hat, to be worn ironically (I hate that brand)
- One pair of Oakley sunglasses
- Three Harley Davidson rub-on tattoos: one Harley logo, one flaming hog, and one buxom bikini babe
In case you’re wondering why I bought Harley Davidson rub-on tattoos, the answer is simple: I thought it would be funny. (That’s the ruling criterion for a lot of my behavior.) Despite the casual dress code of the normal workweek, employees at Netflix were required to wear shirts in the office. So no one, up to this point, knew whether or not I was sporting ink under the corporate-branded swag I usually wore. I was pretty sure no one suspected that the forty-five-year-old dad would be inked up, even if he was from Santa Cruz. So how better to lighten the atmosphere than to peel off my Built to Last tank top at the pool and let the gossip fly?
What can I say? I’m easily amused.
When I think back to our 2000 retreat, I don’t remember any of the business that we conducted. I don’t remember discussions about apportionment of investment, realignment of priorities, departmental initiatives, or any of the other corporate bullshit we might have felt honor-bound to spend some time on.
What I remember are the things that built culture.
Alisal offered the usual activities that I’m sure most companies would have engaged in—horseback rides, trust falls, tennis—but at Netflix we were wired a little bit differently. Inspired by our employee onboarding, the highlight of our retreat was to be a skit throw-down between the Netflix departments, each of which would enact a scene from a recently released DVD.
As luck would have it, one of the biggest DVD releases of that summer was the Kirsten Dunst vehicle Bring It On. Remember that movie? If not, here’s the synopsis we used on the website:
Torrance Shipman’s cheerleading squad at Rancho Carne High School in San Diego has got spirit, spunk, sass, and a killer routine that’s sure to land them the national championship trophy for the sixth year in a row. But the road to total cheer glory takes a shady turn when they discover that their perfectly choreographed routines were in fact stolen from the Clovers, a hip-hop squad from East Compton.
Sounds like my kind of thing, right?
The only option, clearly, was for the entire executive team at Netflix to dress in cheerleading outfits and do a team cheer. Imagine us all chanting Brrr…, it’s cold in here! / There must be some Netflix in the AT-mosphere! Imagine Reed Hastings in a cheerleader outfit, pom-poms in each hand. And me and Ted Sarandos, representing the squad from East Compton, in do-rags, oversize jerseys, baggy shorts, and a lot of gold chains, letting loose a rousing rendition of that summer’s mega-smash by the Baha Men, “Who Let the Dogs Out.”
Did I mention that alcohol was involved?
Later that night, we had a full banquet, with hundreds of us squeezed together at long wooden tables covered in red-and-white checkered tablecloths, eating heaping plates of ribs. Our invitation had specified “Ranch Formal” dress, without any details about what “Ranch Formal” actually was. Interpretation ranged from my lederhosen (don’t ask) to Reed’s tuxedo (nattily paired with a straw hat) to product manager Kate Arnold’s vintage red gingham dress.
It was hot, it was loud, and the group was quickly feeling the effects of the open bar, which served cocktails in quart-sized mason jars. Boris had somehow convinced one of the bartenders to give him a bottle of ice-cold vodka, a tray, and dozens of shot glasses, and he was drunkenly wandering around the mess hall, solemnly asking everyone he encountered the same question: “Are you een?” This was remarkable in and of itself, because Boris rarely spoke. I’m sure most of the office didn’t know what his voice sounded like, or that he had a strong accent, until that night.
“Are you een?” he’d say, holding the tray on his shoulder like a waiter, a solemn expression on his face.
Many people, I’m sure, had no idea what he was talking about. Many people, I’m sure, got vodka shots that night just because they looked confused and didn’t say no. Boris, at any rate, took shots regardless of what your answer was. (For a while, anyway. I faintly recall seeing him asleep on a picnic table before dinner was even over.)
Just as things were starting to get wonderfully out of hand, I decided that I would bring the whole group together in song. Pulling several folded pages out of my pocket, I clambered up onto one of the long benches and, wobbling slightly, banged a spoon on the regrettably empty mason jar that had once held my gin and tonic. The crowd quieted.
Using the melody from “God Rest You Merry, Gentlemen,” I began:
Come join me friends and raise a glass to toast our newfound luck.
Each week from every member we now extract a buck.
It seems Marquee was just the key
To prove that we don’t suck!
And we soon will be rolling in dough…
At this point, I held off, waiting for the lackluster call-and-response. A few in the group, sober enough to realize what I was looking for, weakly responded:
Rolling in dough, and we soooon will be rolling in dough.
Our engineers built Cinematch and boy it’s doing great.
Our customers all love how many movies they can rate.
I doubt they’ll even notice
that we launched it two months late!
Or that porn’s always getting five stars.
(Getting five stars! Or that porn’s always getting five stars.)
(That’s a true story, by the way. Although Reed had made a decision pretty early on not to ship the really hard-core stuff—Clinton DVD fiasco aside—we were still renting out soft-core pornography in 2000. And the reviews were typically…enthusiastic.)
The crowd was waking up a bit, singing along.
Now marketing they’re geniuses, they get the world to see
How life will be so wonderful once we all use Marquee.
If that won’t sell
Then what the hell—
Just give ’em twenty free.
Things were loud now, and I picked up speed.
The finance folks, they try so hard, but still they will not learn
That Wall Street could care less about the rate our members churn.
But they’ll drop trou’
Once we show how
A profit we can turn.
And we stop losing bundles of cash.
At this point, people couldn’t wait to blast out the response, amplified with alcohol-fueled enthusiasm. The next stanza was largely about Reed and Barry, and as I began to sing it, I looked over to try to catch their eye. Reed’s seat was empty, though. And just across the table, Barry sat with his head down, his right hand cupping his phone to his head, the index finger of the other pushed into his ear to block out the noise.
As I leaned into one of the last stanzas (They fix each tweak, but then next week, Reed makes us change it back!), I could see a commotion starting at the far end of the hall. I could just barely make out who it was. Was that Kate? In her red gingham dress? I could barely see her through the crowd, which was now hooting and hollering, facing away from me.
I was losing them. The group was even more distracted as the red gingham dress got closer to the middle of the room. And then I saw it—what everyone was yelling about. It wasn’t Kate in the red dress. It was Reed! Wearing that gingham like it had been made for him. And behind him, there was Kate, decked out in Reed’s black tuxedo.
I could barely breathe, I was laughing so hard. Reed doesn’t really drink—back then, he would get drunk exactly once per year—but when he does, he makes it count. I was just on my way to see if he’d bat his eyes at me when Barry grabbed me by the arm and pulled me into the hallway, away from the noise. He wasn’t laughing at all. He didn’t say anything until the doors to the mess hall had closed behind us, giving us a bit of protection from the mayhem inside.
“That was Ed Stead on the phone,” he said, referring to Blockbuster’s general counsel. “They want to see us. Tomorrow morning. In Dallas.”
Barry turned and looked back through the doorway. Reed was now standing on one of the benches, flouncing the ruffles of his dress and curtseying. He was yelling something, too, but we couldn’t hear him over the rapturous noise of the crowd.
“This is gonna be some red-eye,” Barry said, shaking his head. “I hope he has something to change into before the flight.”