Inside Netflix’s Binge-Worthy Business Model
Editor’s note: Although Marc Randolph is best known for being the cofounder and founding CEO of Netflix, his career as an entrepreneur, advisor and investor spans more than four decades. Randolph launched more than a half-dozen other successful startups, mentored hundreds of early-stage entrepreneurs and invested in numerous successful tech ventures. APICS magazine Senior Managing Editor Elizabeth Rennie recently had the opportunity to speak with Randolph, who will be a keynote speaker later this year at APICS 2018 in Chicago.
Rennie: There seem to be many conflicting accounts of how Netflix was founded. What really happened?
Randolph: The reason genesis stories are so simple and compelling is because people really aren’t that interested in all the gory detail. Companies don’t spring from some eureka moment and then become fully formed entities around an original, simple idea by one person. Genesis stories are messy; they’re constantly changing direction. The idea that you start with never is what you end up with. And it’s usually based on the contributions of not just one, all-knowing founder, but dozens of people along the way who contribute little bits of the DNA.
But, of course, when someone asks you, “Where did the idea come from?” you can’t launch into this detailed explanation because their eyes immediately glaze over. So, very quickly, you realize it’s just a lot simpler to have a one-line answer. And a good one basically captures the spirit of the company. So, there’s the myth that Netflix came to be because of a late charge from returning a movie late, and you know that’s not true. But it’s okay; it’s a story. People like stories.
The reality was that [Netflix cofounder] Reed Hastings and I were looking for an idea. We went through hundreds of ideas, passing them through a complicated matrix of requirements that we believed would offer the highest possibility for success. One of the ideas was to do video rental by mail. But even that idea was a bad one, because, at the time, video rental was just cassettes, so that wouldn’t work. It was only a few months later that DVDs were suddenly in test markets, and we recognized this might actually change one of the big dynamics because DVDs are small and light.
Rennie: So you have your idea, what happens next?
Randolph: In fact, we did an interesting proof of concept. We went and bought a music CD from a record store and then went a few doors down and bought a little gift envelope. Then, we mailed this music CD to ourselves and demonstrated that we could ship a movie through the mail in a regular envelope for just the price of a first-class stamp. That enabled us to actually say, “Wow, this might work.”
Rennie: You mentioned a “matrix of requirements” that you consider when looking for a great business idea. As an adviser and an investor, what’s inside that matrix?
Randolph: The reality is that ideas don’t count for much. I’m being very honest here. Again, I don’t think I can name a single company where the idea they became successful with is the same one they started with. … So, first of all, I’m looking for an interesting problem. I’m looking for one that’s challenging. I want a big problem because I want something that, if I solve it, there’s potential for it to be a meaningfully large business. I want, ideally, a problem that’s like, “If this went right, it actually gives me permission and expertise to solve even larger problems.”
I was a direct marketing person before I entered the technology world. So, with Netflix, I was looking for something that would use personalization to a high degree — and something that I could do in e-commerce because that was a category that was just starting to come up. I was looking for categories that had operational dependencies so I could differentiate myself from other companies, which were commodities based. Note that none of these things is “I was looking for something in movies because I love movies.”
Even today, when I’m working with, mentoring or investing in early-stage companies, I’m almost never looking at the idea because I know the idea’s going to change. What I’m looking for is whether the entrepreneur has the right skillset to be successful. I’m looking for whether they really understand the problem they’re trying to solve, and then I ask, “Is this person going to have the drive, the flexibility and the passion to keep pursuing this and eventually figure out how to solve this problem?”
Rennie: What are some other key attributes that you look for in a successful entrepreneur?
Randolph: It’s a very lonely, difficult job, where 90 percent of the things you try fail. So, you have to have passion and conviction to keep going and the self-confidence that you’re going to eventually figure it out. Topping the list of important skillsets, I believe, is focus. … In a startup, just by definition, the world is lined up against you. Nature abhors a startup. So, as you’re launching this company and working your way through the problems, there are hundreds of things that are wrong. Success requires you to take all the resources you have and focus them on a very narrow set of things. The most skilled entrepreneurs can drown out the 100 things that are on fire and focus on the two or three that are really important. And they are intuitively able to sense what those two or three important things are.
The other skillset you’re looking for is leadership. After all, this person may have to gather together a bunch of people, get them to leave their otherwise well-paying and well-benefited jobs, and take a much more risky position for a much lower salary. You have to convince them that you can see where you’re going and have the conviction to lead.
Rennie: As a Netflix user myself, one of the things that I think adds the greatest value is that I am connected with what I personally enjoy watching. Do you agree that personalization is the heart of the service? And when did you know it would really differentiate the business?
Randolph: It’s absolutely the heart of the service. We realized from day one that, even though we were launching a DVD-by-mail company, eventually movies will be delivered digitally. Everyone took great pains to point out just how imminent our demise was when that happened. And the thing is, they were right. Eventually people would stop watching movies on DVD and begin streaming them, or downloading them or doing it digitally in one manner or another. The question was when. So, we had to build a company that was relevant in the world of DVDs, but that would stay relevant when the world transitioned to digital.
When I look back, I think one of the smartest things we did was positioning the company in a way that allowed it to bridge that divide. So, [although] calling ourselves the “world’s fastest shipper of plastic” was flawed, equally flawed would have been “we are the streaming experts” because it would have meant nothing to people for 10 years. So, instead, we became “we’re the place to find movies you love.”
It will be an equally compelling positioning in the future when people are receiving their movies in some yet-to-be-known way. But, of course, when you’re positioning yourself as the best place to find movies you love, you have to put your money where your mouth is, and we really did drive toward making the service about that. All the personalization that you were just referring to earlier is what drives that proprietary content. It drives the dynamic website, which presents things that we think you’re going to like. So, we’re genuinely about making this a place where you find better things to watch than anyplace else.
Rennie: What’s your creative process, and where do you look for ideas?
Randolph: Once you’re an entrepreneur, you’re always an entrepreneur. So, in reality, you never need to look for an idea. They are constantly running right up to you and pulling on your pant leg. They’re whispering to you at night. All these ideas are popping out of everywhere, clamoring for attention. And what happens is you have to fight that down.
The way I got my creative fix in the last dozen years is by helping other people make their ideas a reality. So, I pick a handful of companies, and then I deeply embed myself within them. I really learn who they are, who their partners are, learn their market and learn their product so that I can genuinely participate as they’re solving really hard problems.
Rennie: What can APICS 2018 attendees look forward to from your keynote later this year?
Randolph: I intend to dispel the myth that, in order to be an innovator or a disruptor, you have to be from Silicon Valley or have a computer science degree. I’m going to explicitly tell them things that they can try at home the day after they leave the conference — things that will allow them to be more innovative in their own work. All of these things that I’ve learned from making Silicon Valley startups successful, everybody can do in their own lives. It’s partly attitude; it’s partly some little tricks. People have the skills within themselves to innovate in their jobs, and I want to give them the confidence to try.
Join us in our hometown of Chicago for APICS 2018, September 30-October 2. Visit apics.org/conference to learn more and register today.