Cspan, created by private industry, americas cabletelevision company, as a Public Service and brought to you today by your television provider. Host Mark Randolph is a cofounder of netflix and he is the author of this new book, that will never work. Mr. Randolph, what the idea of netflix come from . Guest ideas come from the strangest places. In that will never work a talk about this crazy idea we had in of all places carpooling. My cofounder Reed Hastings and i were commuting back and forth to work brainstorming ideas, and one of these crazy ideas we had with maybe we could do video rental by mail using dvds. Rather than rushing home writing a Business Plan or hurrying to the office and doing a powerpoint slide show, we decide we would try to take the first step to validate that idea so we turned the car around, drove down to santa cruz we both lived. I went to a used music store and bought a little music cd. I think it was patsy cline. We went next door, bought a little gift envelope you could put a greeting card in. We put the cd in, mailed it to his house and the next day when he picked me up yet an unbroken cd in an envelope that it got into his house 24 hours for the price of a firstclass stamp. If there was an aha moment i think that was it. Host to where were you carpooling . Guest Reed Hastings was the founder of Company Called pure atria which was a big geeky Software Company. They acquired to Software Company that i was working at called integrity qa and it went to work for reed and we spent about nine months working together. As luck added we lived in the same town so spent those nine months carpooling together. Then lightning struck. Pure atria would be acquired and both reed and i would be out of a job. I decide this is perfect, im going to start my next company. Reed kind of wanted to keep a hand in this entrepreneurial thing, so we agreed i would start it and run it. He would be on the board and he would be the biggest financial backer. All we needed was an idea. That led to those crazy car rides we brainstorm everything we could think of. Host where did the title come from . Is that a quote from your wife, lorraine . Guest that will never work is a quote for my wife but it is also a quote from the 10,741 other people that i i td that idea too. I think everyone has had that experience where you come rushing in the kitchen and just some great ideas, tell your spouse for you, did office with a great idea and everyone says that will never work. But in many ways this book is about the process of taking an idea that no one things will work, that my wife said would never work, and somehow and turned into the company which is change the way we watch Television Drama before we get into the reasons netflix will never work, theres some floor about the founding of the company. What is that lower . Guest people like the epiphany moment. They like to get the moment that it all became clear. They want newton under the apple tree or archimedes in a bathtub. But the reality is it doesnt happen like that. So of course its been said it all originated with the late phantom movie and yes, there was a late aunt of movie but theres also some good spent many, many years doing subscriptions, someone else some also done a lot of personalization, somebody else with lots of experience with computer algorithms, with building websites. We had tons of people who each contribute little bit but when someone asks where did the idea come from, they dont want the 310 page book. Book. They want the quick soundbite. But in many ways thats what that will never work is about. It is that untold story of netflix. Host mr. Randolph, we are talking about 1996. What were the reasons that this was never going to work . Guest so theres lots of reasons are doing told me that will never work but probably the person was the obvious one, is that if i was going to do dvd rental by mail to admit i was to be mailing addicts to someone and they would get it two days later and keep it for number updates and mail it back. People said thats crazy. Why would anybody wait two days for movie when they can go to one of the 9000 Blockbuster Stores . The other reason and perhaps the one that really got in our way when it came to raising money was that everyone believed this was a digital format. It was just a matter of minutes before everybody was screaming or downloading. And, of course, Reed Hastings and i knew this was true, that eventually people would be downloading or streaming movies. We just didnt think it would happen quite that quickly. The challenge was how do you build the company which is appropriate now when its impossible to stream or download something, but have it be in the right place that when that time came along we would be ready . And it took almost ten years before netflix transitioned into streaming. Host those first few days of the company being online, what was that like . Guest well, that will never work in some ways is a compendium of all of the screw ups, all the disasters, all the missteps, all the times we almost went out of business. Youre correct, we had our ve, very first disaster in day one. We had spent six months building this simple ecommerce website and we were so excited. This was the moment we were going to go live. We set up a a computer in our Conference Room and rigged it up so a bell would wring every time an order came in. And at 9 a. M. On april 14, 1998, our cto hit a few keys and we relied. It didnt take long and we got that first being and richard and again opening bottles of champagne. And then to a three minutes later, ding, ding, ding three more orders and were so excited and really got two more orders. In all the excitement we kind of lost track of things until someone noticed that its been a while since the bell has run. Was it unplugged . Is our problem . It turned out that in the first 250 minutes we had crashed all of our servers. Host so what did you do . Guest so instead of me remembering that day toasting my success with champagne, my memory of april 14 is being at a computer superstore pushing the shopping cart while our cto piled in all the components we would use to limp along that website, that first long day. We had this pool about how many orders we would get. People said ten, 30. But we ended that first day with 107 orders, which astounded me. That was my whole first month forecast. But now looking back, 107 orders, that seems pretty trite considering where we are now. Host you spent quite a bit of time perfecting the mailer that netflix used. Guest netflix, as a nation, took ten years before we got to streaming, which means we were mailing dvds to people. We had to go to the post office and we had to do it for a firstclass stamp and we had to do in way that didnt get mangled or broken or put off to the side. It turns out that devising the simple envelope that could also double as the return envelope was a real work of art. We spent hundreds of hours perfecting it. I couldnt get my mind off it. I dreamed about little red envelopes. There was one time i remember coming into the office probably ten that night. I used to come back after dinner at sometimes, walking and just to get something and passing a stack of envelopes and this idea struck me. Before i even knew what i was doing i ran into my car and get something wife and i called the restaurant bag. This was a collection of all the tools and toys and kate and staples and crayons that you would use to keep three kids under five unused at a restaurant. I remember pulling this thing open and pulling up paper and tape and markers and reconstructing this envelope in about two or three hours that night. Handing it out to our Warehouse Manager on the way out the door and saying all right, give this one a try. Host when netflix first went online you were mailing these by hand, correct . People were packing them by hand . Guest absolutely. At the beginning it was pretty scrappy. You have no money. We had this tiny little office. We had this smelly green carpet. We had the warehouse being stored in an old safe. Not because were scared of them being stolen. This happened to be an old bank and we had use every single square foot we had. We didnt even have furniture. People will bring in each chairs. I remember one time my wife came in after dinner one time and she was coming there to give me and she looked and said, wait a minute, are those our dining room chairs . We were doing everything we had to. So packing dvds by hand was the least of it. Host who funded netflix to begin with . Guest you know, Reed Hastings turned out this is the understatement of the year. Turned out to have been an unbelievable partner. Perhaps the most important thing is reed was a first person who really believed in this idea. He was the first person who did not say that will never work. Reed wrote a check for 1. 9 million. He wrote me a check. He handed it to me at a member going oh, my gosh, this is the biggest check i have ever held in my hands. I took it down to our local Wells Fargo Branch just the retail when an member stand in line with this check wondering whats going to happen . Is like the person behind the counter could hit a little buzzer and then the manager of the bank will come out and bring me back and serving champagne . But it was kind of an anticlimax. I had for the check and all she said was, do you want any cash back with that . Reed was 1. 9 billion of them but also to go out and ask other people. I had asked my mother. I had asked friends 1. 9 million. Theres a reason these are called the friends and family round. Host whats the role of a Venture Capitalist and is there a negative side to that . Guest Venture Capital is the essential fundraising mechanism thats used in Silicon Valley and pretty much in place people are doing startups. These are people who are willing to invest money into a business. They are not loading the money. They are investing and doing it under very long odds. The reality is when people say that will never work, most of the time they are right. But a Venture Capitalist is willing to take the chance at ninth avenue at Ten Investments they make are going to fill on the off chance that one of them succeeds. You mentioned is there a dark side to it. In some ways may be its not a side, but you have to know what youre getting into. Because when you Venture Capitalist gives you the money and, in fact, Venture Capital was essential in starting and growing netflix, but they are not doing it because they really like the idea and want to see you succeed. Although they do. They are doing it because not only did expect their money back, they expect their money back times ten. So once you are in that game you are all in it for the long game. You cant go to them and say, i think ive had enough. No, your commitment is you will do Everything Possible to make sure their investment pays off. Host in your book. Host in your book that will never work you write that tech is a true meritocracy tried to the foundation of tech is coding. Its computer code and computer code is remarkably transparent. Theres a principle among coders called peer review. Where after youve written something ask one of your peers to sit down and review it with you. It doesnt make a difference what you look like. Doesnt make a difference how you dress. It doesnt make a difference what type of the day you got to the office or when you leave or even what you smell like. Its all there in the quality of your code, and that ethos has permeated Silicon Valley. We are the beneficiaries of it in that certainly i i wouldnt know a line of code if you wrap it around my neck, but we all get a chance to recognize we can be casual. We will ultimately be judged in the quality of her work which is a tremendously refreshing thing. Host april 1997 netflix one online. At what point did you give financially secure . Guest well, one of the essential ingredients of being an entrepreneur is you never feel secure financially or otherwise. Certainly in terms of the otherwise, its inherent in a startup that you struggle and claw and climb your way to the top of this first deal and you collapsed energy when you finally made it, only to catch her breath and look up and see an even bigger hill in front of you. When we started netflix our goal was to be as big as a single blockbuster, 750,000 a year. We had that goal in the first two or three months. But then you look up and say, theres 9000 9000 blockbusters. Once we passed blockbuster theres hbo and comcast and if amazon. It is never ending. Part of that is recognizing you can never sit back and say, we are done. And economically i have never been some was motivated by how much money i have. Thats not the point of this. Its the font of come into a a room and sitting down with really smart people and solving really interesting problems and that i can never get enough of. Host at one point blockbuster wanted to bite netflix, correct . Guest that is true. One of the most critical things that i advise earlystage entrepreneurs or infect anyone with the business is you cant run out of money. Because then its game over. We had a point, this was in 2000 so the company was about two and half years old. The good news was we are on track to do about 5 million in revenue. The bad news is, we were on track to lose 50 million getting there. You dont need to be a financial analyst to understand thats not sustainable. We decided to do this thing all prudent entrepreneurs do, which is called pursue strategic alternatives, which is code for we have to sell this sucker. Our obvious strategic alternative was blockbuster. But we were 5 million in sales, they were 6 billion in sales. We were probably at that time 300 employees. They were 50,000 employees. We tried getting this meeting. Nothing. As luck would have it, they actually finally called us for a meeting when we were on this corporate treat in Santa Barbara in the mountains. We flew from Santa Barbara to dallas for the meeting, but because we were on retreat and because of that casualness, i was in shorts and a tshirt. The usher us up into this huge Conference Room and in come the blockbuster folks and we make our pitch about inviting the companies. And blockbuster couldve bought netflix for 50 million. But they laughed at us. In some ways it was a disappointment because i was hoping this could be the day that saved us. The instant influx of money, or even better, making our problems some elses problems. But in many ways this was the moment where we finally said to ourselves, wow, the only way out is through. We are going to solve this problem on our own. Host mr. Randolph, you say that the culture, Corporate Culture of netflix is freedom and responsibility. Where did that come from and is that a common Corporate Culture in Silicon Valley . Guest its a very common culture for earlystage companies. Thats for obvious reasons because as i mentioned before, in an Early Stage Company you have no resources. You have, lets say seven people doing the job of 100 people. Everyone is is stretched thin. There is no time for command and control. Theres no time for me to say heres your job, choose which have to do, here is how to do it, and then check in with me every few hours and looking at how its going. All you can say is you see that killed over there . Ill meet you at the top in the week. They have to figure it out on their own. They have to have the freedom to decide the ultimate best way to solve the problem but the responsibility to see that it sold. Its a fairly easy thing to do when you seven employees because you can handpick people with the responsibility to handle that. Its a little bit harder when you have 70, and even harder when you 700. But whats truly remarkable at netflix is they still have managed to preserve the culture with 7000 employees. That is the remarkable thing about netflix and something that is very, very rare. Host something it has continued in a different form but is a subscription model to netflix, correct . That is not something you hit upon right at the beginning. Guest ironically, and i kick myself sometimes for missing that because i am one of those persons who was a 40yearold overnight success. Netflix was my six startup. Two of the startups were in the publishing business. So i spent many years mastering magazine circulation, mastering subscriptions. But the idea that we could apply subscriptions to video rental by mail with so far out there. The idea for video rental and general by mail was so far out there, that it took us a while to get there. It took us two and a half years of failed experiments before we finally stumbled upon this racy combination of things, which was a subscription service. It was also the no due dates and no late fees, and finally goes making a list of movies you want to see so we could ship them to you automatically. If you would ask me on april 14 when we launched the company years earlier but with the Business Model look like, i never couldve told you it was going to be subscriptions. I mean, who knew . Host what do you think of the name netflix . Guest well, its growing on me. One of my early investors actually gave me some great advice because at the beginning when you just start you dont have a formal name yet but you still have to write checks. You need to get a lease. You need to have company name and jeff whats called a beta name which is a name youre going to use while youre figuring it out. His advice was picked a beta name which is so bad that when you run into problems finding a real name you wont be tempted to use it. Our beta name was kibble, like the dog food. That was because one of my favorite sayings was its not a success unless the dogs eat the dog food. You could at the best dog food advertising but if the dogs dont eat it, nothing happens. I wanted that to be the culture of netflix. It had to work for customers. But as he predicted, when we got close to april in had to come up with a really, all the good ones were taken. Or they were trademarked or the doma