Speaker 1: Get in touch with technology with tech Stuff from how
Speaker 1: stuff works dot com. Hey there, and welcome to tech Stuff.
Speaker 1: I'm your host, Jonathan Strickland. I'm an executive producer here
Speaker 1: at how Stuff Works in a law of all things tech,
Speaker 1: and recently I did some episodes about the video rental
Speaker 1: company Blockbuster and how it went from being the dominant
Speaker 1: force in rentals to declaring bankruptcy and all but disappearing
Speaker 1: from view today. As per text Stuff listener Kevin's request,
Speaker 1: I'm going to begin to talk about another company, Netflix,
Speaker 1: one that has been frequently cited as the giant killer
Speaker 1: when people talk about Blockbuster. But this is a very
Speaker 1: interesting and surprisingly deep story, the story of Netflix and
Speaker 1: rise and where it is today. So this is actually
Speaker 1: gonna be a rare four part episode. The founding of Netflix,
Speaker 1: just by itself is a pretty fascinating tale, and that's
Speaker 1: what this episode is really going to focus on. So
Speaker 1: where did Netflix come from and how has it evolved? Well, first,
Speaker 1: the origins of Netflix are a matter of some debate,
Speaker 1: or at least there are contradicting versions of the origins
Speaker 1: of Netflix. Read Hastings, the co founder of Netflix, once
Speaker 1: said that he came up with the idea after he
Speaker 1: incurred a forty dollar late fee from the aforementioned Blockbuster.
Speaker 1: The video he had rented was Apollo thirteen. No word
Speaker 1: on whether or not his response to getting hit with
Speaker 1: the fee was Houston, we've had a problem. Actually. In
Speaker 1: an interview in Fortune magazine, Hastings said, quote, I remember
Speaker 1: the fee because I was embarrassed about it. That was
Speaker 1: back in the vh just days and it got me thinking,
Speaker 1: there's that there's a big market out there. So I
Speaker 1: started to investigate the idea of how to create a
Speaker 1: movie rental business by mail. I didn't know about DVDs,
Speaker 1: and then a friend of mine told me they were coming.
Speaker 1: I ran out to Tower Records in Santa Cruz, California
Speaker 1: and mailed CDs to myself, just a disk in an envelope.
Speaker 1: It was a long twenty four hours until the mail
Speaker 1: arrived back at my house and I ripped them open
Speaker 1: and they were all in great shape. That was the
Speaker 1: big excitement point. End quote. So later on he would
Speaker 1: change the name of the video store from Blockbuster to
Speaker 1: a little mom and pop video rental store that had
Speaker 1: gone out of business several years later. In a future episode,
Speaker 1: I'll explain why that story changed. But then there's another
Speaker 1: version that Hastings has shared at the Mobile World Congress convention.
Speaker 1: He said the idea spawned from a theoretical scenario he
Speaker 1: encountered in graduate school. So a math problem, if you will,
Speaker 1: And the math problem goes something like this, what is
Speaker 1: the bandwidth of a station wagon loaded down with tapes?
Speaker 1: I'm talking about tapes that have magnetic storage on them,
Speaker 1: that kind of tape. To answer that question, you have
Speaker 1: to know a lot of different variables. You need to
Speaker 1: know how many tapes you can load into the station
Speaker 1: wagon using the most efficient method possible, sort of Tetris style,
Speaker 1: so that you can fit the maximum number of tape
Speaker 1: tapes in the in the carrying capacity of the station wagon. Two,
Speaker 1: you need to know how much data can each tape
Speaker 1: hold individually. It's for you to be able to know
Speaker 1: what the band with is. And three, you would need
Speaker 1: to know how long it would take for the station
Speaker 1: wagon to get from its starting point to whatever its
Speaker 1: destination is. And that would allow you to answer that question.
Speaker 1: And this got him into thinking about how much data
Speaker 1: a DVD could hold and how quickly you could distribute
Speaker 1: the information on that DVD by utilizing the postal service,
Speaker 1: and that the Internet would make delivery services faster. But
Speaker 1: another version of this story was shared by Mark Randolph,
Speaker 1: who was the other co founder of Netflix, and he
Speaker 1: said that he and Hastings were racking their brains to
Speaker 1: come up with a way to build the Amazon dot
Speaker 1: Com of something, and this would be back in now.
Speaker 1: In those days, Amazon dot Com was still only an
Speaker 1: online bookstore. That's all they dealt with was books. Also,
Speaker 1: it's interesting that they wanted to build the Amazon dot
Speaker 1: Com of something because at that point Amazon dot Com
Speaker 1: had been operating at a loss and it would continue
Speaker 1: to do so until two thousand three. It did have
Speaker 1: a profitable quarter at the end of two thousand one,
Speaker 1: but two thousand three was its first profitable year. Still,
Speaker 1: Amazon dot Com got a lot of investment money poured
Speaker 1: into it, so maybe that's what they meant. Plus, in
Speaker 1: those days, the way that startups typically worked was that
Speaker 1: you would get a business going. Maybe you would figure
Speaker 1: out a way to generate revenue, but that wasn't really
Speaker 1: that important. What was more important was that you showed
Speaker 1: yourself to have a really valuable idea, one so valuable
Speaker 1: that a larger company wanted it, and then they would
Speaker 1: acquire your company for a princely sum, and then you
Speaker 1: could go and do it all over again and continue
Speaker 1: to make startups and sell them till the cows came home.
Speaker 1: Remember this is in the days well before the dot
Speaker 1: com bubble burst. But let's take a step back for
Speaker 1: just a second. Who are Read Hastings and Mark Randolph. Well,
Speaker 1: first we'll start with Wilmot Read Hastings Jr. He was
Speaker 1: born in Boston, Massachusetts, in nineteen sixty to a well
Speaker 1: to do family. That's putting it lightly. His mother's family
Speaker 1: were founding members of the Social Register. And for those
Speaker 1: who do not know, I certainly do not move in
Speaker 1: these circles, So I would not be one to know
Speaker 1: about this if I had not read extensively about it before.
Speaker 1: The Social Registered tracks things like marriages, births, other big
Speaker 1: life events among the well to do in high society.
Speaker 1: So we're talking old money typically, and it's a relatively
Speaker 1: small list of families in the grand scheme of things.
Speaker 1: These are movers and shakers and business and politics and
Speaker 1: in finance. And there's no way I would ever be
Speaker 1: listed in there, not that I have any great desire
Speaker 1: to be, but his family on his mother's side founded
Speaker 1: that his great grandfather was Alfred Lee Loomis, whom I
Speaker 1: covered in a previous episode of Tech Stuff, and he
Speaker 1: would go to college. That that is, Hastings would go
Speaker 1: to college in Maine at Bowdoin College. He graduated with
Speaker 1: a bachelor's degree there, and then he entered the Peace
Speaker 1: Corps for a few years, spending much of that time
Speaker 1: in Swazila and in Southern Africa teaching mathematics. When he
Speaker 1: got back to the States, he first attempted to enroll
Speaker 1: in m I T. He wanted to study computer science,
Speaker 1: but M I T wouldn't accept him, so instead he
Speaker 1: enrolled over at Stanford University and he would graduate nineteen
Speaker 1: eight with a master's degree in computer science. He got
Speaker 1: a job as a software developer, and in nineteen ninety
Speaker 1: one he founded his first company, called Pure Software. In
Speaker 1: nineteen Pure Software merged with another company called Atria Software
Speaker 1: in a stock transaction deal worth nearly a billion dollars,
Speaker 1: and Hastings would become the president and CEO of this
Speaker 1: new company called Pure Atria. One of the company's services
Speaker 1: was to work on solving computer bugs that would pop
Speaker 1: up when multiple developers would all work on the same
Speaker 1: computer code. Atria's former CEO would actually become the chairman
Speaker 1: of this new company, and in August nine, another company
Speaker 1: called Rational Software made a move to acquire Pure Atria,
Speaker 1: which meant that Hastings got a handsome payout an enormous
Speaker 1: amount of money, made him a millionaire and a multimillionaire,
Speaker 1: and it gave him the money he would need to
Speaker 1: found Netflix. He was essentially the source of the seed
Speaker 1: money for the company. Mark Randolph was born in Chappaqua,
Speaker 1: New York, in nineteen fifty eight, also to a wealthy family.
Speaker 1: He had famous relatives of his own. His great uncle
Speaker 1: was Sigmund Freud, and he was also the nephew of
Speaker 1: Edward Burnet's, a public relations and propaganda genius some might say,
Speaker 1: the master of misdirection. You can learn more about Burnet's
Speaker 1: and episodes from shows like Stuff You Should Know and
Speaker 1: Stuff They Don't Want You to Know. They've both done
Speaker 1: episodes about Edward Burnet's and his is a fascinating story.
Speaker 1: Randolph would go on to attend Hamilton's College in New York,
Speaker 1: where he earned a degree in geology, which totally rocks.
Speaker 1: When he graduated, his dad helped Randolph get a clerical
Speaker 1: job at a company called Cherry Lane Music Company, and
Speaker 1: Randolph worked in the mail order side of the business
Speaker 1: and learned about catalogs and mail order strategies and marketing
Speaker 1: strategies and about direct mail. He began analyzing customer behaviors
Speaker 1: and learning which products were performing best and the types
Speaker 1: of customers who were likely to buy a future product
Speaker 1: based upon past purchases, and so he started to redesign
Speaker 1: the UH, the company's approach to this and make it
Speaker 1: more effective. He was then asked to design the computer
Speaker 1: inventory and processing system for the company when they decided
Speaker 1: to move to a computer system, and he would co
Speaker 1: found the American version of Mac User magazine, and then
Speaker 1: he was tapped to launch two new mail order businesses.
Speaker 1: They were called mac Warehouse and MicroWarehouse. After those jobs,
Speaker 1: he worked for a software company called Borland International for
Speaker 1: seven years years and after that he worked at various
Speaker 1: startups in the dot com boom and became a founding
Speaker 1: member and chief product marketing officer at Atria, in which,
Speaker 1: as I mentioned, Pure Software had acquired. So Randolph then
Speaker 1: became the head of corporate marketing at the new company
Speaker 1: of Pure Atria. But just a few months after he
Speaker 1: took that position, they had the announced merger with Rational Software,
Speaker 1: and that meant his job was already on borrowed time.
Speaker 1: He knew that his job was going to be eliminated
Speaker 1: upon the completion of that acquisition, so he and Hastings
Speaker 1: started talking about a possible business venture together. And I've
Speaker 1: heard it said that Hastings is sort of the engineering
Speaker 1: and numbers guy, and it makes very cold and calculated
Speaker 1: decisions in many ways, and Randolph was more of a
Speaker 1: people person in creative type now, according to Randolph himself,
Speaker 1: as the acquisition neared, he would talk to Hastings about
Speaker 1: various ideas. He had to launch the next Amazon dot
Speaker 1: Com of something, and they were going back and forth
Speaker 1: on what that something should be. Early on, they talked
Speaker 1: about the possibility of video sales and rentals using the
Speaker 1: Internet as a way to connect customers with video titles.
Speaker 1: But this was still in the day of VHS tapes,
Speaker 1: and the cost on a per tape basis would be
Speaker 1: between fifty five dollars per title. That's how much a
Speaker 1: lot of these video rental stores were paying, and then
Speaker 1: you had the expense of shipping tapes in the mail
Speaker 1: and the question about whether or not they would remain
Speaker 1: in good condition. How long could you do this per
Speaker 1: tape before they wore out? Presumably the wear and tear
Speaker 1: would be much greater than you would see in your
Speaker 1: typical store, And eventually that made them decide that this
Speaker 1: particular idea was impractical. But then again, according to Randolph,
Speaker 1: he came across something interesting while reading about new technologies.
Speaker 1: He heard about the DVD format, and in the DVD
Speaker 1: format was brand new in the United States. It had
Speaker 1: launched the year before in Japan, but just made its
Speaker 1: way over to the US. In an optical disc would
Speaker 1: be much lighter and easier to ship than a VHS tape,
Speaker 1: and it looked like it would be easy to get
Speaker 1: titles much more cheaply on a per title basis, because
Speaker 1: it looked like instead of charging this fifty to eighty
Speaker 1: five dollars per title, it would be closer to fifteen
Speaker 1: to twenty dollars, and that really brought that initial startup
Speaker 1: cost way down. So the story goes that Hastings and
Speaker 1: Randolph went to a local music store, not necessarily Tower records,
Speaker 1: and then they bought a CD. Then they hopped over
Speaker 1: to a greeting card store and they bought a card
Speaker 1: that had an envelope large enough to hold the c D.
Speaker 1: Then Hastings mailed the c D to himself and he
Speaker 1: went home and he waited for it to arrive. And
Speaker 1: then within a day or two, it got there, and
Speaker 1: he checked out the c D to see if there
Speaker 1: was any visible damage on it, and he saw that
Speaker 1: the disc inside was undamaged. This could work, they thought,
Speaker 1: I'll explain more in just a moment, but first let's
Speaker 1: take a quick break to thank our sponsor. Hastings and
Speaker 1: Randolph pulled in Christina Kish, who had joined pure Atria
Speaker 1: on Randolph's recommendation, but then she found herself out of
Speaker 1: a job, literally on her first day of work. She
Speaker 1: comes to work on her first day, finds out that
Speaker 1: she's going to get laid off once this acquisition happens.
Speaker 1: She would be allowed to continue to show up and
Speaker 1: draw a paycheck during this acquisition process, but she didn't
Speaker 1: really have anything to do, and she already knew that
Speaker 1: the job was strictly just sitting at a desk doing
Speaker 1: nothing until the acquisition was done. Her main job in
Speaker 1: the early planning stages of what was going to become
Speaker 1: Netflix was to look at Blockbusters business plan and determine
Speaker 1: how did Blockbuster make money? And that was a little
Speaker 1: challenging because she saw how big the overhead was, how
Speaker 1: much the costs were to operate Blockbuster, and it became
Speaker 1: clear that Blockbuster strategy was not going to work for Netflix.
Speaker 1: That Blockbuster had largely succeeded by acquiring various video chains
Speaker 1: and growing this way and adding to their customer base
Speaker 1: in that way, but that was not really a viable
Speaker 1: option for Netflix. Meanwhile, uh they also brought on a
Speaker 1: woman named terse T Smith. She was someone else who
Speaker 1: had joined pure Atria on Randolph's recommendation, and Hastings brought
Speaker 1: in a developer of his own named Eric Meyer, who
Speaker 1: would be responsible for designing the website. Together, they began
Speaker 1: to hash out their plan for what would become Netflix.
Speaker 1: So how do you convince people to a shoe a
Speaker 1: brick and mortar store for an online library of DVDs
Speaker 1: and then expect them to wait patiently for a movie
Speaker 1: to be packed up, shipped and delivered to their homes.
Speaker 1: It seemed like a really big challenge. Randolph started doing
Speaker 1: research in the video rental industry. He attended a convention
Speaker 1: and held by the Video Software Dealers Association or v
Speaker 1: s d A, and there he met the president of
Speaker 1: the v s d A. It was a guy named
Speaker 1: Mitch Low. Low initially agreed to just do some consulting
Speaker 1: with the entrepreneurs, giving information about valuable rental industry stuff,
Speaker 1: such as how to use software to simulate the experience
Speaker 1: of talking to a knowledgeable video store clerk for recommendations.
Speaker 1: This would become a key feature early on with Netflix
Speaker 1: creating a system that would recommend movies based upon your
Speaker 1: likes and your interests, something that that a video store
Speaker 1: clerk could do. And you talked to a video store
Speaker 1: clerk and say, you know, I really like action movies,
Speaker 1: and I like movies featuring you know, a protagonist who's
Speaker 1: really the odds are stacked against them, and etcetera, etcetera,
Speaker 1: And they say, oh, well, have you seen die Hard?
Speaker 1: Let me take you over here and I'll show you
Speaker 1: and or if you have seen die Hard, I'll show
Speaker 1: you some other movies that are similar to that that
Speaker 1: you might really enjoy. Well. Low talked about the ways
Speaker 1: that video clerks did this, so that they could figure
Speaker 1: out a way to essentially simulate that through their algorithms.
Speaker 1: Randolph eventually was actually able to convince Low to join
Speaker 1: the new company, and interestingly, Low had already experimented with
Speaker 1: a video rental method that was outside the norm, and
Speaker 1: later that method would prove to be actually really effective,
Speaker 1: although it wasn't in the early days. So what he
Speaker 1: had done was he had installed a video rental kiosk
Speaker 1: in a Japanese hospital, and that particular venture was a failure,
Speaker 1: but it would turn out to be a pretty good
Speaker 1: idea later on A box that has read one might
Speaker 1: say more on that in a future episode. The company
Speaker 1: would grow to eight people with the addition of a
Speaker 1: couple of programmers and a new director of operations in finance,
Speaker 1: and they got to work building out the initial website
Speaker 1: and user into face now. According to the book Netflix,
Speaker 1: which is a phenomenal book, I relied on it very heavily.
Speaker 1: When doing the research for these episodes. Christina Kish would
Speaker 1: draw out the stages she wanted customers to encounter when
Speaker 1: they would navigate to whatever the website was going to
Speaker 1: turn into. She this was sort of the experience she
Speaker 1: wanted customers to have, and it went from seeing the
Speaker 1: initial page to the point where you're checking out and
Speaker 1: paying to rent a title, and she did it all
Speaker 1: like drawing crayon on paper. Other programmers started building out
Speaker 1: the back end of the operations, which would include stuff
Speaker 1: like keeping track of inventory. They need to know which
Speaker 1: titles were available, how many copies of each title were
Speaker 1: in stock, how many of those copies were out for rental,
Speaker 1: that kind of thing. They need to know that in
Speaker 1: order to be able to fulfill orders, So they had
Speaker 1: to build the system to actually support that. They also
Speaker 1: needed to have the infrastructure in place to be able
Speaker 1: to actually ring transactions. This is in the early days
Speaker 1: of online commerce. You didn't have a whole lot of
Speaker 1: examples out there beyond some big names like Amazon dot Com.
Speaker 1: So essentially they were building out all the basic functions
Speaker 1: of online shopping that developer I mentioned earlier, Eric Meyer,
Speaker 1: he set a very high goal. He wanted the programming
Speaker 1: team to make sure that the Oracle software they were
Speaker 1: using as a foundation for the back end operations would
Speaker 1: eventually be able to handle up to ten million customers,
Speaker 1: which seemed like a crazy number, but He was essentially
Speaker 1: talking about scaling up the back end for business before
Speaker 1: there even was a business, and he felt strongly that
Speaker 1: was better to be prepared and be ready for the
Speaker 1: eventuality than to be caught without the structure in place.
Speaker 1: Once the need arose. They created a search tool that
Speaker 1: they would call flicks Finder that would help users find
Speaker 1: films by title, director, or actor. So if you really
Speaker 1: liked movies that featured I don't know, Bruce Campbell, for example,
Speaker 1: then you would get results like Army of Darkness or
Speaker 1: Bubba Hotep, that kind of thing. They also added in
Speaker 1: a feature called film Facts, which included stuff like a
Speaker 1: synopsis for each DVD and included ratings for the films,
Speaker 1: and would include a rundown of the different features you
Speaker 1: could find on the DVD, because of course a lot
Speaker 1: of DVDs would ship with bonus material on them. And
Speaker 1: they created a recommendation engine, or they put the building
Speaker 1: blocks in for a recommendation engine. They would take a
Speaker 1: couple of years for that to really take form, but
Speaker 1: this is something that Netflix is known for to to
Speaker 1: this day. The recommendation engine would suggest films similar to
Speaker 1: ones that the customer had previously rented and they might
Speaker 1: be in a similar genre, or they might have the
Speaker 1: same principal actors or director involved. And they also included
Speaker 1: a feature that would remind customers about films they had
Speaker 1: flagged as being interested in but had not yet did.
Speaker 1: So let's say you go to Netflix's site early on
Speaker 1: and you see a whole bunch of different movies that
Speaker 1: you're interested in. You're only going to rent a couple
Speaker 1: at the moment, but you want to flag the ones
Speaker 1: you're interested in so that you remember on a future visit.
Speaker 1: Oh yeah, yeah, yeah, I did want to see that movie.
Speaker 1: That was what that feature was all about. Meanwhile, other
Speaker 1: team members were busy building out inventory. DVDs were a
Speaker 1: novelty in nineteen seven. Not a whole lot of people
Speaker 1: owned DVD player yet by the end of that year,
Speaker 1: and they were wicked expensive when they first came out,
Speaker 1: like eleven d dollars for a DVD player when they
Speaker 1: first debuted. Towards the end of nine seven, the team
Speaker 1: had accumulated around five hundred DVDs, most of those older films.
Speaker 1: That wasn't because the newest films were more expensive or anything.
Speaker 1: It was mostly because movie studios hadn't really started to
Speaker 1: release films to DVD yet. And this was where we
Speaker 1: get into a weird situation because from the movie studio perspective,
Speaker 1: until there was a market, right until you had enough
Speaker 1: people buying DVD players, there wasn't a huge incentive to
Speaker 1: put titles on DVD because there weren't enough people out
Speaker 1: there to buy the DVDs. But then without the library,
Speaker 1: without the titles, there was no incentive for customers school
Speaker 1: and by the hardware. So that was a real Catch
Speaker 1: twenty two and I honestly don't know if Catch twenty
Speaker 1: two is one of the DVD is available at the time.
Speaker 1: Jim Cook, the guy who I mentioned earlier who had
Speaker 1: become the head of finance and operations. I hadn't mentioned
Speaker 1: him by name yet, but he was the finance and
Speaker 1: operations guy in the early days of Netflix. He helped
Speaker 1: Randolph and Kish tweak their business plan, and he was
Speaker 1: really good at raising concerns about the cost of operations
Speaker 1: and the risks of getting into a business with a
Speaker 1: medium that had yet to receive wide adoption. So he
Speaker 1: would raise points of concern and it came down to
Speaker 1: Randolphin Kish to figure out, well, how are we going
Speaker 1: to address this, how are we going to answer this
Speaker 1: point of criticism, And so it became a back and
Speaker 1: forth and it helped kind of improve the process. Before
Speaker 1: they ever launched, they also designed and tested out the
Speaker 1: postage paid mailers, the inn actual envelopes that they intended
Speaker 1: to use with the DVDs, and they ended up bringing
Speaker 1: their friends and family across the United States in on
Speaker 1: this to try and test out the system. So they
Speaker 1: would mail disks to their friends and family across the
Speaker 1: US that the friends and family would tear off the
Speaker 1: little return address or the shipping address which would have
Speaker 1: the return address underneath it, and then they would put
Speaker 1: it back in the mail. And so most of their
Speaker 1: friends and family didn't actually own DVD players, so they
Speaker 1: would get this envelope with disks in it, and they
Speaker 1: would take the little label off and then they would
Speaker 1: pop it back in the mail without ever having watched
Speaker 1: anything because they didn't have anything to watch it on.
Speaker 1: So the real purpose was really to see if the
Speaker 1: mailers adequately protected the disks and if they could hold
Speaker 1: up to the trip of being sent across the United
Speaker 1: States and back again and still be usable for future rentals.
Speaker 1: One thing that the team. Included was a special barcode
Speaker 1: on each of those envelopes, and this was really important
Speaker 1: because the barcode allowed the envelopes to skip certain steps
Speaker 1: in the mail sorting process at postal services, at post offices,
Speaker 1: and otherwise those envelopes could be really badly damaged and
Speaker 1: the discs could be crushed inside. So Randolph learned about
Speaker 1: a service that would allow him to skip mail sorting automation.
Speaker 1: All they had to do was pre sort the envelopes
Speaker 1: on Netflix's side, So he created a system that used
Speaker 1: a barcode scanner, just the kind that you would find
Speaker 1: in say, department store a grocery store, and they would
Speaker 1: print these barcodes on the envelopes and in the warehouse
Speaker 1: you would scan each envelope and it would tell you
Speaker 1: which bag out of like twenty seven bags you should
Speaker 1: put the envelope. And then you had all that pre
Speaker 1: sorted before it ever got to the post office, and
Speaker 1: it could skip the sorting stage there and go straight
Speaker 1: to wherever it need to go for that particular zip code.
Speaker 1: The original mailers were made out of cardboard and they
Speaker 1: had a little bit of stiffness to them. They could
Speaker 1: hold up to three discs at a time. Originally, and
Speaker 1: like I said, they had that removable address flap on
Speaker 1: them that when torn off, would reveal Netflix's return address
Speaker 1: and that could be used as the return envelope for
Speaker 1: the discs. The original DVD storage vault, as in the
Speaker 1: place where they would actually hold the DVDs they would
Speaker 1: use for rental, was initially a room in their office space.
Speaker 1: It wasn't a warehouse or anything um. In order to
Speaker 1: hold all the DVDs, they were maximizing the use of
Speaker 1: the space so much that the aisles were only wide
Speaker 1: enough for one person to go down the aisle at
Speaker 1: a time, and after testing out numerous configurations to find
Speaker 1: which way was the most efficient, they eventually landed on
Speaker 1: a an arrangement that essentially copied the way Blockbuster stores
Speaker 1: were laid out. It seemed to work best. It made
Speaker 1: finding the relevant copies faster and more efficient. The team
Speaker 1: also worked on pricing models for rentals and ways to
Speaker 1: promote the service, including users getting their first rental free,
Speaker 1: though they were still charged shipping and handling fee. But
Speaker 1: one thing they did not yet have was a name.
Speaker 1: I'll explain how they came up with that name in
Speaker 1: just a second, but first let's take another quick break
Speaker 1: to thank our sponsor. One of the original names the
Speaker 1: group debated on using was Kibble Incorporated. Now this goes
Speaker 1: to the concept of, and I hate this phrase, eating
Speaker 1: your own dog food, the idea that the people who
Speaker 1: build the business or service will want to use whatever
Speaker 1: that service or product might be. And you hear this
Speaker 1: among developers frequently, that you're eating your own dog food
Speaker 1: means that you actually make use of the apps that
Speaker 1: you develop. The team gravitated towards finding a name that
Speaker 1: would consist of two short words, ideally words that are
Speaker 1: one syllable each. They wanted one of those two words
Speaker 1: to reference the fact that the service was all about movies,
Speaker 1: and they wanted the other word to reference the fact
Speaker 1: that the service was web based. And so they eventually
Speaker 1: made a list that had two columns and down one
Speaker 1: column were terms and slang that were related to the web,
Speaker 1: and down the other column was a similar list, but
Speaker 1: it was slang in terms all about the movie industry.
Speaker 1: And then they started matching up different names to come
Speaker 1: up with a potential name for a company. So some
Speaker 1: of the early suggestions included replay, dot com, direct, Picks
Speaker 1: dot com, Cinema Center dot com, and e flix dot com.
Speaker 1: But as we all know, the eventual winner was Netflix
Speaker 1: dot Com. That was the one that people I guess
Speaker 1: objected to the least they I don't know that there
Speaker 1: was anyone who was passionately advocating for the name, but
Speaker 1: there was no one who was in great opposition to it,
Speaker 1: and so that became the name of the company. The
Speaker 1: original logo was in purple and white. It's easy for
Speaker 1: us to forget that that was the case. That the
Speaker 1: Netflix is branding is so um so powerful now with
Speaker 1: the red and white scheme that it's easy to forget
Speaker 1: that originally was purple and white. It had an unspooling
Speaker 1: reel of film as part of the logo design. The
Speaker 1: red and white color scheme would come much later. They
Speaker 1: brought on a guy named Corey Bridges to work in
Speaker 1: customer development, and Bridges had previously worked for Netscape and
Speaker 1: helped launch their internet browser. Bridges secretly reached out to
Speaker 1: influencers and use net groups because this was before stuff
Speaker 1: like YouTube and Instagram and other social media platforms. But
Speaker 1: he saw those folks and use net groups as being
Speaker 1: really passionate community members, and by tapping into people who
Speaker 1: were really big users in and use net groups that
Speaker 1: were focusing on film discussion and asking them if they
Speaker 1: would participate in a beta program that Netflix was going
Speaker 1: to hold. He got a lot of responses, especially when
Speaker 1: he said that they would be allowed to be the
Speaker 1: first people to write about this new service once it
Speaker 1: was ready to launch, that they would essentially have the
Speaker 1: scoop on everyone else, and his promotional plan worked like gangbusters.
Speaker 1: They signed up eagerly to test out this service. On
Speaker 1: April fourteenth, the company was ready to go live. They
Speaker 1: had built up a library of DVDs and they had
Speaker 1: tested the features with their beta testers. Read Hastings, who
Speaker 1: had provided the seed money, had mainly stayed out of
Speaker 1: the actual development process while all of this creative work
Speaker 1: was going on. This was Mark Randolph's show for that
Speaker 1: initial few months setting up the company, but read Hastings
Speaker 1: did arrived at the company and watch as they actually
Speaker 1: went online, so he was there on hand for launch day.
Speaker 1: In fact, the story goes that some of the other
Speaker 1: employees didn't even know who read Hastings was. They had
Speaker 1: never even really chatted with him at this point. So
Speaker 1: while this team was working on Netflix. Hastings had actually
Speaker 1: gone back to pursue more graduate studies at Stanford. And
Speaker 1: here's one way that Netflix was a very different service
Speaker 1: when it first launched then it would become later on,
Speaker 1: and why the story about Hastings and those late fees
Speaker 1: doesn't ring terribly true even before we heard about Mark
Speaker 1: Randolph's version of the story. When Netflix first went live,
Speaker 1: users didn't get to subscribe to rent films indefinitely and
Speaker 1: just pay a monthly fee. Rentals had a seven day
Speaker 1: duration and after that you were expected to return the
Speaker 1: DVD in the provided postage paid mailer envelope. And the
Speaker 1: different titles even had different rental fees. Not everything was
Speaker 1: priced exactly the same. I actually used the Internet Archive
Speaker 1: wayback machine. If you've never used that, I highly recommend
Speaker 1: checking it out. It allows you to look at uh
Speaker 1: snapshots of websites from over the years, so if you
Speaker 1: pick a website that's been around for a long time,
Speaker 1: you can see what it looked like in different years.
Speaker 1: And so I went to the earliest date available for
Speaker 1: Netflix dot com and on the Internet Archive that date
Speaker 1: would be January sevent so, not quite a year after
Speaker 1: the company had officially debuted. This is still before Netflix
Speaker 1: would move to a monthly subscription plan for users, however,
Speaker 1: So you would rent DVDs for a week, and if
Speaker 1: you wanted to rent let's say, the film Blade starring
Speaker 1: Wesley Snipes, you would need to cough up four bucks
Speaker 1: to rent that movie. But if you wanted to rent
Speaker 1: Star Trek six the Undiscovered Country, that would cost you
Speaker 1: five dollars. Now you could rent as many films as
Speaker 1: you liked, and there was an offer on the site
Speaker 1: saying that you could actually save money on a per
Speaker 1: rental basis if you chose to rent four or more
Speaker 1: titles at a time. About an hour and a half
Speaker 1: after they launched their service, their web servers already hit capacity.
Speaker 1: The promotional strategy had worked maybe a little too well.
Speaker 1: The use net groups were really buzzing about this new service,
Speaker 1: and before long the servers crashed. So while programmer Eric
Speaker 1: Meyer worked on patching things up to get everything up
Speaker 1: and running again, he sent some of the rest of
Speaker 1: the programming team on a frantic trip to a nearby
Speaker 1: electronics store to buy more servers in order to boost capacity.
Speaker 1: Things were not going so hot over in the DVD
Speaker 1: storage vault either. In fact, things were pretty chaotic. The
Speaker 1: laser printer they were using to print out addresses jammed.
Speaker 1: The flurry of activity meant the DVDs soon got out
Speaker 1: of order and it became much more difficult to track
Speaker 1: down specific disks, and every time the servers came back up,
Speaker 1: new orders would fly in, so the team was struggling
Speaker 1: to keep up. By the end of the day, they
Speaker 1: had orders to send out more than five hundred disks
Speaker 1: to more than one customers, and this was all done
Speaker 1: by hand, and it was sometime around them. They also realized, oh, shoot,
Speaker 1: the Internet is always open. We can't close. It's not
Speaker 1: like from eight pm till six am we're shut down.
Speaker 1: So the site still has to be active. It still
Speaker 1: has to be up and available, even though we won't
Speaker 1: be completing any more orders until the next day. That
Speaker 1: was a stark realization. They soon included a message during
Speaker 1: high capacity situations that read, sorry, due to extreme opening
Speaker 1: week demand, the Netflix Store may be slow. Helping or
Speaker 1: hindering things was that while Netflix was in development, the
Speaker 1: DVD player was a novelty right that people. Very few
Speaker 1: people had them. But by the spring of nine, when
Speaker 1: Netflix was actually launching as a service, it was a
Speaker 1: different story. The price for DVD players had come down
Speaker 1: to about half of what they had been and DVD
Speaker 1: player sales were starting to outpace VCR sales. So while
Speaker 1: in late potential customer base was small, by spring of
Speaker 1: that had changed. So it was kind of a right place,
Speaker 1: right time scenario for Netflix. Movie studios were playing ball too.
Speaker 1: As sales picked up, studios began to release more of
Speaker 1: their libraries on DVD. Now they saw that there was
Speaker 1: a demand for this kind of home entertainment, and they
Speaker 1: saw the opportunity and they began to jump on that.
Speaker 1: New titles and old became potential revenue generators. And Netflix,
Speaker 1: which was protected by US president that had law that
Speaker 1: said a company can buy and then rent out movies.
Speaker 1: That is totally fine by law if you if you
Speaker 1: buy a product, you can rent that product out to
Speaker 1: other people. So Netflix was taking advantage by scooping up
Speaker 1: copies of as many different titles as it could, building
Speaker 1: out its own library. By August, those initial five titles
Speaker 1: were now closer to and because VHS rental chains like
Speaker 1: Hollywood Video and Blockbuster were slow to adopt the DVD format,
Speaker 1: Netflix had a good running start on them as well.
Speaker 1: Those companies were so entrenched in the VHS world that
Speaker 1: they thought of switching lanes and moving to DVDs was
Speaker 1: really daunting it. It represented an enormous cost for them
Speaker 1: to be able to change formats like that. So Netflix,
Speaker 1: because it had not been entrenched in another medium, was
Speaker 1: at an advantage. So it was an auspicious beginning. And
Speaker 1: we're just getting started now. In our next episode, we'll
Speaker 1: look at how Netflix, whether the first year or two
Speaker 1: of its existence, and how it started to come up
Speaker 1: against what would become its main rival for the first
Speaker 1: decade of Netflix is existence as a company, that being Blockbuster.
Speaker 1: If you guys have suggestions for future episodes of tech Stuff,
Speaker 1: whether it's a company, a technology, a person in tech,
Speaker 1: whatever it may be, send me an email. The address
Speaker 1: for the show is tech Stuff at how stuff works
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Speaker 1: merchandise store, So go check out the designs there. Maybe
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Speaker 1: Netflix really soon. For more on this and thousands of
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