WEBVTT - The Netflix Story 0:00:04.120 --> 0:00:07.160 Get in touch with technology with tech Stuff from how 0:00:07.200 --> 0:00:13.840 stuff works dot com. Hey there, and welcome to tech Stuff. 0:00:13.880 --> 0:00:17.160 I'm your host, Jonathan Strickland. I'm an executive producer here 0:00:17.160 --> 0:00:19.560 at how Stuff Works in a law of all things tech, 0:00:20.280 --> 0:00:24.920 and recently I did some episodes about the video rental 0:00:25.000 --> 0:00:30.120 company Blockbuster and how it went from being the dominant 0:00:30.200 --> 0:00:35.800 force in rentals to declaring bankruptcy and all but disappearing 0:00:35.880 --> 0:00:40.240 from view today. As per text Stuff listener Kevin's request, 0:00:40.720 --> 0:00:45.680 I'm going to begin to talk about another company, Netflix, 0:00:45.760 --> 0:00:49.920 one that has been frequently cited as the giant killer 0:00:50.120 --> 0:00:55.200 when people talk about Blockbuster. But this is a very 0:00:55.240 --> 0:00:59.840 interesting and surprisingly deep story, the story of Netflix and 0:01:00.320 --> 0:01:03.080 rise and where it is today. So this is actually 0:01:03.120 --> 0:01:08.480 gonna be a rare four part episode. The founding of Netflix, 0:01:08.520 --> 0:01:11.680 just by itself is a pretty fascinating tale, and that's 0:01:11.680 --> 0:01:13.960 what this episode is really going to focus on. So 0:01:14.880 --> 0:01:20.000 where did Netflix come from and how has it evolved? Well, first, 0:01:20.160 --> 0:01:24.440 the origins of Netflix are a matter of some debate, 0:01:24.800 --> 0:01:29.000 or at least there are contradicting versions of the origins 0:01:29.120 --> 0:01:34.040 of Netflix. Read Hastings, the co founder of Netflix, once 0:01:34.240 --> 0:01:36.319 said that he came up with the idea after he 0:01:36.400 --> 0:01:40.640 incurred a forty dollar late fee from the aforementioned Blockbuster. 0:01:41.160 --> 0:01:45.200 The video he had rented was Apollo thirteen. No word 0:01:45.280 --> 0:01:47.440 on whether or not his response to getting hit with 0:01:47.480 --> 0:01:51.280 the fee was Houston, we've had a problem. Actually. In 0:01:51.360 --> 0:01:56.400 an interview in Fortune magazine, Hastings said, quote, I remember 0:01:56.480 --> 0:01:59.200 the fee because I was embarrassed about it. That was 0:01:59.240 --> 0:02:01.600 back in the vh just days and it got me thinking, 0:02:01.680 --> 0:02:04.680 there's that there's a big market out there. So I 0:02:04.680 --> 0:02:07.920 started to investigate the idea of how to create a 0:02:07.960 --> 0:02:11.680 movie rental business by mail. I didn't know about DVDs, 0:02:11.840 --> 0:02:13.880 and then a friend of mine told me they were coming. 0:02:14.200 --> 0:02:17.400 I ran out to Tower Records in Santa Cruz, California 0:02:17.720 --> 0:02:21.200 and mailed CDs to myself, just a disk in an envelope. 0:02:21.360 --> 0:02:23.399 It was a long twenty four hours until the mail 0:02:23.520 --> 0:02:26.400 arrived back at my house and I ripped them open 0:02:26.639 --> 0:02:29.040 and they were all in great shape. That was the 0:02:29.160 --> 0:02:34.480 big excitement point. End quote. So later on he would 0:02:34.520 --> 0:02:37.880 change the name of the video store from Blockbuster to 0:02:38.040 --> 0:02:41.200 a little mom and pop video rental store that had 0:02:41.240 --> 0:02:44.440 gone out of business several years later. In a future episode, 0:02:44.440 --> 0:02:47.880 I'll explain why that story changed. But then there's another 0:02:48.000 --> 0:02:52.440 version that Hastings has shared at the Mobile World Congress convention. 0:02:52.800 --> 0:02:56.680 He said the idea spawned from a theoretical scenario he 0:02:56.800 --> 0:03:00.000 encountered in graduate school. So a math problem, if you will, 0:03:00.320 --> 0:03:03.040 And the math problem goes something like this, what is 0:03:03.639 --> 0:03:08.480 the bandwidth of a station wagon loaded down with tapes? 0:03:08.960 --> 0:03:12.440 I'm talking about tapes that have magnetic storage on them, 0:03:12.480 --> 0:03:15.280 that kind of tape. To answer that question, you have 0:03:15.360 --> 0:03:17.680 to know a lot of different variables. You need to 0:03:17.720 --> 0:03:20.240 know how many tapes you can load into the station 0:03:20.240 --> 0:03:23.799 wagon using the most efficient method possible, sort of Tetris style, 0:03:24.440 --> 0:03:26.519 so that you can fit the maximum number of tape 0:03:26.560 --> 0:03:30.639 tapes in the in the carrying capacity of the station wagon. Two, 0:03:30.800 --> 0:03:33.760 you need to know how much data can each tape 0:03:33.840 --> 0:03:36.480 hold individually. It's for you to be able to know 0:03:36.560 --> 0:03:38.160 what the band with is. And three, you would need 0:03:38.200 --> 0:03:40.000 to know how long it would take for the station 0:03:40.040 --> 0:03:42.480 wagon to get from its starting point to whatever its 0:03:42.480 --> 0:03:46.040 destination is. And that would allow you to answer that question. 0:03:46.040 --> 0:03:48.400 And this got him into thinking about how much data 0:03:48.520 --> 0:03:52.120 a DVD could hold and how quickly you could distribute 0:03:52.160 --> 0:03:56.640 the information on that DVD by utilizing the postal service, 0:03:57.080 --> 0:04:01.640 and that the Internet would make delivery services faster. But 0:04:02.360 --> 0:04:06.080 another version of this story was shared by Mark Randolph, 0:04:06.320 --> 0:04:11.080 who was the other co founder of Netflix, and he 0:04:11.160 --> 0:04:14.720 said that he and Hastings were racking their brains to 0:04:14.760 --> 0:04:17.760 come up with a way to build the Amazon dot 0:04:17.800 --> 0:04:22.240 Com of something, and this would be back in now. 0:04:22.240 --> 0:04:26.480 In those days, Amazon dot Com was still only an 0:04:26.560 --> 0:04:30.559 online bookstore. That's all they dealt with was books. Also, 0:04:30.600 --> 0:04:34.440 it's interesting that they wanted to build the Amazon dot 0:04:34.480 --> 0:04:37.640 Com of something because at that point Amazon dot Com 0:04:37.720 --> 0:04:40.560 had been operating at a loss and it would continue 0:04:40.600 --> 0:04:42.640 to do so until two thousand three. It did have 0:04:42.680 --> 0:04:44.720 a profitable quarter at the end of two thousand one, 0:04:45.160 --> 0:04:49.520 but two thousand three was its first profitable year. Still, 0:04:49.720 --> 0:04:52.440 Amazon dot Com got a lot of investment money poured 0:04:52.480 --> 0:04:55.200 into it, so maybe that's what they meant. Plus, in 0:04:55.240 --> 0:04:59.120 those days, the way that startups typically worked was that 0:04:59.200 --> 0:05:02.560 you would get a business going. Maybe you would figure 0:05:02.600 --> 0:05:05.160 out a way to generate revenue, but that wasn't really 0:05:05.160 --> 0:05:08.640 that important. What was more important was that you showed 0:05:08.680 --> 0:05:12.160 yourself to have a really valuable idea, one so valuable 0:05:12.520 --> 0:05:15.760 that a larger company wanted it, and then they would 0:05:15.760 --> 0:05:20.360 acquire your company for a princely sum, and then you 0:05:20.400 --> 0:05:23.279 could go and do it all over again and continue 0:05:23.320 --> 0:05:27.760 to make startups and sell them till the cows came home. 0:05:27.920 --> 0:05:31.400 Remember this is in the days well before the dot 0:05:31.440 --> 0:05:35.320 com bubble burst. But let's take a step back for 0:05:35.400 --> 0:05:40.560 just a second. Who are Read Hastings and Mark Randolph. Well, 0:05:40.600 --> 0:05:43.960 first we'll start with Wilmot Read Hastings Jr. He was 0:05:44.000 --> 0:05:47.960 born in Boston, Massachusetts, in nineteen sixty to a well 0:05:48.040 --> 0:05:50.920 to do family. That's putting it lightly. His mother's family 0:05:51.279 --> 0:05:54.719 were founding members of the Social Register. And for those 0:05:54.720 --> 0:05:57.279 who do not know, I certainly do not move in 0:05:57.279 --> 0:06:01.039 these circles, So I would not be one to know 0:06:01.120 --> 0:06:04.080 about this if I had not read extensively about it before. 0:06:04.480 --> 0:06:09.440 The Social Registered tracks things like marriages, births, other big 0:06:09.480 --> 0:06:13.600 life events among the well to do in high society. 0:06:13.640 --> 0:06:18.360 So we're talking old money typically, and it's a relatively 0:06:18.480 --> 0:06:21.640 small list of families in the grand scheme of things. 0:06:22.080 --> 0:06:26.480 These are movers and shakers and business and politics and 0:06:26.600 --> 0:06:31.359 in finance. And there's no way I would ever be 0:06:31.440 --> 0:06:34.040 listed in there, not that I have any great desire 0:06:34.080 --> 0:06:38.240 to be, but his family on his mother's side founded 0:06:38.440 --> 0:06:42.640 that his great grandfather was Alfred Lee Loomis, whom I 0:06:42.720 --> 0:06:47.120 covered in a previous episode of Tech Stuff, and he 0:06:47.160 --> 0:06:50.000 would go to college. That that is, Hastings would go 0:06:50.040 --> 0:06:54.200 to college in Maine at Bowdoin College. He graduated with 0:06:54.240 --> 0:06:56.719 a bachelor's degree there, and then he entered the Peace 0:06:56.760 --> 0:06:59.400 Corps for a few years, spending much of that time 0:06:59.400 --> 0:07:03.279 in Swazila and in Southern Africa teaching mathematics. When he 0:07:03.320 --> 0:07:07.119 got back to the States, he first attempted to enroll 0:07:07.279 --> 0:07:09.800 in m I T. He wanted to study computer science, 0:07:10.160 --> 0:07:12.960 but M I T wouldn't accept him, so instead he 0:07:13.080 --> 0:07:17.440 enrolled over at Stanford University and he would graduate nineteen 0:07:17.520 --> 0:07:20.520 eight with a master's degree in computer science. He got 0:07:20.560 --> 0:07:23.640 a job as a software developer, and in nineteen ninety 0:07:23.720 --> 0:07:28.040 one he founded his first company, called Pure Software. In 0:07:28.120 --> 0:07:33.120 nineteen Pure Software merged with another company called Atria Software 0:07:33.240 --> 0:07:36.360 in a stock transaction deal worth nearly a billion dollars, 0:07:36.720 --> 0:07:39.520 and Hastings would become the president and CEO of this 0:07:39.600 --> 0:07:43.560 new company called Pure Atria. One of the company's services 0:07:43.640 --> 0:07:46.640 was to work on solving computer bugs that would pop 0:07:46.720 --> 0:07:49.280 up when multiple developers would all work on the same 0:07:49.320 --> 0:07:53.679 computer code. Atria's former CEO would actually become the chairman 0:07:53.760 --> 0:07:58.360 of this new company, and in August nine, another company 0:07:58.480 --> 0:08:02.600 called Rational Software made a move to acquire Pure Atria, 0:08:02.920 --> 0:08:07.360 which meant that Hastings got a handsome payout an enormous 0:08:07.440 --> 0:08:12.000 amount of money, made him a millionaire and a multimillionaire, 0:08:12.080 --> 0:08:13.920 and it gave him the money he would need to 0:08:14.040 --> 0:08:18.360 found Netflix. He was essentially the source of the seed 0:08:18.400 --> 0:08:22.520 money for the company. Mark Randolph was born in Chappaqua, 0:08:22.600 --> 0:08:26.760 New York, in nineteen fifty eight, also to a wealthy family. 0:08:27.200 --> 0:08:30.080 He had famous relatives of his own. His great uncle 0:08:30.200 --> 0:08:33.120 was Sigmund Freud, and he was also the nephew of 0:08:33.240 --> 0:08:39.040 Edward Burnet's, a public relations and propaganda genius some might say, 0:08:39.080 --> 0:08:42.680 the master of misdirection. You can learn more about Burnet's 0:08:42.720 --> 0:08:46.160 and episodes from shows like Stuff You Should Know and 0:08:46.200 --> 0:08:48.200 Stuff They Don't Want You to Know. They've both done 0:08:48.200 --> 0:08:51.840 episodes about Edward Burnet's and his is a fascinating story. 0:08:52.160 --> 0:08:55.760 Randolph would go on to attend Hamilton's College in New York, 0:08:56.000 --> 0:08:59.800 where he earned a degree in geology, which totally rocks. 0:09:00.640 --> 0:09:04.000 When he graduated, his dad helped Randolph get a clerical 0:09:04.080 --> 0:09:07.440 job at a company called Cherry Lane Music Company, and 0:09:07.559 --> 0:09:10.440 Randolph worked in the mail order side of the business 0:09:10.480 --> 0:09:14.680 and learned about catalogs and mail order strategies and marketing 0:09:14.679 --> 0:09:19.400 strategies and about direct mail. He began analyzing customer behaviors 0:09:19.559 --> 0:09:22.960 and learning which products were performing best and the types 0:09:23.000 --> 0:09:26.040 of customers who were likely to buy a future product 0:09:26.120 --> 0:09:30.240 based upon past purchases, and so he started to redesign 0:09:30.800 --> 0:09:34.400 the UH, the company's approach to this and make it 0:09:34.440 --> 0:09:38.040 more effective. He was then asked to design the computer 0:09:38.160 --> 0:09:40.880 inventory and processing system for the company when they decided 0:09:40.880 --> 0:09:43.480 to move to a computer system, and he would co 0:09:43.679 --> 0:09:48.320 found the American version of Mac User magazine, and then 0:09:48.320 --> 0:09:51.160 he was tapped to launch two new mail order businesses. 0:09:51.640 --> 0:09:56.160 They were called mac Warehouse and MicroWarehouse. After those jobs, 0:09:56.320 --> 0:09:59.400 he worked for a software company called Borland International for 0:09:59.480 --> 0:10:01.880 seven years years and after that he worked at various 0:10:01.880 --> 0:10:04.920 startups in the dot com boom and became a founding 0:10:04.960 --> 0:10:10.040 member and chief product marketing officer at Atria, in which, 0:10:10.320 --> 0:10:14.760 as I mentioned, Pure Software had acquired. So Randolph then 0:10:14.800 --> 0:10:17.840 became the head of corporate marketing at the new company 0:10:17.880 --> 0:10:20.679 of Pure Atria. But just a few months after he 0:10:20.720 --> 0:10:25.240 took that position, they had the announced merger with Rational Software, 0:10:25.280 --> 0:10:28.160 and that meant his job was already on borrowed time. 0:10:28.200 --> 0:10:30.679 He knew that his job was going to be eliminated 0:10:30.760 --> 0:10:34.199 upon the completion of that acquisition, so he and Hastings 0:10:34.200 --> 0:10:37.719 started talking about a possible business venture together. And I've 0:10:37.760 --> 0:10:41.640 heard it said that Hastings is sort of the engineering 0:10:41.720 --> 0:10:45.520 and numbers guy, and it makes very cold and calculated 0:10:45.559 --> 0:10:47.880 decisions in many ways, and Randolph was more of a 0:10:47.920 --> 0:10:51.280 people person in creative type now, according to Randolph himself, 0:10:51.840 --> 0:10:54.600 as the acquisition neared, he would talk to Hastings about 0:10:54.679 --> 0:10:57.480 various ideas. He had to launch the next Amazon dot 0:10:57.520 --> 0:11:00.320 Com of something, and they were going back and forth 0:11:00.360 --> 0:11:03.360 on what that something should be. Early on, they talked 0:11:03.400 --> 0:11:07.160 about the possibility of video sales and rentals using the 0:11:07.200 --> 0:11:11.360 Internet as a way to connect customers with video titles. 0:11:11.360 --> 0:11:14.080 But this was still in the day of VHS tapes, 0:11:14.480 --> 0:11:17.040 and the cost on a per tape basis would be 0:11:17.040 --> 0:11:21.520 between fifty five dollars per title. That's how much a 0:11:21.559 --> 0:11:24.280 lot of these video rental stores were paying, and then 0:11:24.320 --> 0:11:26.959 you had the expense of shipping tapes in the mail 0:11:27.360 --> 0:11:30.520 and the question about whether or not they would remain 0:11:30.960 --> 0:11:33.800 in good condition. How long could you do this per 0:11:33.880 --> 0:11:37.480 tape before they wore out? Presumably the wear and tear 0:11:37.559 --> 0:11:39.880 would be much greater than you would see in your 0:11:39.880 --> 0:11:42.920 typical store, And eventually that made them decide that this 0:11:43.000 --> 0:11:47.360 particular idea was impractical. But then again, according to Randolph, 0:11:47.640 --> 0:11:51.120 he came across something interesting while reading about new technologies. 0:11:51.120 --> 0:11:55.440 He heard about the DVD format, and in the DVD 0:11:55.559 --> 0:11:58.240 format was brand new in the United States. It had 0:11:58.320 --> 0:12:01.600 launched the year before in Japan, but just made its 0:12:01.600 --> 0:12:05.640 way over to the US. In an optical disc would 0:12:05.640 --> 0:12:08.880 be much lighter and easier to ship than a VHS tape, 0:12:09.000 --> 0:12:10.680 and it looked like it would be easy to get 0:12:10.679 --> 0:12:13.920 titles much more cheaply on a per title basis, because 0:12:14.240 --> 0:12:17.080 it looked like instead of charging this fifty to eighty 0:12:17.160 --> 0:12:20.559 five dollars per title, it would be closer to fifteen 0:12:20.600 --> 0:12:23.600 to twenty dollars, and that really brought that initial startup 0:12:23.679 --> 0:12:27.080 cost way down. So the story goes that Hastings and 0:12:27.200 --> 0:12:31.080 Randolph went to a local music store, not necessarily Tower records, 0:12:31.320 --> 0:12:33.400 and then they bought a CD. Then they hopped over 0:12:33.440 --> 0:12:35.840 to a greeting card store and they bought a card 0:12:35.880 --> 0:12:38.160 that had an envelope large enough to hold the c D. 0:12:38.600 --> 0:12:42.079 Then Hastings mailed the c D to himself and he 0:12:42.480 --> 0:12:44.360 went home and he waited for it to arrive. And 0:12:44.400 --> 0:12:46.800 then within a day or two, it got there, and 0:12:46.880 --> 0:12:49.000 he checked out the c D to see if there 0:12:49.040 --> 0:12:52.200 was any visible damage on it, and he saw that 0:12:52.280 --> 0:12:56.640 the disc inside was undamaged. This could work, they thought, 0:12:57.480 --> 0:12:59.720 I'll explain more in just a moment, but first let's 0:12:59.720 --> 0:13:10.000 take a quick break to thank our sponsor. Hastings and 0:13:10.120 --> 0:13:14.040 Randolph pulled in Christina Kish, who had joined pure Atria 0:13:14.360 --> 0:13:17.600 on Randolph's recommendation, but then she found herself out of 0:13:17.600 --> 0:13:20.320 a job, literally on her first day of work. She 0:13:20.360 --> 0:13:23.240 comes to work on her first day, finds out that 0:13:23.320 --> 0:13:26.400 she's going to get laid off once this acquisition happens. 0:13:27.280 --> 0:13:29.640 She would be allowed to continue to show up and 0:13:29.720 --> 0:13:33.040 draw a paycheck during this acquisition process, but she didn't 0:13:33.080 --> 0:13:35.600 really have anything to do, and she already knew that 0:13:35.880 --> 0:13:39.880 the job was strictly just sitting at a desk doing 0:13:39.920 --> 0:13:43.400 nothing until the acquisition was done. Her main job in 0:13:43.440 --> 0:13:46.040 the early planning stages of what was going to become 0:13:46.160 --> 0:13:49.840 Netflix was to look at Blockbusters business plan and determine 0:13:50.000 --> 0:13:53.360 how did Blockbuster make money? And that was a little 0:13:53.440 --> 0:13:56.679 challenging because she saw how big the overhead was, how 0:13:56.760 --> 0:14:01.160 much the costs were to operate Blockbuster, and it became 0:14:01.200 --> 0:14:04.920 clear that Blockbuster strategy was not going to work for Netflix. 0:14:05.480 --> 0:14:10.760 That Blockbuster had largely succeeded by acquiring various video chains 0:14:11.040 --> 0:14:14.160 and growing this way and adding to their customer base 0:14:14.160 --> 0:14:16.400 in that way, but that was not really a viable 0:14:16.440 --> 0:14:21.240 option for Netflix. Meanwhile, uh they also brought on a 0:14:21.240 --> 0:14:24.760 woman named terse T Smith. She was someone else who 0:14:24.760 --> 0:14:28.720 had joined pure Atria on Randolph's recommendation, and Hastings brought 0:14:28.800 --> 0:14:31.560 in a developer of his own named Eric Meyer, who 0:14:31.600 --> 0:14:34.880 would be responsible for designing the website. Together, they began 0:14:34.880 --> 0:14:38.040 to hash out their plan for what would become Netflix. 0:14:38.440 --> 0:14:40.640 So how do you convince people to a shoe a 0:14:40.720 --> 0:14:45.040 brick and mortar store for an online library of DVDs 0:14:45.120 --> 0:14:48.200 and then expect them to wait patiently for a movie 0:14:48.280 --> 0:14:53.080 to be packed up, shipped and delivered to their homes. 0:14:53.480 --> 0:14:56.560 It seemed like a really big challenge. Randolph started doing 0:14:56.600 --> 0:14:59.960 research in the video rental industry. He attended a convention 0:15:00.000 --> 0:15:03.800 and held by the Video Software Dealers Association or v 0:15:04.200 --> 0:15:07.240 s d A, and there he met the president of 0:15:07.320 --> 0:15:09.000 the v s d A. It was a guy named 0:15:09.120 --> 0:15:13.880 Mitch Low. Low initially agreed to just do some consulting 0:15:14.240 --> 0:15:19.360 with the entrepreneurs, giving information about valuable rental industry stuff, 0:15:19.400 --> 0:15:22.720 such as how to use software to simulate the experience 0:15:22.840 --> 0:15:26.320 of talking to a knowledgeable video store clerk for recommendations. 0:15:26.720 --> 0:15:30.960 This would become a key feature early on with Netflix 0:15:31.080 --> 0:15:36.280 creating a system that would recommend movies based upon your 0:15:36.360 --> 0:15:40.440 likes and your interests, something that that a video store 0:15:40.480 --> 0:15:42.320 clerk could do. And you talked to a video store 0:15:42.360 --> 0:15:45.720 clerk and say, you know, I really like action movies, 0:15:46.000 --> 0:15:51.000 and I like movies featuring you know, a protagonist who's 0:15:51.040 --> 0:15:54.840 really the odds are stacked against them, and etcetera, etcetera, 0:15:54.840 --> 0:15:56.400 And they say, oh, well, have you seen die Hard? 0:15:56.480 --> 0:15:58.200 Let me take you over here and I'll show you 0:15:58.240 --> 0:15:59.640 and or if you have seen die Hard, I'll show 0:15:59.680 --> 0:16:01.600 you some other movies that are similar to that that 0:16:01.640 --> 0:16:05.760 you might really enjoy. Well. Low talked about the ways 0:16:05.840 --> 0:16:08.600 that video clerks did this, so that they could figure 0:16:08.600 --> 0:16:12.760 out a way to essentially simulate that through their algorithms. 0:16:13.200 --> 0:16:16.760 Randolph eventually was actually able to convince Low to join 0:16:17.120 --> 0:16:21.720 the new company, and interestingly, Low had already experimented with 0:16:21.880 --> 0:16:25.440 a video rental method that was outside the norm, and 0:16:25.560 --> 0:16:28.800 later that method would prove to be actually really effective, 0:16:28.840 --> 0:16:30.800 although it wasn't in the early days. So what he 0:16:30.840 --> 0:16:33.640 had done was he had installed a video rental kiosk 0:16:33.840 --> 0:16:37.960 in a Japanese hospital, and that particular venture was a failure, 0:16:38.440 --> 0:16:41.160 but it would turn out to be a pretty good 0:16:41.200 --> 0:16:45.640 idea later on A box that has read one might 0:16:45.720 --> 0:16:49.880 say more on that in a future episode. The company 0:16:50.000 --> 0:16:52.680 would grow to eight people with the addition of a 0:16:52.680 --> 0:16:56.400 couple of programmers and a new director of operations in finance, 0:16:56.800 --> 0:16:59.120 and they got to work building out the initial website 0:16:59.120 --> 0:17:02.760 and user into face now. According to the book Netflix, 0:17:03.080 --> 0:17:07.000 which is a phenomenal book, I relied on it very heavily. 0:17:07.000 --> 0:17:10.520 When doing the research for these episodes. Christina Kish would 0:17:10.640 --> 0:17:15.160 draw out the stages she wanted customers to encounter when 0:17:15.160 --> 0:17:19.119 they would navigate to whatever the website was going to 0:17:19.200 --> 0:17:21.679 turn into. She this was sort of the experience she 0:17:21.760 --> 0:17:24.879 wanted customers to have, and it went from seeing the 0:17:24.920 --> 0:17:28.280 initial page to the point where you're checking out and 0:17:28.320 --> 0:17:31.600 paying to rent a title, and she did it all 0:17:31.680 --> 0:17:35.680 like drawing crayon on paper. Other programmers started building out 0:17:35.720 --> 0:17:39.119 the back end of the operations, which would include stuff 0:17:39.160 --> 0:17:42.600 like keeping track of inventory. They need to know which 0:17:42.640 --> 0:17:46.600 titles were available, how many copies of each title were 0:17:46.600 --> 0:17:49.560 in stock, how many of those copies were out for rental, 0:17:49.880 --> 0:17:51.840 that kind of thing. They need to know that in 0:17:51.920 --> 0:17:53.600 order to be able to fulfill orders, So they had 0:17:53.640 --> 0:17:56.639 to build the system to actually support that. They also 0:17:56.680 --> 0:17:59.240 needed to have the infrastructure in place to be able 0:17:59.280 --> 0:18:02.439 to actually ring transactions. This is in the early days 0:18:02.480 --> 0:18:06.040 of online commerce. You didn't have a whole lot of 0:18:06.080 --> 0:18:10.480 examples out there beyond some big names like Amazon dot Com. 0:18:10.520 --> 0:18:13.160 So essentially they were building out all the basic functions 0:18:13.200 --> 0:18:17.639 of online shopping that developer I mentioned earlier, Eric Meyer, 0:18:18.040 --> 0:18:20.919 he set a very high goal. He wanted the programming 0:18:20.960 --> 0:18:23.600 team to make sure that the Oracle software they were 0:18:23.680 --> 0:18:27.000 using as a foundation for the back end operations would 0:18:27.000 --> 0:18:30.160 eventually be able to handle up to ten million customers, 0:18:30.640 --> 0:18:34.400 which seemed like a crazy number, but He was essentially 0:18:34.400 --> 0:18:38.480 talking about scaling up the back end for business before 0:18:38.520 --> 0:18:41.280 there even was a business, and he felt strongly that 0:18:41.400 --> 0:18:45.280 was better to be prepared and be ready for the 0:18:45.320 --> 0:18:48.639 eventuality than to be caught without the structure in place. 0:18:48.960 --> 0:18:53.359 Once the need arose. They created a search tool that 0:18:53.440 --> 0:18:57.320 they would call flicks Finder that would help users find 0:18:57.320 --> 0:19:00.800 films by title, director, or actor. So if you really 0:19:00.840 --> 0:19:04.960 liked movies that featured I don't know, Bruce Campbell, for example, 0:19:05.359 --> 0:19:08.080 then you would get results like Army of Darkness or 0:19:08.280 --> 0:19:11.119 Bubba Hotep, that kind of thing. They also added in 0:19:11.160 --> 0:19:14.679 a feature called film Facts, which included stuff like a 0:19:14.720 --> 0:19:19.040 synopsis for each DVD and included ratings for the films, 0:19:19.240 --> 0:19:21.800 and would include a rundown of the different features you 0:19:21.800 --> 0:19:23.840 could find on the DVD, because of course a lot 0:19:23.880 --> 0:19:27.240 of DVDs would ship with bonus material on them. And 0:19:27.320 --> 0:19:32.280 they created a recommendation engine, or they put the building 0:19:32.280 --> 0:19:35.040 blocks in for a recommendation engine. They would take a 0:19:35.040 --> 0:19:37.720 couple of years for that to really take form, but 0:19:37.840 --> 0:19:40.639 this is something that Netflix is known for to to 0:19:40.720 --> 0:19:44.679 this day. The recommendation engine would suggest films similar to 0:19:44.800 --> 0:19:47.920 ones that the customer had previously rented and they might 0:19:47.960 --> 0:19:50.520 be in a similar genre, or they might have the 0:19:50.560 --> 0:19:54.120 same principal actors or director involved. And they also included 0:19:54.160 --> 0:19:56.960 a feature that would remind customers about films they had 0:19:57.000 --> 0:20:00.320 flagged as being interested in but had not yet did. 0:20:00.560 --> 0:20:03.720 So let's say you go to Netflix's site early on 0:20:04.320 --> 0:20:05.840 and you see a whole bunch of different movies that 0:20:05.880 --> 0:20:07.840 you're interested in. You're only going to rent a couple 0:20:08.200 --> 0:20:11.280 at the moment, but you want to flag the ones 0:20:11.320 --> 0:20:14.240 you're interested in so that you remember on a future visit. 0:20:14.520 --> 0:20:16.600 Oh yeah, yeah, yeah, I did want to see that movie. 0:20:16.920 --> 0:20:20.400 That was what that feature was all about. Meanwhile, other 0:20:20.440 --> 0:20:24.199 team members were busy building out inventory. DVDs were a 0:20:24.240 --> 0:20:27.359 novelty in nineteen seven. Not a whole lot of people 0:20:27.400 --> 0:20:29.720 owned DVD player yet by the end of that year, 0:20:30.800 --> 0:20:33.080 and they were wicked expensive when they first came out, 0:20:33.119 --> 0:20:36.120 like eleven d dollars for a DVD player when they 0:20:36.119 --> 0:20:39.120 first debuted. Towards the end of nine seven, the team 0:20:39.119 --> 0:20:43.640 had accumulated around five hundred DVDs, most of those older films. 0:20:44.359 --> 0:20:48.040 That wasn't because the newest films were more expensive or anything. 0:20:48.080 --> 0:20:50.719 It was mostly because movie studios hadn't really started to 0:20:50.720 --> 0:20:53.919 release films to DVD yet. And this was where we 0:20:53.960 --> 0:20:57.840 get into a weird situation because from the movie studio perspective, 0:20:58.280 --> 0:21:01.240 until there was a market, right until you had enough 0:21:01.320 --> 0:21:05.399 people buying DVD players, there wasn't a huge incentive to 0:21:05.440 --> 0:21:09.040 put titles on DVD because there weren't enough people out 0:21:09.040 --> 0:21:12.520 there to buy the DVDs. But then without the library, 0:21:12.840 --> 0:21:17.800 without the titles, there was no incentive for customers school 0:21:17.960 --> 0:21:20.440 and by the hardware. So that was a real Catch 0:21:20.480 --> 0:21:23.480 twenty two and I honestly don't know if Catch twenty 0:21:23.480 --> 0:21:25.520 two is one of the DVD is available at the time. 0:21:26.080 --> 0:21:28.800 Jim Cook, the guy who I mentioned earlier who had 0:21:28.840 --> 0:21:31.520 become the head of finance and operations. I hadn't mentioned 0:21:31.600 --> 0:21:34.320 him by name yet, but he was the finance and 0:21:34.400 --> 0:21:37.320 operations guy in the early days of Netflix. He helped 0:21:37.440 --> 0:21:40.119 Randolph and Kish tweak their business plan, and he was 0:21:40.160 --> 0:21:43.120 really good at raising concerns about the cost of operations 0:21:43.440 --> 0:21:46.800 and the risks of getting into a business with a 0:21:46.920 --> 0:21:51.119 medium that had yet to receive wide adoption. So he 0:21:51.160 --> 0:21:55.520 would raise points of concern and it came down to 0:21:55.680 --> 0:21:57.600 Randolphin Kish to figure out, well, how are we going 0:21:57.640 --> 0:22:00.560 to address this, how are we going to answer this 0:22:00.640 --> 0:22:03.119 point of criticism, And so it became a back and 0:22:03.200 --> 0:22:06.600 forth and it helped kind of improve the process. Before 0:22:06.640 --> 0:22:09.600 they ever launched, they also designed and tested out the 0:22:09.680 --> 0:22:13.560 postage paid mailers, the inn actual envelopes that they intended 0:22:13.560 --> 0:22:17.040 to use with the DVDs, and they ended up bringing 0:22:17.080 --> 0:22:20.240 their friends and family across the United States in on 0:22:20.320 --> 0:22:23.560 this to try and test out the system. So they 0:22:23.600 --> 0:22:27.440 would mail disks to their friends and family across the 0:22:27.600 --> 0:22:30.119 US that the friends and family would tear off the 0:22:30.160 --> 0:22:35.080 little return address or the shipping address which would have 0:22:35.119 --> 0:22:37.440 the return address underneath it, and then they would put 0:22:37.440 --> 0:22:38.919 it back in the mail. And so most of their 0:22:38.920 --> 0:22:42.239 friends and family didn't actually own DVD players, so they 0:22:42.240 --> 0:22:44.760 would get this envelope with disks in it, and they 0:22:44.800 --> 0:22:46.600 would take the little label off and then they would 0:22:46.640 --> 0:22:48.879 pop it back in the mail without ever having watched 0:22:48.920 --> 0:22:50.800 anything because they didn't have anything to watch it on. 0:22:51.359 --> 0:22:53.199 So the real purpose was really to see if the 0:22:53.240 --> 0:22:56.359 mailers adequately protected the disks and if they could hold 0:22:56.440 --> 0:22:58.920 up to the trip of being sent across the United 0:22:58.920 --> 0:23:02.000 States and back again and still be usable for future rentals. 0:23:02.680 --> 0:23:06.440 One thing that the team. Included was a special barcode 0:23:06.560 --> 0:23:09.240 on each of those envelopes, and this was really important 0:23:09.560 --> 0:23:13.680 because the barcode allowed the envelopes to skip certain steps 0:23:13.840 --> 0:23:17.560 in the mail sorting process at postal services, at post offices, 0:23:18.040 --> 0:23:21.560 and otherwise those envelopes could be really badly damaged and 0:23:21.600 --> 0:23:26.119 the discs could be crushed inside. So Randolph learned about 0:23:26.160 --> 0:23:29.240 a service that would allow him to skip mail sorting automation. 0:23:29.560 --> 0:23:31.680 All they had to do was pre sort the envelopes 0:23:32.080 --> 0:23:35.920