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Netflix (Part 1)

Season 3, Episode 8

ACQ2 Episode

November 11, 2018
January 6, 2019

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In a world ravaged by late fees and lack of rewinding, two men from a sleepy California beach town make a stand against tyranny, daringly dethrone an evil empire and... oh who are we kidding, they just copied Amazon's business plan for books and applied it to movie rentals. But as always there is much more to the story than that! We dive into the fascinating, true, and oft-untold history of Netflix in our first two-part special on Acquired. Part 1 covers Netflix's original DVD rental business from founding to 2009, and next time on Part 2 we'll cover the (rocky) transition to streaming from 2010 to present. Buckle up for a wild ride!


Carve Outs:


We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
November 11, 2018

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
November 11, 2018


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
November 11, 2018

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
November 11, 2018

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
November 11, 2018

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
November 11, 2018

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
November 11, 2018

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
November 11, 2018

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
November 11, 2018

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Welcome to season three, episode eight of acquired the show about technology, acquisitions, and IPOs. I'm Ben Gilbert. I'm David Rosenthal, and we are your hosts. Today. We are talking about a company that somehow. Somehow, David, we have not covered on the show yet. Netflix, and we're breaking this one into two parts today.

We'll be covering the founding of the company up through the IPO and the waning years of their DVD business. And then next episode we'll pick up at the takeoff of streaming and original content. So David, I could not believe this when diving in that the Netflix IPO was 16 years ago and it was founded 21 years ago.

Yeah. Crazy. All these Fang companies, they're getting old. I know. I mean, I just, I did not realize that it was a pre.com bubble in my head. It was sort of like Facebook era, not Google era or Amazon era. Well, this is why we have to do this as a two parter because, uh, you know, we, when we first started researching this, we, we didn't think of it that way, but like, there really are two different companies here.

There's Netflix, pre streaming and Netflix post streaming. We're going to cover the pre streaming today. Well listeners, we announced on the last episode that we had formally launched the acquired limited partner program, and we've been totally floored by how many of you have joined our LP community and are listening to the bonus show.

So if you'd like to join us and get an extra episode in between every normal acquired show, you can click the link in the show notes to join and support the show or go to glow.fm/acquired. On last week's bonus show episode, we talked about the elusive concept of product market fit and the practices, structures, and mindsets that successful companies do differently before and after.

This stage. Now before we dive in, I want to thank our fantastic sponsors for all of season three Silicon Valley bank. Now our sponsor guest today is Theron McKella, a managing director of SVB based out of San Francisco. All right, so I hear SVB is working on some initiatives and looking for feedback on what really matters to startups.

Can you tell us a little bit about what you're up to and how listeners can help out. Yeah. It has to be, is trying to figure out how we better serve founders. We're always on this mission. We do a survey and we want to find what really matters to startups. Um, how your companies are doing, whether you're hiring, looking for a financing, looking for technical co-founders, what's your exit plan?

Through this information, we can find your opinion of these, the startups opinions, and we share those results. So next year. Beginning of the year, we produce a, a kind of the outcomes from those results. We highlight the opportunities out there for companies and we really try to share the word to different government leaders, policymakers, um, encourage people to make action, to help entrepreneurs.

Um, this is something that's important to SVB. And, uh, the survey has been running I think almost for 10 years now. So excited to see what the highlights and outcomes are for this last year. Awesome. Listeners, if you want to take the survey, you can click the link in the show notes or in the Slack, and thanks as always to Silicon Valley bank.

All right, David, you ready to take us in with the acquisition? I suppose the IPO history and facts? Uh, well, there will be lots of acquisition offers back and forth as we go here, but, uh, we're, which I didn't know until I started reading. Uh, Dave and I both read this, uh, is a great book by Gina Keating called Netflixed Netflixed.

Yeah. This is really fun. When we were discussing what episode to do for this one, we were like, okay, we're getting kind of towards the end of season three. We want to do like a big important, splashy episode. Let's do one of the Fang companies. Netflix. I thought, you know, Netflix seems pretty straightforward, like Reed Hastings, like a solid dude, you know?

For sure, but like very, you know, it doesn't seem controversial like this seems pretty straightforward. As always with these companies, once acquired shows up on the seed, there is so much more to the story. There is stop teasing us and go in there. That right. All right. Okay, so as we mentioned upfront, this is part one.

We're going to cover Netflix from founding through about 2009 on this episode, part two. Next time we're going to go 2010 to the present, but let's start with the founding. So, as I was alluding to, most people know or think they know the founding story of Netflix. Nothing too controversial. It's the classic Silicon Valley startup story.

We go back to 1997 a successful former enterprise software guy from Santa Cruz of all places, uh, is fed up with movie rental, late fees. Uh, these are the VHS days still and kind of sees the power of the coming wave of. The internet sees Amazon that's taking off, sees the potential to disrupt bricks and mortar retail and starts what would become Netflix and becomes himself, you know, Paragon of Silicon Valley statesman.

Of course, I'm talking about Mark Randolph, not Reed Hastings. This is a truth. Statement, the illustrious CEO of Netflix, the illustrious CEO of Netflix was I, I texted Ben when we started researching this and reading Netflix. The parallels to Tesla here are like unreal. It's pretty awesome. So Mark Randolph, the reason that is true is he was the CEO of Netflix for the first year while Reed Hastings was finishing up a graduate school at Stanford.

Yes, but really he was the founder and CEO of Netflix. I think it was closer to two, but we'll have to go through my notes here as we, as we dig through. Let me give you two other wild Marc Randolph facts from his background. One is that he helped to found Macworld magazine. Yes. Love that. And two is he is currently on the board of Chubbies shorts.

Yes, yes. And um, Looker, I believe the analytics tool and, and liquor actually came out on Netflix, I think, which would make sense. Okay. So here is the official story. If you'll listen to Reed Hastings, he listened to Netflix, the, the official founding story, the lore. We're going to give you that. Then we're going to tell you the true story.

So. Official story. Reed Hastings, he has been a successful technology entrepreneur in the enterprise space, and he has an epiphany for what would become Netflix. He's returning an overdue movie to his local video store. Now, originally, the version of this story that he would tell is he was returning it to a blockbuster.

That gets changed not to a blockbuster after a lawsuit between blockbuster and Netflix. And you know how your founding story can just change. Yes. Just how can just not know. Just change whether it was true or not. We've seen this many times, so he's returned the movie to the local video store and he's so fed up.

He comes up with this magical subscription model alternative when he's on a treadmill at the gym. This isn't just like, Lord, like I'm actually here. I'm going to quote from Reed Hastings saying in print to fortune magazine in 2009. Quote, the Genesis of Netflix came in 1997 when I got this late fee, about $40 for Apollo 13.

Remember Apollo 13? So good, great film. Uh, I remember the fee because I was embarrassed about it. That was back in the VHS days, and it got me thinking that there's a big market out there. I didn't know about DVDs. And then a friend of mine told me they were coming and I ran out to tower records in Santa Cruz, California, and mailed CDs to myself.

Just a disc in an envelope. It was a long, 24 hours until the mail arrived back at my house. I rip them open and they were all in great shape. That was the big excitement point. Another, another fun element on this story is the reason that he talks about being on the treadmill is because, uh. He also talks about how the gym memberships you pay monthly, whether you sort of use it or not.

And he was like, Oh, I can totally apply that. It was like the very same day that I was upset about my late fee for Apollo 13 I happened to be going to the gym later thinking about their business model. And it's like this completely convoluted, apocryphal story invented purely to explain like what is the Netflix business model and what was the opportunity to be found.

You know, we, we've talked about this a bunch on this show, but like, I actually don't think there's anything wrong with this because especially in the. Early days of a company, you need to communicate your value prop and stories are how you do that. So, um, you know, this is like this happened. It just wasn't as clean.

Yeah. So, okay. What's the real story? One note as we dive in here, it is helpful to be familiar with Bay area geography when discussing, uh, Netflix. So for those of you who are, you will intimately understand this. For those of you who aren't, we will try and guide you along the way. So it was 1997. Reed Hastings was involved, but as also of course, was Mark Randolph, and they knew each other because they worked together at a company called pure atria, uh, formerly pure software in Sunnyvale, California, which merged with atria.

Which merged with atria. Yeah. So what was, what was this company? Uh, it was a publicly traded company. It made bug detection software for developers, tools company. Ben, we should also say this was Reed Hastings. He founded this company also. He founded pure software and for Reed, this was his second job. He did a job for three years and then decided I'm going to start a company.

David, I don't know if you're, are you going to touch on his, his background before starting pure. Not really. So go for it. All right. So, uh, Reed Hastings is like an unbelievable human being. So he went to school to join the Marines and ended up dropping out instead to completely flip tracks and join the peace Corps.

And after we finished the peace Corps, went and took his first job, then his, his second job was starting pure, and in between, he did a master's in CS at Stanford. I think he went to Boden undergrad on these coasts. Um, but yeah, that's it. That's how we got out to the Valley. So. He's running pure, it's going well.

It was sort of predicated on a simple notion that he had around building a better debugger. He's starting to amass a large team. You know, they're, they're taking all this money, they're getting ready to go public. He tells the board, Hey, I want to not be CEO of this company. I, I've never been a manager.

You know, it's kind of like, I think for the benefit of myself and all the other shareholders, we really should get a CEO right. The board says, no, you should remain CEO. And he ends up basically learning on the fly and then, you know, six successfully manages to both IPO this company and then merge it with atria.

Such like the opposite of what was usually what boards were usually doing at that age, which was firing CEOs as soon as they humanly kid are firing founders. Okay. So. As Ben alluded to, pure atria. At this point, it's publicly traded. It's basically a rollout. They had acquired atria. They'd acquired a bunch of companies that are all in the space.

They're rolling up and consolidating. Randolph. Marc Randolph had been at one of the companies, small companies that pure atria had acquired. Um, and after the acquisition, he read a, kind of, takes a liking to him and he gets promoted. He becomes head of marketing for the whole combined company. So they're working pretty closely together.

So it's 1997. One final piece of this roll up has happening though, and that's the biggest piece, which is there's a huge merger that's about to happen between pure and rational software. Um, which is the biggest competitor in the space. They've just announced they're going to merge public to public merger.

It is actually going to be the largest merger in Silicon Valley history at that point in 1997 valued at just under a billion dollars. Yeah. Cute. Cute. Just under a billion dollars. Um, and Reed Hastings is finally going to get his wish. He's going to be fired as CEO, not fired, but he's, he's going to be redundant.

He's not going to stay with the company. Uh, neither is Randolph. And it's interesting to note here. Uh, Hastings is really bummed about what has happened to the culture. And it's important to think about as we talk about Netflix later. Hasting says that pure, like a lot of these other companies went from being a heat filled.

Everybody wants to be here place to a drone, ish. And I'm quoting here, when does the day end? Sausage factory. And he says, we got more bureaucratic as we grew. Um, and, and his. Thinking at that time is whatever I do in the future with the next thing I have to start, we have to think of systems so that we don't end up like that.

And that will come back into play. Read is about to become hugely wealthy. Like he's still very young, hugely wealthy, and his plan is to basically ride off into the sunset. He's reapplied to Stanford, um, this time to do the graduate program and education, which is a fantastic program by the way. A lot of people do GSB and, uh, the education masters jointly Reid's going to go do.

This when your grad program and education with the intention of he's going to become an education focused philanthropist for the rest of his life. Randolph though he, he's not so, you know, not about to become so wealthy, he, he has to keep working. So he decides what he wants to do is he wants to start a company and he really admires Amazon, which is public at this point, been around for a few years and he thinks.

That there's a really good opportunity to do. Just like Bezos was thinking, he was looking at all the categories he could attack. He chose books. Randolph thinks, well, I can just use another category and run the same Amazon playbook, and it just so happens that in addition to working together, Reed and Mark both live in Santa Cruz.

So this is, I said, Bay area geography is going to become important. Santa Cruz is a sleepy little university slash beach slash surfer town over the Santa Cruz mountains, which separate, uh, Silicon Valley. Uh, the Valley is on the. Inland side of the mountains from the Pacific ocean. Santa Cruz is on the ocean side.

The mountains are awesome and it's beautiful, but like they're very high and it is very remote. Like if you live in Santa Cruz, you do not live in Silicon Valley. And it takes about an hour to commute back and forth. But just like the whole vibe is like beach town surfer town, not, not, you know, everything we think of is Silicon Valley.

So as a result, Reed and Mark are often carpooling. Together, back and forth between Sunnyvale where pure is based and Santa Cruz. And so Randolph just starts like spit balling ideas with Reed during their car rides. He's like, what about this category? What about that category? What about that category?

And he's convinced he wants to do this. So he starts a shell company. He calls it kibble inc because the idea is get the dogs to eat the dog food. So kibble inc dog food. Yeah. Anyway. Um, he starts a shell company. They're spitballing stuff. He starts thinking about, has been alluded to. We'd worked at Macworld.

He had also worked in the direct mail industry. That's how he got into marketing. He's presumably, we don't know this for a fact, but because of that, very familiar with the AOL prodigy, CompuServe customer acquisition techniques that I think we've referred to it in the past of a, just mailing out tons and tons of CDs to potential customers.

I mean, how many. AOL CDs. Did you have mailed to your house back in the day? Oh my gosh. And the best thing was, every time you'd go to like a movie theater or something, there just be another box full of them at the desk, the whole country in like, you know, when would this been? Like 95 to 99 it was just saturated with.

AOL coasters fall somewhere now. Well, the important thing that I want to say about Aranoff here is it basically his background, but you know, before pure atria, he's a publishing guy. He knows the publishing industry inside and out and kind of stacked on top of that. He's a. Data and analytics guy, which didn't really exist in meaningful form.

You know, there was no digital data and analytics then, so he was frequently tasked with things like serving audience and trying to understand who are our readers, his philosophy as he spitballing a lot of these different ideas here is thinking about. How can we automatically, probably through the user interface of some product, build a data and analytics suite, and how can we build sort of intelligence into the UI to automatically do things that make the experience of consuming better?

It's funny to see all these different threads that become massive pillars of Netflix today, um, that are in sort of the backgrounds of these founders is that those become the pillars of, of Netflix from. Mark Randolph's history and background to Netflix today. So inspired by this, he hears about this coming new video format called DVD.

It's just just getting launched. It's in the movie studios and electronics manufacturers are just rolling it out to being launched in a few test markets. Um, and of course DVDs. Come on. Optical disks that are the same form factor as a CD. And so Randolph's like, Oh, well, maybe we can, uh, mail these things.

Um, so they do go, he does go to, um, a local record store and not tower records in Santa Cruz, uh, buys a CD, goes to a gift card, buys a, um. Very like large, like birthday card and stuff's the CD in it and mails it to Reed Hastings house. The next day or two when they're meeting to commute together. Reed's got the mayor, he's got the envelope and he's like, it came, it's fine.

Did this, this blew my mind when I read this story. Today. When we think about the old Netflix, we're like, Oh man. It started in that era of DVDs as if it was so long ago. It started before DVDs and they had to proxy like, can we mail DVDs by mailing a CD? Because neither of them had ever touched a DVD before when they had this idea.

I mean, talk about like being on the very tip of a wave and then a, and then sort of riding it the whole way. Like they were betting that DVD was going to succeed and that cause the, they evaluated what this work with tapes and they were like, Nope, shipping costs are too high. Shipping costs are too high, and just logistically like he got store them and cattle, like the CDs are tiny, although not as tiny as bits.

So Netflix, it's, it's boring. It's off to the races. So, so what happens, read is like, great. I'm going off to Stanford. Um, but I've got all this money. I think I'm going to dabble in angel investing. Um, I'll fund this company. So, uh, just like Ilan did with Tesla, uh, Reed leads the first round of funding in kibble, inc, uh, which, uh, in a little bit becomes Netflix, read, invest $2 million.

Randolph becomes, the CEO read is just an investor. And on the board, they recruit the initial team. They set up their first office in Scott's Valley, which is still on the Santa Cruz side of the mountains. Just a little bit. North of the town of Santa Cruz. And the idea is, yep, we're running the Amazon playbook, except instead of attacking borders and Barnes and noble, we are attacking blockbuster.

It turns out that unsurprisingly, it's actually a pretty good idea. So the home video industry at this point is now bigger than box office for, uh, for film and television. Um, or I guess mostly film at this point. It's enormous. And the rental segment, so there's both sales and rental, uh, of home video. The rental segment is completely dominated by blockbuster.

There's Hollywood video and a few others, but like blockbuster is that the 800 pound gorilla? I want to quote the  here because for, for entrepreneurs out there who are listening, the moral of this story is you never get to stop justifying your market size to investors. It's going to be in your seed pitch deck.

It's going to be in your a pitch deck. And the second paragraph of the , and when Netflix goes public, first paragraph describes what they do. The second paragraph is in 2001 domestic consumer spent more than $32 billion on in-home filmed entertainment, representing approximately 80% of filmed entertainment, blah, blah, blah.

It goes on to talk about exactly what David just said, that the largest portion is rental. I was reading the  and I just chuckling that like. Did the story at any stage is always the same. What do you do? Why could it be huge? Why is your Tam then, how are you differentiated? Yeah, like just, it never ends.

The more things tuned, the more they stay. The same. Quick aside, because I think there's an important point here. This whole business of movie rentals. Is it in the first iteration of Netflix is business, and the blockbuster business is enabled by a Supreme court ruling around copyright law of what's called the first sale doctrine.

Um, and it basically says that once you buy a copy of any copyrighted work, whether that's a book or a movie or whatever, you can then do whatever you want with it. You can resell it, you can rent it out like it's yours. You have then cleared the copyright that was established well before any of these businesses, but.

The important point in here is that like regulatory issues and and lobbying and getting regulatory issues favorable to your business are very, very important. I feel like Silicon Valley now knows that, but for a long time and forgot that, and like this whole industry is enabled by a Supreme court ruling.

And, and fortunately in a very sort of bayzos way where he basically always credits the infrastructure that was laid before him that allowed the company to exist, the internet, um, ups, et cetera. Like, you know, this wouldn't have been possible if what they had to do was go and lobby and get laws changed at the outset.

Uh, infrastructure had been been laid for them. Go vote. It's important. Hopefully you already voted in these elections. Yeah, I assumed they had to pay some form of royalty back to the content holder every time they rented it. I mean, then blockbuster, like before Netflix comes along and you're just fat and happy blockbuster.

That's kind of an amazing business. I mean, you buy this little store, it's not that big of square footage. You pay 15 to $18 or whatever for a movie, and then you rent it out for what? Like three, $3 and you run it. 50 times or something. It's awesome. It's the same businesses scooters today. You know, you buy a scooter for 300 bucks, you rent it for a couple bucks per ride, and you do thousands of rides, and that's a good business.

Okay, so they're getting started. Randolph goes to a conference in Las Vegas, the software and video conference. He meets a guy named Mitch Lowe who's going to come back into the story later. Mitch owns a 10 store video rental chain, small rental chain in Marin County. Just North of San Francisco. Again, Bay area geography.

This is about as far on the opposite end of the Bay area as you can get from Santa Cruz. Uh, we're talking like two and a half hour drive with no traffic. Mitt is entrepreneurial. He owns these video rental stores, but he's also working on, uh, a software tool, a CRM tool for video rental stores and Randolph's like, Oh man, you are like the industry expert.

Like I need you to come in. And like. Join the team. He eventually persuade him to do so. I assume it then moves from Miranda Santa Cruz cause you cannot do that commute every day. But he joined as the video acquisition chief, so he's now going to be in charge of like inventory and stocking and like what, what DVDs Netflix is going to buy.

And so to kind of just like StitchFix like that we saw there like. Getting that early industry DNA on the team like really has a big impact together. They, and they'd hired a couple people from pure, a couple of folks that they'd worked with in the marketing department there. They all set on the settle on Netflix as the name, and then Ben texted me the original logo.

We're going to have to tweet this and link to it in the show notes. Let's just say you don't want enterprise marketing people designing your consumer product, a branding and logo. I think, I think show notes can be a full HTML. So we'll just try and embed this image in the show notes. If you swipe over, tap over to it.

It is awesome. And the best thing is it was used for some really awful, it was 97 to 2000 and you know, Netflix on their next rev kind of nailed it and is basically the same logo they use today, except with a little bit of a nice brand refresh. But like the, the first one is . It's got this little like swooshy thing and it's very late nineties.

Yeah. So it's purple. It was bad. Um, okay. Netflix. So what do they do? This is, this is brilliant. And I think this was driven by, by Mitch Lowe. DVDs are just getting launched. Like they're like. Most people don't have it. Player machines don't exist out there. How do they do like get their initial customers do initial customer feedback.

They, they borrow a page, future page from me. They go online into product discussion, forums of enthusiasts for like. Movie technology and like DVD product forums, and they just started talking about Netflix there and like, people love it. So like 600 bucks, like getting a DVD player was like, Ooh, I'm like over 1000 bucks at this point in 1990 $7 so like the people who are buying these things are super techie, super early adopters, like the perfect market to adopt Netflix and give you no feedback here.

Isn't it six 40 by four 80 like it's like, yeah, I think that, I think it might even be less. Like, you know, there's, it's for so research here, we didn't even go back and watch DVDs. Like, I don't, I don't have a DVD drive anywhere. I don't know if you do like, no, I sold my old X-Box and I have no, actually, I have no means to play any disks.

Yeah, me neither. Well, wait, stay tuned for part two. Um. So they officially launch the product in April, 1998, November. They'd been building all this momentum and, uh, you know, early customer lists from these product forums. And it's just like they nail it. Like the market is still tiny, but like talk about product market fit on day one, the servers crashed.

There's tons of demand. You could buy DVDs from them, right? Yes. You could both buy and rent. Yeah. Yeah. I mean, the magic that they came up with was the business model of rather than paying per DVD, you just pay a certain amount and then you can either keep two or three depending on what plan you opt into.

But I didn't realize when they started, you could also just order DVDs from them and pay for them and keep them totally, uh, well, that part of the business is gonna come up again in one sec. The other perfect part of the timing here is like. The consumer electronics manufacturers were so powerful. This time we're talking Sony, Toshiba, Panasonic, like all these Japanese and some U S I forget which ones are us companies anyway, like these guys are dominant there.

So, and they know that DVD. Machine's like that's their next drug that they're going to sell us consumers. Um, so they're pushing it hard, best buys, pushing it hard. Circuit city's pushing it hard. Netflix goes, and they do deals with these consumer electronics manufacturers to get Netflix promo coupons inserted into the boxes with DVD players, like talk about an awesome distribution act.

Like it doesn't get any better than that. Uh, and this was a big part of their customer acquisition for many, many years, and it works like amazingly. The only downside is they're giving away a free month of Netflix, uh, as the promotion that ends up coming back to bite them in terms of that cost them a lot of money.

Um, which we'll see in a sec. Blockbuster. While all this is going on, they're initially like, Oh, DVDs. That's like, nobody's going to use that. Like, you know, we're just going to stick with VHS. It feels shortsighted to me. In a different way than we normally rip on big companies that get disrupted. Like if you were to tell blockbuster at that time, streaming video on the internet will be the thing that ends you.

Like it's not that surprising for me that they would scoff at that and like it just didn't feel like, it just felt like that was too far away. And when people actually do that and, but like just switching the size of the box. And like switching to a thing that plays videos better and like, come on, all electronics come down over time.

How, how could they not believe that this was going to be a big change for their business? Well, okay, so let's be really fair to blockbuster here. So I went into research here thinking blockbuster. Oh my God, these guys are idiots. Like this is like. You know, classic case of corporate hubris getting disrupted, not the case at all.

Blockbuster management until the very end is we'll see you is actually super competent and like really good. And the reason here that they didn't go into the market as fast as Netflix is, there was a format war, so DVD and Devex or battling it out against one another and it wasn't clear in the beginning who was going to win.

Whoa. I forgot about Devex. Yeah. Devex um. That's like way lesser known that even like beta max or HD DVD or any of these alternatives, it was the beta max of of the, the optical disc era. So blockbuster was kind of waiting on the sidelines to see what would happen before they made the big bet and threw their weight behind it.

Netflix bet the company on DVD over Devex. I don't know why. Maybe they just feel like, Oh, DVD, we'll go with that. Um, but fortunately it worked. Um, so that's ended up becoming like a digital, like a, not stream, but like fuck, it was like a files, like a filing coder format. And I used to have like a div IX player on my Mac that I could like play Devex files if I was downloading them from, uh, the back of a truck somewhere.

And. Oh, the early two thousands so blockbuster isn't in the DVD game yet. Netflix is the only game in town. They've got promos in all the boxes with the players that are, that are shipping. The first four months after launch, they do 20,000 rentals. They're already at $1 million revenue run rate. Like that's super impressive.

Even today, like start up, you launch here at $1 million revenue run rate. Four months in like super impressive and super capital efficient considering they were buying all these DVDs, like, I can't remember what did they, they had only raised the money from Reed to date, right? Yeah. Only the $2 million.

Well, capital official. Yeah. Yes, yes, yes. But with all this growth, like they are just burning huge. Like, like they're, they're, they're really in a rock and a hard place because they have to buy the DVDs. That's capital efficient. But the operations, this is why giving away those free rentals. The free month of rentals, which is going to end up being a couple, like they have to package these things in mailers, they have to ship them, they have to do all the labor to do that.

They have to do the customer support. It gets really expensive to operate this, and the more you grow, the more expensive it gets. They realize that the. The Netflix actually had this perverse aspect of their business model and the DVD streaming era that their very best customers who use them the most cost them the most money.

So they, uh, realized pretty early on before the streaming era, just before this in the DVD era. Because if you're constantly rotating disks in and out. You're costing Netflix a lot of money in operations to do that. So they, they figured out that they need to funnel customers to really obscure niches of like back catalog titles because those don't turn over as much.

Like I might really love some like random thing. It's unlikely somebody else does. So I'm going to. Rent that keep it for a long time, and then I don't have other demand for that, uh, that unit. So that's how they start working on the recommendation algorithm and the personalization. As a result, it's not big new releases that drive Netflix in the early days.

It's the back catalog. So Bollywood movies become huge. And this is funny. Um, softcore pornography becomes huge, as with all video formats, uh, the, uh, aphorism that pornography drives innovation, um, also true here. That's going to come back in a sec. So they raised the series a, there is a $6 million series a from IVP in August, 1998 to finance all of this.

Reed is still finishing up at Stanford. He's just the investor, the angel investor. He's just on the board. He's not super involved. Uh, once he finishes his masters, he gets into, you know, education philanthropy as he wanted to. He also starts this thing called tech net. Um, which is a lobbying group for the technology industry.

It's still the largest. Tech industry lobbying group. I didn't realize Reed Hastings started it like pretty cool. Um, so he starts that he's running that January, 1999 a couple things happen. One, there's some, uh, Reed is very liberal in his politics and other people in tech, at least at that point in time and still weren't, and they were like, you're running this lobbying group.

You're very liberal. Like, I'm conservative. Like this should be more bipartisan. So. Reed ends up leaving tech net. He wants to get back into the entrepreneurial game. He's like, Oh, Netflix, my angel investment is kind of working. I'm going to go spend some more time there. He basically just shows up and announces like, okay, now I'm going to be co-CEO with Rand off here, and, uh, uh, ran off as apparently not super happy about this.

But like, you know, the company's growing so. Okay. And read is great. So like everybody kind of gets along and they initially divvied up that Randolph's going to be in charge of marketing and content acquisition, and Reed is going to be in charge of engineering and ops. This is where Reed really starts building like a world-class technical team, technical and ops team at Netflix.

I think this is the time when they actually name their algorithm, the cinema match, and they start having a company wide metric around, uh, . What percentage of the long tail of the DVDs are we actually successfully managing to get people to use their use one of their slots on? Yep. Yep. Obviously it will get into the Netflix, the challenge way later, but, um, this is really when it starts to become really in a lot of ways, pioneering modern data science and data engineering.

Yup. And remember, they're still in Santa Cruz in Scott's Valley at this point. So reaches up and he's like, okay, a few things need to change around here. So one, even though they just raise this series a and they're still burning cash so fast because they're growing so quickly, they realize they need to fundraise again really quickly or like do something or they're going to go bankrupt.

So the first thing that the board and Reed and Mark think is like. Oh, we said maybe we should just sell the company, like do a quick flip here. They, and who would be the natural acquire? None other than the inspiration for the company. Jeff Bezos. So the two of them fly up to Seattle, they meet with Bezos.

This is a, this is 1998 still, I believe Bezos is like, Oh, you know, this is interesting. Okay. And Amazon is public. They've made some acquisitions at this point. Um, baseless is like, I'll give you $12 million to buy the company. Uh, which I assume must have been right around the post money for, uh, or maybe even less than the post.

Of the raise that they just did. And Netflix is like, come on, like, no, we're not going to sell the company, but how about we do a cross promotion deal with you guys, where we've got this business where we're selling DVDs. Um, we're realizing that that's not super core to, to our subscription model. Um, how about we.

Give you that. So whenever anybody on any Netflix customers want to buy DVDs, we'll just kick them over to Amazon to buy DVDs. Um, and an exchange. I think this happened to me once. Oh, really? I'm now like recalling it was in that era of Amazon doing these weird partnerships, like when as toys org us and target.

Yeah. Yeah. Oh man. It's crazy. Imagining Amazon today doing some gigantic co-branded corner of their, their store like that. Seriously. Well, especially given what we'll see in part two with Amazon and video. So in return, Amazon is going to advertise Netflix on the homepage. Remember, this is the era of portals, which is now the most valuable real estate in technology.

Crazy. So that happens on the back of that, they start fundraising and as they go out to fundraise, Reed is like, okay, like I'm the successful past entrepreneur here. I'm going to take over as the only CEO. I'm going to do this fundraise face of the company. I investors at this point need to bet that I'm going to do it again.

Yep. He also, he's like. And we got to move out of Santa Cruz. We're going to move to Silicon Valley. So they compromise, they move to Silicon Valley technically, but they moved to Los Gatos, which is like as far South as you can possibly get in Silicon Valley. So probably another. 30 plus minutes South of Palo Alto and mountain view, I would say.

And Netflix is still there today, and lots of people, especially as the company's grown now, live in San Francisco and work in Los Gatos and spend two hours a day on one-on-one commuting. Incredible is a good time. So it's a pretty special company to work for. When you think about why do people do this two hour commute?

I'm actually not sure when this. Notorious deck, uh, started in his first revision. But the Netflix culture is extremely unique in the early days. And I don't know if the early days was right around this time or even earlier, Hastings decided that he needed to be able to communicate to new hires all the ways that they were very different and very opinionated in a culture.

And he wanted to preserve this in a way that would scale because it didn't at his last company. To illustrate the point, there's two interesting things that all mentioned from Netflix's culture. One of which is that, uh, Hastings doesn't. Ever refer to it as a family. It's not welcome to the family. The more appropriate analogy is a sports team that we don't have unconditional love for each other.

We have conditional love, we have really high standards, and it's a really high performing team. And to the degree that in a family, you can sort of love someone even if they're not a, a, an amazing employee on a team you don't. The second tidbit is that out of respect for everyone else on the team, they hold every seat to a really high regard.

And so. You, you will be let go from the company if you are not performing really well. And it's not because they're punishing you for that or anything. It's out of respect to everyone else who is still at the company because they deserve to work with an a player and they say they take the burden on this and say, we were extremely generous with severance, but, uh, we're extremely opinionated that, you know, you need to be an extremely high performer to have that seat, otherwise you need to make it available for someone else.

Out of fairness, I've always thought like. The way that all this is sort of like phrase, and they came up with this as so both opinionated and thoughtful and every little detail considered. Now a Hastings has released the deck on SlideShare, and I think it might be like the number one view, uh, deck on SlideShare meeting years ago.

It was released on SlideShare and it's still a way, yeah. Yeah. And so like it was this internal thing that they evolved over and over and over, and then finally decided we should make this available for public consumption because it's a great recruiting tool. I mean, for the right set of people, like that's why you're off to a flame.

Yeah, yeah. Yeah. So one of the things that makes them different, you see. Reads personal history and shaping reflected in this culture, like as all companies, right? Or like, like my partner Riley at wave is, uh, he always says like, company cultures are like, reflections of pure reflections of the founder, you know, personalities.

And, uh, you know, read as a guy who was. And ROTC was going to join the Marines and then instead did the peace Corps and then, you know, went to Silicon Valley and became an engineer and then a CEO, and then a philanthropist. Like it's just all like these, this dichotomy, like baked in there. Very cool. In addition to all of those things, he is also a fundraising machine.

Remember, he has orchestrated the largest merger in Silicon Valley history at this point. So basically every VC, and this is before the the.com crash, they're like. Oh, Reed Hastings, you're raising like, how much money can I give you? Um, he raises his, within a few months, raises $100 million or, or rephrased, uh, from our last, uh, LP bonus show.

How large of a percentage ownership can I have in your company? Yes, exactly. And I don't care what the tech size is, right? You raises. Oh, $100 million, mostly from TCV. Uh, and we'll see. TCV ends up being a enormous shareholder in Netflix, um, and IPO and several other firms.

David: One of the first hires he makes after becoming full CEO of the company is Acquired superhero -- who has shown up in at least one other episode, probably many more...

Ben: Spotify Episode!

David: Barry McCarthy, who he hires a CFO of Netflix. And Barry becomes critical to Netflix's success, then does his short detour at Clinkle before going to Spotify.

Ben: Yeah, fast forward through that. Or DVD skip through that.

Ben: So Barry's fame for folks who have listened to the Spotify episode is that he's the guy conceived of and then executed the plan for the direct listing, where Spotify did not actually issue new shares at IPO. They had a direct listing.

David: Huge, huge hire as well as several other folks. They hired Tom Dylan from Seagate to run ops for the company. Remember, ops is super important here and then together this lead new leadership team, like they all kind of figured out like a sort of similar to Amazon and prime that delivery speed for rentals, movie rentals, when DVD rentals, when you order them is huge and that the faster they can get.

From you clicking a rental online on Netflix to getting the DVD in your mailbox. That drives customer loyalty. That drives retention, but most importantly, that drives word of mouth and organic distribution. Like when you click rent magical, you get, remember this is 1998 99 you get that DVD in your mailbox.

The next day you're going to tell all your friends. It's funny like how archaic it feels now, because now I'm like, how could it not be, you know, actually instant. But I am remembering, I'm trying to think what year it was. Probably 2000 it was the summer of 2008 cause I was doing my internship in, in North Carolina for Cisco and my roommates and I did a Netflix plan for our apartment.

Uh, cause none of us were 21 yet. And so we were like, what do we do every day after work? And so we just got a really fat Netflix plan. And like. It was pretty amazing that like you, we'd hear about a movie from a friend over the weekend. We'd like click the button and then we were watching it Tuesday night and sometimes even Monday night.

And it's, it's like, it's, it's funny to describe that as a magical experience, but it totally was. And this is all thanks to Dylan and McCarthy and, and, and read and then the rest of company of the company, of course. But they figured this out and they realized that this is the key. One of the key levers to their business.

So they start building distribution centers, not just like randomly like, Oh, we're going to build them in big cities and geographical density. They start late. They get really analytical about it, like where's our customer base? Where's it growing? Where our word of mouth hotspots, let's build distribution centers close to them and get these DVDs to them as fast as possible and grow demand kind of organically.

This way also helps them better manage inventory. Uh, everything. And then of course, this leads to the recommendation algorithm becoming super, super important. Did you ever manage your Netflix queue? I, I'm like remembering old features now that were like critically important to the service. Did you, were you, were you a subscriber back then?

No, I subscribed way late. I'm not, I don't want a ton of movies, so, uh, it was, I was not the target market. I remember being obsessed and actually comparing my cue with friends. It was two things that were important to like compare with friends. One was like all my ratings, I'm like a completionist when Twitter was not algorithmic, I tried to read every tweet and I think I did between like 2009 and like 2017 and so like I tried to like.

Ray, every movie I'd ever seen and find it on Netflix and rate it. And like the, I had a group of friends that totally prided themselves on doing that and being very opinionated about each of these movies. And the other thing that I definitely remember is I built up this huge queue that I was constantly adjusting of, like, which movies were going to be sent to me when and like how much did I want to prioritize moving something through the queue?

And I thought, I mean both of those systems were just genius cause they were. I know Netflix wasn't measuring engagement, but engagement ended up being a proxy for how long am I going to stay a customer? And like both of those things like lit up my brain and all the right ways of, Oh, I have to go and update this piece of data on Netflix and lay the groundwork for.

Netflix today and the streaming one real quick, funny aside, I mentioned pornography being a big part of Netflix in the early days read, uh, in 2000, he gets appointed to the California board of education. Uh, he's like, um, we need to get out of this pornography thing. So, uh, let's just, let's just, uh, that, that never happened.

So another thing you will never find in Netflix history, but did drive a bunch of their growth in the early days. Okay. It's 2000. Growth is great. Everybody's high flying. High fiving, they got an a team, you know, built at the company. They file to go public and McCarthy is going to take them public. They have 120,000 subscribers.

They're shipping 800,000 DVDs a month. Everything is great. But then the.com crash happens before, uh, before they can actually get out and get public. They postpone the IPO, but again, they're still growing and again, as they grow, they're burning all this capital so much so that they've burned through the a hundred million dollars that they've raised.

Fortunately. The existing investors were so excited before the IPO, they wanted to buy in and get more of the company and get a pop. They invest another about $50 million before the IPO and before the crash. It turns out to be super necessary capital, but the crash happens and like, they're like, I don't think we can survive.

Once again, they try and offload the company and sell it this time, not to Amazon. They go to. Blockbuster, blockbuster, and this is where blockbuster enters the story. So they go to Dallas where Blockbuster's headquartered Dallas, Texas. They meet with them and they'll like, you know, we need to sell the company.

We want to sell it for 50 million, 50 this company's raised like 150 million at this point. Like, imagine if this transaction had happened. Blockbuster's like, eh, you seem kind of desperate. I don't think so. We're just going to crush you. Unreal. Absolutely unreal. Totally unreal. So for the companies that made it through the.com burst, you look at Amazon, you look at Netflix, you're like, wow, they were really smart, really good capital allocators.

We're super nimble. We're able to make it through this. Like Netflix tried to get out. They were like, look, we'll just cut our losses and go be part of blockbuster. And again, blockbuster on not idiots. They're, they're really not. Like they. At this point, C DVDs, um, are already in the market. And they also see the online subscription business model and how good it is.

They are like, this is why they don't buy them. They're like, we could spend $15 million on buying you or we could spend slightly less than that and just copy you and build you and use the blockbuster brand. And they build blockbuster online and which is a clone of Netflix. And it's really good. Like, you know, initially it's not so good and Netflix kind of makes fun of them, but like eventually, like it gets really good.

The website was terrible. There's actually a really good a recommend, a friend of the show, a Caro over at Wondery. They did an episode, um, or a little series called business Wars was about Netflix versus blockbuster. And there's some Epic episodes in there about Hastings and the rest of the Netflix team.

Sort of like loading up the blockbuster site when it first launches and laughing at how terrible the website is, and they can't even, like, they got Accenture to build it. They didn't hire their own engineers. And like. But they overcome it. They, they actually make it get, um, I mean, we'll think about this.

It's Netflix, but if you actually want a video tonight, you can just go return it to blockbuster and then get a new one rather than waiting for this whole mail thing. Well, well that comes up in one sec. So initially, blockbuster online is a true Netflix clone. It's separate, separate business, separate office building from blockbuster.

No attachment to the stories because they franchise the stores. So the franchisee owner of the store is, they don't want blockbuster online to be cannibalizing. Their business. So that kind of becomes an issue in a bit. Netflix though, they're like, all right, we can offload this thing. Well, I guess we're going to have to soldier through, so they do.

This is what we're going to say these things, but like I want everybody to like really think about this. They do a 40% layoff, a 40% riff of the company. Four out of 10 people they lay off. Remember it just a couple months ago they were going to go public and everyone was high fiving. Having lived through my first two years in the working world of the 2008 recession.

Like, I know what this feels like. Like bad times are bad. Like we have been in good times for the last, you know, 10 years. Imagine that like 40% of your coworkers just gone in one day and Netflix does this, but this is what they have to do. And the way that they did it too, he called a immediate urgent company meeting.

They made this decision. He calls it an immediate company meeting and says. 40% of you are going to be laid off today. And then people go back to their offices to wait and see if their manager comes to talk to them or not. Harrowing, totally harrowing, but managed about as well as he can. And, um. You know, it's just like in times like this, it's either the company is going to die because you're going to go bankrupt, or you need to cut the burn.

This is war time. You know? And this was also is interesting reading that Netflixed book. The way that Barry McCarthy sort of was looking at this as we need to do this. To prepare for the IPO, not only from a cash burn perspective, like we've got, I think they ended up IPOing with $15 million in the bank.

Um, so they definitely needed that, that mezzanine round that they thought was just going to be to, uh, let those investors buy a little extra equity. But. It was really about a, what story were they gonna go tell the street when they, when they went into BPO in 2002 yeah. And I think they weren't quite profitable when the IPO, but it was, they were on track to be profitable the next year.

And you know, they needed to show that even if they were a very lean organization and they needed to be, to be in this.com burst era, that they could still execute their business. And also when it comes to this, I mean, like. So it's kudos to, again, a terrible moment, but like so many other companies would have been like, let's cut 10% then let's cut another 10% and like thousand cut your way into it.

McCarthy and Hastings. They're like, no, we're cutting to the bone. We're doing it right now. This is one example. There's another example we'll get to in this episode, and then there's a third example that we're going to save for the second part of this, this Netflix set, but Reed Hastings and Netflix management are.

Awesome at executing these. Like we made a decision, we're going to go hard at it. I know it seems insane, but we have very sound logic for why it needs to happen and it's happening. I'll foreshadow that the next two are related to, uh, either spin offs or spin outs from that. Indeed. Well, okay. Uh. The next year, it May, 2002 they finally do the IPO.

This is still a nuclear winter for the tech world. Um, but they need the cash. They've gotten to profitability. They're like, we're just going to do it. We're going to go public. They raise 82 and a half million dollars in their IPO and a market cap of just over $300 million. So they sell over a quarter of the company in the IPO.

Oh, I mean, like, can you imagine that these days it's like seven to 10%? Like, you know, like, Oh, well, and it's not, it's another not IPOing for $300 million. I know. I know. Crazy. Yeah. I joke to David and I message last night, like, wow, it's a really nice, a nice series B post IPO story. Seriously. Um. But the business is capitalized, and then, you know, they have no debt.

They don't need to raise any more money, and they don't, uh, they eventually do take on debt, but I believe not until the streaming era. I think they did a tiny secondary the next month and just sold a little bit more in sort of a additional stock offering. But yeah, T to your point, no, nothing meaningful for awhile.

Yeah, they're fully capitalized. So remember Randolph, the original CEO and a, and lo, the guy who was running the, the video stores in Marin. Now that the IPO has happened, they're like, okay, great. We're going to go focus on new things like initiatives within the company now, and they start testing kiosks, Netflix kiosks that they're going to put in grocery stores, and they're like, this is going to be a great new growth initiative, and Hastings and McCarthy, they're like.

Yes. And actually Hastings at first agrees about the problem they're trying to solve. So an important detail is that Netflix is convenient in a way, because you don't have to leave your house, but it's inconvenient in a way that you can't have it now. Like they constantly were struggling with this existential problem of instant is not a part of our value proposition to date.

And so, you know, this is sort of a. Um, lo and Randolph's brilliant idea of like, maybe, maybe this is the way to solve instead. Maybe this is the way to solve instance. Maybe it is, but eventually McCarthy and everybody, they're just like, guys, we just did a 40% riff. We finally got public. We got to stay focused.

There are no new initiatives that we're doing right now. They kill and. And we'll wait before they kill it though. This is great. Uh, low and Randolph are so obsessed with this idea, the two of them. So they've convinced a grocery store, a single grocery store in Las Vegas at Smith's grocery chain to work with them to do this.

And. This is so awesomely startup-y they decide it's not worth our investment in figuring out how to actually build a vending machine that's going to event DVDs. So we're going to task a Netflix employee to just stand there behind a little like kiosk. It's a store within a store after the checkout of the Smith's grocery store, and just like people can come and they will just do it manually and the employee will hand you the DVD, which is just awesome.

And to oversee this. I know lo and Randolph actually got, uh, an apartment and move there for a month to kind of like be a part of standing up this operation. I mean, they were still awesome. It is awesome. Uh, as we will see. Um, but you can also understand why McCarthy in Hastings, like guys, guys, not now.

The second thing that happened before they killed it is that, um. Lowe went and talked to the CEO of McDonald's and was basically like brokering a deal. It was like, then he came back to this guy freaking loved it. McDonald's was like, we want to roll this out at all of our, you know, a little extra revenue for the people that are hanging out in our stores.

We're in and so low brings this back to Hastings and Hastings is like, are you freaking kidding me? Like our first brand impression with the majority of American that doesn't use us yet is not going to be in makeup. Donald's when they're waiting in lion like that. No, absolutely not. And so part of killing it was like, look, we don't have the head count for this.

We don't, we can't split our focus like this. And now you're coming to me with McDonald's. All right, David, take the curtain off. What did this become and how did it become that? So Randolph and lo, they're demoralized. Netflix has changed so much. Randolph, you know, he started this thing, he was CEO, like, you know, it's, it's time for us to go.

They go, Randolph gets full time into an investing, and as we talked about  and liquor and all that low, he can't stop thinking about this kiosk thing. He's like, I'm gonna make this happen. He's like, I'm going to start a company. That company becomes red box, which child while she's out. An actual, very significant competitor to a Netflix.

Yeah. I actually don't know what's happened to it now. Like, does it still exist in the streaming world? I think it is now part of something called outer wall, uh, which is, uh, they own, uh. Redbox, Coinstar, eco ATM, gazelle, a bunch of these other things. Outer wall stands for the outer wall of the grocery store and it was basically rolled up.

I think it's actually a Bellevue based company. Yeah. Yeah. Cause Coinstar was in Bellevue. Yeah. Yeah. I think maybe Coinstar expanded to become outer wall when it rolled up. All this other stuff, something like that. But red box is now part of that, uh, that private equity family. Yeah. Crazy. Crazy. Um. Okay. So back to Netflix.

We're now in March, 2003. Things are going great. The company hits a million subscribers. They announced this on their earnings call. Everyone's high-fiving once again, as we'll see, this doesn't last long. McCarthy. He's like, this is great. I've gotten landed the plane. I really want to go be the CEO of my own company.

I'm going to leave by the end of the year and do that. But you know, I want to give everybody plenty of notice. Want to give the street notice. Um, so he announces that. Almost immediately afterwards. Blockbuster fully launches, they've been testing, they fully launched blockbuster online the week that they launch blockbuster online to the general public Netflix market.

Cap drops is 60% in one week like a rock. And as we said, like it actually becomes a pretty good product. Plus they have all the marketing power of blockbuster. And so what happens is very quickly. All of the market going to subscription based online movie rentals, DVD rentals. Netflix was the only player until now.

Every new customer in America who came to do this. I had to do Netflix. Blockbuster gets 50% of new signups. So have new people coming into the market, which is where the vast majority of the market is still coming in. Blockbuster takes 50% share immediately. And if you think about that, the timing on this, so when, when Netflix IPO, they had 500,000 subscribers.

It's an interestingly, not that big of a number on the number of movies. It was 11,500 movies, as they say in their . So. It's now 2003 Netflix is barely profitable. They just turned their first quarter profit. Blockbuster launches this. This is exactly at the the crest of the DVD wave where when Netflix is reporting earnings, sort of the quarters before blockbuster, they're like celebrating on the earnings call.

Like. There is now $200 DVD players. America is buying DVD players. Our bet was right. This is just fueling our business. This is amazing timing. And so for blockbuster, judge, just nail it and launch it exactly. This time is like this. This a million subscribers that they have up from 500,000 at IPO is. You know, there's a, what, 200 million households in the U S or something like that.

Like anything that happened before is irrelevant and what matters now as new signups in the future. Yep. Exactly. Not only does that happen, they've got a second problem, which they're even more worried about. They get word that Amazon. And they're one time potentially acquire is going to come into the market and is working on building a Netflix competitor.

Remember, not streaming. We're still in the DVD rental market. They announced this. They're like, we gotta be honest about this with the street. They announced this on their Q3 analyst call that they think Amazon is coming. They're going to get ready for it, and McCarthy says, I'm not leaving. I'm staying.

I'm going to stick it out in a fight here. He actually says, and I quote on the. On the investor analyst call, you don't leave your friends in the middle of a knife fight. It was just awesome. What a hero. Uh, and uh, uh, and he literally like swashbuckling comes rides back in. In an anticipation, none of of blockbuster, not in reaction to blockbuster, but in an anticipation of Amazon coming in.

Cause I think Amazon's gonna follow the Amazon playbook and just undercut everybody on price. Netflix cuts their subscription price by almost 20% for the first time. It's like sub $20 for the, the big plan. Yup. Unfortunately, this turns into a full on disaster. A Amazon actually never ends up entering the market they do in Europe.

Um, but not in the U S blockbuster sees this and they're like, Oh, Netflix is starting a price war. So now blockbuster and Netflix get locked into a price war and blockbuster further undercuts Netflix. And things go like haywire. Cause remember the cash burn cycle is super important here in blockbuster has a much healthier balance sheet at this point too.

So blockbuster is like, wait, Netflix just cut prices. Why? Like we can outspend them. Okay. I guess we'll cut prices. Yep. Well they can in the Gantt as we'll see, so McCarthy and hasty, they'll like. Okay. We need to model out exactly. Because Netflix has a bunch, blockbuster has a bunch of debt from their old stores, and they used to be part of Viacom and then they'd spun out.

There was a whole complicated transaction. So yes, they have resources, but they also have debt covenants, so they model out in detail. What they think the blockbuster online business is, how long they think they can survive at this lower price, and with all the promotions they're doing until they trigger their debt covenants.

And so they'll like, okay, we think we have about six months. David, can you go into what, what debt covenants are a little bit. Definitely. If you have debt, there are agreements on the debt called covenants that basically say you have to maintain certain financial, uh, health metrics of financial health. If you don't, if you trigger those debt covenants, then you.

The lenders, the people who own your debt can put you into default and push you into bankruptcy. So it's like you don't want to do that. Now. You can go back and renegotiate with them anyway, lots of detail and all this happens with blockbuster. And just to drive the point home and put a super fine point on the, um.

On the cash cycle here? Yes, there's been a million subscribers acquired. They hope to acquire another hundred million in the future. They're dramatically accelerating marketing spend to be able to bring people on at a faster rate every quarter than they had been before. However, since the first month is free, they make no money on people for at least a month after they acquire them and they're spending more money than ever before.

To get nothing for that first month. So it's like, you know, to your point, that timing is tricky. Plus there's advertising dollars that you're spending to get those new customers. So what does blockbuster do? They run a Superbowl ad indefinitely. Like, Oh my God. Um, but they keep cool heads. They're like. The market is still growing.

We're still getting subscribers. If anything, blockbuster is just educating the market. They don't cut prices further. They don't get further drawn into the price war and it basically works because we will see here the, if Barry McCarthy is the acquired superhero, the acquired super villain. Steps into the scene here.

Carl Aiken of Marvel fame of a warehouses he showed up in our episodes so far, I don't think we've talked about Matthew is with Apple with wa like this guy. Oh my God. Hedge fund billionaire hold activist shareholder. He gets super involved with blockbuster. He buys about a 17, either 17 or 19% stake on the public markets in blockbuster starts agitating fire files.

A proxy battle to basically at the blockbuster annual shareholder meeting to, uh, elect a separate slate of board directors that are all his cronies. He wins crazy. Again, blockbuster is actually like. Being smart here. Their management is actually pretty good. Carl, I can just like replaces the whole board with like I can cronies.

He starts bringing his son to board meetings. Who's disliked. Some 26 year old dude, and he's like, you should give product Zane. It's insane. But for the black Western management, they managed to kind of like keep things on track and they decided with all this going on, they need to raise prices back up.

Um, so Netflix and blockbuster both raise prices back up. The tide is rising. Both companies are coexisting here in the market. Things go pretty well. Netflix is still the leader. They end 2005 now they have over 4 million subscribers. They have a market cap of over a billion and a half. So up. What's that?

Five X from the IPO. Three years ago they launched the Netflix prize in 2006 that you alluded to, which is we probably don't have time to cover it in it. Full detail here, maybe in the, maybe in part two, but super awesome. Get a ton of PR. Can any brilliant computer scientists out there beat our algorithm by, was it 10% 10% yup.

Yup. Yeah. Everybody thinks that like it's going to happen very quickly. Ends up taking like three years before it finally does get a, it's 2009 I think when the, when the prize was finally awarded. But anyway. All this is happening. Blockbuster. Like they're still growing, but they realize like the bricks and mortar business is, is, you know, not long for this world online.

And we're now in the mid two thousands, um, they really need to go all in. Management decides on online and they think, what is, what is the one thing we have. That we can beat Netflix on. They've realized that the turnaround time on rentals is super important, and this is actually pretty brilliant. They come up with this concept called that the market is total access, which is essentially you sign up for, yeah, this is a debit at the end.

You sign up for blockbuster online, which is essentially just a Netflix clone and the, the extra that you get is. You can now return your movies to any blockbuster store and exchange them for your next movies at the store. So this is like what Amazon is doing with, um, you know, Amazon go and prime now, and like, this is actually like pretty visionary.

It's risky because it does involve a lot of capital. A lot of ops. Um, you know, it's, it's like people are very skeptical that this could work, but if it does, Netflix can't match it. They have no physical footprint. Um, and blockbuster has stores all across America. Netflix is super, super scared when this happens.

This is in 2006. So scared that at Sundance in the beginning of 2007, um, well, and they get scared, it actually makes a huge impact. So Epic's growth flatlines not only do they stop growing, they start losing subscribers. Uh, this has never happened. Like, remember, they've just been. Adding subscribers, you know, quarter after quarter, after quarter.

It's like watching Snapchat or something. Totally. This is like, this is the Instagram stories moment. Um, and they're so worried. Sundance 2007, Reed Hastings meets with the blockbuster CEO and he offers essentially a merger of the two companies. And he says. Netflix will buy Blockbuster's online business from you for $600 million.

So it'll be essentially like a, I guess what's that like two thirds Netflix, one-third blockbuster is the ratio. I assume it would be all stock and blockbuster rejects it. They were like, no, man, we got you guys on the roofs. We have a structural advantage you don't have. We're back in the game. And then history like turns on a knife point.

This is crazy. Like blockbuster was gonna win. If they could execute this. But Carl Icahn, Oh my God. Oh my God. This is literally, this might be the worst self inflicted wound in like the history of business. This makes like the Uber thing look like child's play. Carl lichen and the blockbuster CEO get in right around this time, get into a huge fight over the CEO's annual bonus and such a fight that the CEO resigns and, and I can put him out.

I can then hires a new CEO. This dude from seven 11 who this guy, and to be clear, this is icon scrutinizing the CEO's proposal for his and other executives bonuses and saying, Nope, I don't see why you should be paying yourself that much. Yep, exactly. And the blockbuster CEO is like, I'm like successfully navigating this.

I'm about to beat Netflix. They just capitulated. They just offered a merger and I think I'm going to beat them. And uh, the, this guy who car-like and brings in, I don't even remember his name, it's not worth it. Basically, like, we try to be pretty even imbalanced on acquired. This guy is a total idiot. Like he is a complete moron.

This is, this is like, he doesn't, he's, he says he doesn't believe in online businesses. This is 2007 like, it's pretty clear that online businesses are a thing. Google has been public for three years. Like, you know, this is insanity. He doesn't believe in online businesses. He, his plan. He's going to totally defund the blockbuster online.

He thinks Netflix is a joke. Nobody's going to do it. Uh, he wants to bring back the heyday of bricks and mortar, wants to make bricks and mortar great again. He wants to attract a cold. David. He wants to attract the kids to come to blockbuster stores by selling pizza and soda at the stores. He has a plan for this.

He calls it rock the block. God. It's like this is like a gift from heaven. If your jaw drop and be like, Whoa, we're saved. Here's the kicker. Here's the kicker. I remember this. I was working on wall street when this happened. Circuit city is like on the brink of bankruptcy. Uh, best buy does manage to survive this, but they're also at the brink of bankruptcy.

Amazon is eating everybody's lunch. Again, online businesses, they work this, see this new CEO of blockbuster. He's like. We're going to buy circuit city for $1 billion. You literally cannot make this stuff up and always better than than than one failing business. You put two of them together. We're going to tie two anchors together and drop them into the ocean.

Oh my God. It's ridiculous. Everybody. It doesn't actually happen because even Carl lichen is like, I'm not sure that's a good idea. Um, have you, have you been to one recently? Yeah. So basically everybody good at blockbuster who was running the online business. They just resigned. And it's crazy. Like in the book, they talk about the guy who was running the online business.

He's really good. After all this happens. Rebasing calls him up and he's like, Hey, let's like get dinner and they get dinner and they talk about everything and then he invites him out to Netflix. He does like a town hall at Netflix and they talk about the whole history and what blockbuster online was doing with Netflix was going, it's crazy.

They all resigned. We know what happens. Blockbuster goes bankrupt. All of the. Momentum they had around total access. It just dies. They defund the whole thing. Netflix wins, and it's amazing because like all of this again, once again, Netflix was at the brink of death. A miracle happens. All of the marketing, all the buzz around total access for blockbuster, that just brings so many more people of the mainstream in America into this market.

They all go to Netflix. So by spring of 2009 Netflix now has 10 million subscribers. They're thriving. Nobody's canceling during the recession. They're on the top of the world. It's amazing. And that is where we're going to leave part one because there's another thing on the horizon coming. I thought Netflix was such a like stable, boring business.

So not the case. You can't stay on your laurels for long because streaming is coming. What a good place to leave it. When we were going back and forth last night on where should we leave it? Should we, uh, should we go into Quickster now I'm really glad that we, uh, uh, this feels like such a good place to, to hang.

Uh, totally. I just like. Circuit city circuit city. I read again like the worst, the worst. Um, alright. I'm emotionally exhausted, but we have other sections. Should we do narratives? Yeah. Going into narratives. I want to recap just a couple of things from reading the, the  last night cause I think they're interesting.

Um, so they sold 27% of the company in this IPO, raised 82 point $5 million, no net income, yet I'll only net losses, but about to have their first quarter of net income. The cap table is fascinating. So Reed Hastings owns 20% of the company, uh, which will get diluted down to about 15% after the IPO TCV technology, crossover ventures in two different vehicles.

I, I'm pretty sure I'm reading this right, has 46% of the company. Yeah. Crazy. Pretty rare to see that at IPO, a single firm with different era ownership. Totally different era. You look at what they did there, they were able to, uh, to raise, you know, I think in that with including that second little offering close to $100 million, they made no real promises in their  about sort of what they were going to do with that in any substantial way.

They sort of just talked about they were going to spend on marketing. They were going to spend on improving the technology. They were going to increase the, the selection that they had. I mean, it wasn't like when we talk about what did they do with this, this capital, they run a flywheel business, so they just had to pour more money into the flywheel and have more money to be able to accelerate it.

You know, in, in looking back, we, we tend to do these, this narrative section where we do bulls and bears, unlike other times like Facebook or like the net, the snap IPO, it's not like there were people running these articles of, of doom and gloom. I mean, it was pretty. Hey, this thing seems to be going pretty well.

It's pretty disruptive. It's not clear if it's going to work yet, but they're IPOing and it's not a huge IPO. Well, to jump into the bear case here, all that's true. And like, yeah, I mean, if you really looked at it like. This was a really good business. I mean, there was potential headwinds in the future of blockbuster.

It was one of the only tech companies, uh, cause people just watched all these dot-coms go bust. It was one of the only tech companies that was posting, you know, nice financials and was about to be profitable. I mean, there was like this huge, wow, it's a real business. You should buy it. Yup. But I think the bear case is, is, yeah, people are just still, so, you know, human psychology hangover from the IPO crash, they're all like, huh, this CEO like was the largest merger and you know, Silicon Valley history and the bubble era now, like you guys are losing money.

And like, I don't believe in online businesses, you know? And also to be fair, a fair bear case was, I dunno, don't count out blockbuster. And as we've seen blockbuster very well could won here. Um, you know, hard to know. But yeah, the bookcase, like you said, like this is a good business. Subscription businesses like they could be a thing if, if they work, if you can get them to work, they can be very challenging to scale.

But like, this is why cable companies are so good and cable companies will come back up in part two of the episode. Like if you can get consumers locked into paying you a certain amount every month, like you can. Build a very stable, very predictable, very good cashflow business around that. Yep. All right.

What would have happened otherwise? Let's do it. I struggle to find any other way that this could have worked out for Netflix. I mean, they either would have ended up part of Amazon and I'm not sure they would have maintained the brand part of blockbuster and they would have killed it. That would have been a terrible, yeah.

Um. If they hadn't opportunistically raised some cash right before they thought they were going to IPO, then they probably wouldn't have weathered the storm. If they didn't IPO when they did, then they probably wouldn't be able to, um, properly fight blockbuster. They didn't do the 40% layoff, like, you know.

Yeah. Just a lot of things went their way here. Company is, it's skill and luck. Yeah, totally. Totally. I think maybe there is a world where they could have kept it. Delayed the IPO longer, you know, they were at profitability and that would have been the wrong decision, I think because blockbuster was coming into the market and access to capital in the private markets didn't exist like it exists today.

Yup, totally. Yup. They had to do this. Yeah, tech themes. Let's do it. The first one that I'm thinking of is like, and we've beat this to death on this episode, so it's not gonna be like surprising to anyone, but tabula rasa. If you come up to me and said, what wave did Netflix take advantage of to, to really launch them as a company, I'd be like streaming, but like, the fact that DVDs were a wave is still a little bit mind blowing to me that I did.

It's just very, uh. I think how fast as humans, we forget the very recent past and what was a big deal and what wasn't is striking. Totally. And yeah, just timing, like not only a big wave, but like Netflix timed it so perfectly. Um, and this is why we ended up breaking this episode into two. Like these are two different businesses.

The DVD. Part of Netflix and foreshadowing Quickster they really are two different businesses. Did you know you can still go to DVD? Oh, actually they'd say they bought the domain. Netflix has dvd.com  can go and access their DVD offering there. Huh. Interesting. Yeah. Wow. I wonder, I mean there still are people who, I think they still have a few million DVD subscribers to this day.

Interestingly enough, from dvd.com this is how muddle this stuff gets. You can rent Blu-rays. What about depicts alpha delpo? Um, okay. I have a couple. The biggest one though, we, we glossed over a lot of stuff as we had to in this story. Um, this is part of why we're doing our LP program and bonuses is to get deeper into like, who are the people that like actually build these things?

And one of the decisions along the way that, like operationally helped make all this happen. But one thing that. Again, we didn't get to cover as much in this episode. That I think is an interesting theme, both across Amazon and Netflix, is that the people in finance and marketing, and we did talk about McCarthy and at Netflix, at these first-generation internet companies were so good.

Like Barry McCarthy, joy Covey at Amazon, uh, Leslie Kilgore, who ran marketing analytical marketing at Netflix. Like we didn't get to talk about her, but there are so many people that are just like really, really, really good. They tended to come from, um, like the CPG world, like from Proctor and gamble. And I think that's where Leslie Kilgore came from.

I could be wrong on that, but there are a bunch of these folks at Amazon, a bunch of these folks in Netflix, um, and they're just so good. And I feel like that's like a. That's like a piece of DNA that's now missing in the Valley is like this combination of finance and marketing, you know, and there's like growth, quote unquote, which is sort of the successor to this.

But, um, cowboy marketing. Yeah. It's become so cowboy and it's become also just so dependent on Google and Facebook. Like, although the good growth, people would find ways and tell you that their way isn't right. And Google and Facebook and there's, there are still ways, there are still good people, but you know, this is the.

Barry McCarthy modeling out Netflix, his online business to a T like he knew what month they were going to have to raise prices. The Netflix program with consumer manufacturers, uh, of, of, uh, consumer electronics manufacturers to put the coupons in the boxes and modeling out exactly what was that was gonna cost exactly what their growth rate was going to be.

You know, the going population, um, subscriber center by subscriber center with the, with the one day delivery being driven by. Where word of mouth is occurring, like all that stuff. Like that's the company building stuff that bill Netflix into like a great business and Amazon did the same thing. So that's what I wanted to call out here.

I have two trends that I want to call out that were stated in the  because one of the things you commonly see in these S ones is. It's an area called trends, but it's basically why should you believe that the wind is at our backs? And one is one that I hadn't really thought about that much, which was the very first one they call out as the shift to viewing in home instead of in theaters.

And I had forgotten about this because this was like in the era, I think it was a little bit before the era where. Piracy really accelerated people, not going to movie theaters. But there was already a trend where people were like, gosh, why? You know, I can go rent it at blockbuster. Why would I, you know, I'll, I'll, I'll wait to see it on video and it'll be cheap on video.

And this was killing movie theaters. But this trend was starting to accelerate. And that was one thing that they cited that it was like, look, no matter how people are renting movies, like they're watching them at home, and that's really helpful for us, which I thought was interesting. And the other that they cited was in a slightly different words, but the paradox of choice, that it was really hard.

So there was one of two things will happen. You go to blockbuster and you're mad that there's not enough selection, or the movie that you want is out. Okay. If you go anywhere where there's infinite selection, then it's, it's too hard to choose what movie that you want to watch. But they had Cinemax and the cinema algorithm was really good at telling you what movie you probably want to watch next.

And so they actually cited that as a sort of trend and advantage to Netflix in their, their S one to shareholders, which was interesting. And I've got a few more, but we're going to save those for part two. All right. Should we grade this and we're going to grade the IPO here. Yeah. So I was thinking about this and I'm like, okay, let, let's say they didn't, cause we've already covered, like they, they needed the IPO to have the cash to be able to win the war that they won and they were close to losing the war against blockbuster.

So even that aside. Get, why IPO, what's the point of that? You've got the cash position and they're sitting in as 15 million in the bank. They're not going to be profitable this quarter, but maybe the next, and it's going to be super thin. So like you need cash from somewhere. Why does this business need cash and what is the flywheel?

I think the flywheel is more spend, gets you more customers, which gives you. More leverage with content providers, which isn't really a huge factor in their business yet, but there are, there's gotta be some element of, yeah. Buying, you know, they're already buying DVDs in mass, so they sort of need to be able to do that to serve more customers.

And you can buy deeper in the tail when you have more customers. They eventually do, do deals with movie studios as they get bigger, to buy DVDs at a discount. Yup. So that gets you more and better content, which then makes you able to, the inherently, that improves the product offering, which then lets you go get more customers.

And so, I mean, it really, it's, it's a flywheel business that they're, they're raising cash to pour onto it. So competitive stuff aside, they should have just gone out and raised as much as they possibly could, have to be able to fuel that, that flywheel faster. They sold 27% of the business. Like. Good move.

I mean, it's not like they could have raised any more and it doesn't feel like the stock price could have been any higher given the macro economic climate they were in. So the way I look at this, they raise the most money they could, which was the good idea. Even if they didn't need it for competitive reasons, which they did it.

It was a good idea timing wise and a an amount wise. So you know, it's not an a plus for me because those are reserved for exceptional circumstances, but this is a solid day. Yeah. I think. One thing I wanted to add on to the the flywheel aspect. We thought about this a lot at Rover actually, um, which is not a subscription business, but has some of the same dynamics with a business like this subscription business.

Once you grow to a certain point, as you're growing, you're spending a ton of money on customer acquisition, bringing new people in, and as we talked about in the early stages of the market, so much the market has yet to come. There comes a point. Where you flip from all of that money that you're spending on customer acquisition.

You're not making that back in terms of the revenue you're getting from your subscribers. You're spending more than the money you're getting back, but at a certain point in the market, in the adoption phase. That flips where you are now. You're still spending as fast as you can, but your subscriber space is so big, they're generating so much cash that you now like your economics tip over into the positive.

Once that happens, you can super quickly go from like a, you know, cash burning business as we saw to like an incredibly, immensely profitable. Immensely big moat because for anybody else to come compete with you, they'd have to spend the same amount that you spent along the way to get there. Um, no blockbuster could credibly do that.

Amazon could credibly do that, but nobody else could. And once Netflix did that, that's when. As far as the DVD business concerned. Oh, was concerned. Uh, that's when they tipped into like, we are an awesome business. It's very stable cash flows. It's the same thing with cable companies. This is how they work.

Uh, or it worked. So yeah, I think it was like, they absolutely needed that capital to do that. I think, yeah, I debate a or a minus. Um, certainly a range because they needed to, they executed. It was great. They did what they had to do. It just, the market conditions were so bad that like. Selling that much with a company, like, you know, um, so not ideal, but I don't think they really had any other choice.

So I don't know. A or a minus. All right. Carve outs. Carve outs. Okay. So mine, uh, I'll go, uh, quickly, uh, I can't believe it's taken me this long. To read and then recommend a N, K Jemisons SkyFii trilogy, the broken earth trilogy. These books are amazing, amazing. If you haven't read them yet, if you're a scifi fan, even if you're not a scifi fan, so three books in the trilogy, each one of them, the first one, when the Hugo award in.

2015, I think. 15 or 16. The second one, one that you go where the next year, the third one, when the Hugo word the following year. So, so, so good. Um, and just like a perfect societal commentary for, you know, the era we're into where like, it's, uh, a persecuted people have an immense power that, uh, can save the world.

Uh, but they're persecuted and like, so you have to give her anyway. It's really, really good. Must read. I have one. I had a list of articles that I've read recently that I thought were good, and then I was like, you know, I should do one that's just like something kind of fun. And I thought it was going to be completely unrelated to the episode, but, uh, I'm now realizing it's not at all.

There's a Netflix show that I've been watching called the good place, and, uh, it's with Kristen bell. It is really goofy, but really good and really good, sort of just like. Popcorn, uh, you know, watch it for a half hour before you fall asleep. It's that, it's, it's basically like a heaven and hell, uh, thing where Kristen bell lands in the good place and she's looking around and she's like, Oh, cool, I'm in the good place, so I'm not in the bad place then.

And she's like talking to the administrator of the good place and it's, it's just like, it's very tongue in cheek, but, um, really good. And, uh, uh, when I picked it, I didn't realize that it was a Netflix show, but, um, Netflix original content coming soon and in the, in the next episode. Well, thank you to our awesome sponsor of all of season three.

Silicon Valley bank couldn't do the show without you guys. Um, if you are subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you like listening to acquired and you just want more, or you want to help us support the show and, and make it even better. And. Somehow we just keep doing more deeper research.

And, um, I've been super, super excited about the guests we've had on. So if you want to help us do more of that, uh, you can become a limited partner. So go to glow.fm/acquired. Thanks everyone and we will, uh, see you next time.

We'll see you next time with part two.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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