How Netflix Escaped Death (Three Times)

**Wouter Teunissen** (0:01)
The IPO was called off, and with it, their last shot at escaping a $50 million projected loss. Their safety net was gone. Netflix was in freefall. It's April 14th in the year 2000 The three-year-old DVD rental by mail business Netflix is approaching 200,000 subscribers, and they're shipping over 800,000 discs per month. They just filed their S1 to go public, but that very same week, the NASDAQ drops 25%. The dot-com bubble has burst, and the tech industry is being slaughtered. In the coming crash, over 2 million tech jobs would vanish. Over half of the public internet companies would go bankrupt or delist. The NASDAQ itself would fall 80% in only two years. In September, the entire company heads to an offsite. It was late on the first night. Hundreds of employees crowd around in a hall around long wooden tables, eating ribs. But CEO Reed Hastings' seat is empty, and the CFO sits with his phone pressed to his ear. It was a call from Blockbuster. They wanted to meet, tomorrow morning, in Dallas. Netflix this year was on pace to do 5 million in revenue. Meanwhile, Blockbuster was on pace to do 6 billion. The team takes a jet in the middle of the night, half still drunk, half still wearing Hawaiian t-shirts and shorts and sandals that they packed for the retreat. Would they finally be saved? They walked into the meeting room in the heart of downtown Dallas. And as the meeting went on, Reed proposed to Blockbuster that they buy Netflix for $50 million. Everything rested on this moment. All they needed was a yes and they'd be saved. But what's that gonna happen?
What followed that disastrous meeting in 2000 was a silent ride back to the jet and a silent flight back to the offsite. Blockbuster would not save Netflix. They would instead compete. Shortly after, there was a set of layoffs for Netflix that would see over 40% of the company be laid off. Brutal questions had to be answered like, do we lay off someone young instead of old? What if an employee was the only breadwinner for the family? What about married couples both working at Netflix? Is it cruel to fire them both? It was ugly. And in the span of a few months, Netflix had gone from raising a guaranteed $85 million through an IPO to half the company being gone. Welcome to the biography of Netflix. This is the entire history of the company, from that fateful offsite in 2000, the founding story, the brutal fight with Blockbuster, and the switch to digital streaming, all the way up until today, being one of the most valuable companies in the world at a $500-plus billion market cap. But really to understand what happens next in the story, we need to go back three years to a beat up Volvo that two men are taking on Highway 17 for their morning drive to work in the bay in January 1997

**Reed Hastings** (2:57)
Turn that off.

**Wouter Teunissen** (3:03)
Now, it's the early hours of the morning, and Reed Hastings and Marc Randolph are carpooling together to work. They've actually been doing this for the last few weeks. And that's because both live in Santa Cruz, which itself is a small beach town that is separated from San Jose, which sits at the bottom of the San Francisco Bay area.

**Marc Randolph** (3:20)
Okay, I've got a new one. What about food custom made for your pet? You can order it online and it ships to your door, all custom made for your own dog or cat.

**Wouter Teunissen** (3:29)
That was the voice of Marc Randolph. His company Integrity QA just got acquired a few months earlier by Reed's company, Pure Atria. And Pure Atria is a company that makes software development tools. And the reason Marc stays on after the acquisition is because he's going to stay on as VP of Marketing. Now, Marc is hungry. He's just about 39 years old, has a wife, has three kids, but he still desperately wants to start a new company. The companies he had previously started were all mail order businesses. So think of like a subscription magazine for Mac enthusiasts, things like that. And the reason Marc is pitching Reed's startup ideas in this very morning write at work is because he and Reed are about to be out of a job. Why? Well, only six months after Pure Atria and Reed bought Marc's company, they were about to merge with another business in the largest merger ever at the time at just under a billion dollars. And after this merger, Reed is going to be out as CEO and Marc would be out as VP of Marketing. And so during the four months that they're working out this merger, every day, every car ride, these two are sitting together where Marc is pitching Reed ideas. Because Marc really only wanted to do two things. He one, wanted to start a company, and two, he wanted to sell things over the internet. Now, why would you want to sell something over the internet? It was still a very strange thing to do at this time, but by now, actually, Amazon has already gone public. And Marc sort of realizes that he wants to sell a product that already existed and help people access it online. It's exactly how for Amazon, in the early days, they didn't actually make the books, but they were still able to sell them. Now, as for internet adoption, two years earlier, in 1995, there were only 25,000 websites online. And listen to this, it's bonkers. By March of 1997, that number was 300,000, and by the end of that very same year, the time we're in right now, it would reach over a million websites. It's incredible. Now, as for the second man in the car, Marc couldn't have picked someone better to pitch ideas to than Reed Hastings. Reed was likely already worth close to $100 million by this point. Pure Atria, the software company he founded, had gone public two years before that. And this guy is intelligent, analytical, and he really doesn't waste time with niceties. And the great story that highlights that is, the first time the two of these guys met was on a trip from San Francisco to Boston. And this was when Reed had just bought Marc's company. And Marc's sitting there, ready to board the flight at the gate. When Reed walks up to him, and remember, this is the first time they've met, and he asks him, where are you sitting? And unsatisfied with the answer that he gives, Reed immediately grabs Marc, upgrades his ticket to first class so that they can sit together. And so imagine this happens to you. You're Marc, you're sitting there, you're very excited. You're getting ready to relax on the plane, order a drink or two maybe, sleep a little even. But as soon as the flight attendant arrives to offer two free complimentary mimosas, Reed waves them away. And he turns his body 90 degrees, and he looks Marc dead in the eyes, and he basically says, let's go. And so for the next five hours, Reed gives an intensive overview of the state of their business. He barely pauses to drink. That's how analytical and intense this guy was. Now back to that car, where Reed and Marc are driving on Highway 17 together to work. Marc is still waiting for a response to a startup idea from Reed.