Season 3, Episode 8: Netflix (Part 1)

[0] Yep.

[1] It's so funny, all the reviews of the iPad, people were like, you can't hook up USB storage to the iPad.

[2] I'm like, I haven't used a USB thumb drive in like five years.

[3] I don't care.

[4] My biggest complaint is the lack of scuzzy.

[5] That's a teaser quote right there.

[6] Welcome to Season 3, Episode 8 of Acquired.

[7] The show, about technology acquisitions and IPOs.

[8] I'm Ben Gilbert.

[9] I'm David Rosenthal.

[10] And we are your hosts.

[11] Today we are talking about a company that somehow, somehow, David, we have not covered on the show yet.

[12] Netflix.

[13] And we're breaking this one into two parts.

[14] Today we'll be covering the founding of the company up through the IPO and the waning years of their DVD business.

[15] And then next episode we'll pick up at the takeoff of streaming and original content.

[16] So David, I could not believe this.

[17] when diving in, that the Netflix IPO was 16 years ago and it was founded 21 years ago.

[18] Yeah, crazy.

[19] All these fang companies, they're getting old.

[20] I know.

[21] I mean, I just, I did not realize that it was a pre .com bubble.

[22] In my head, it was sort of like Facebook era, not Google era or Amazon era.

[23] Well, this is why we have to do this as a two -parter because, you know, when we first started researching this, we didn't think of it that way.

[24] But like, there really are two different companies here.

[25] There's Netflix.

[26] pre -streaming and Netflix post -streaming.

[27] We're going to cover the pre -streaming today.

[28] 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.

[29] 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 for $5 a month or go to kimberlite .fm -acquired.

[30] That's K -I -M -B -E -L -I -T -E dot -F -M -S -Aquired.

[31] 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.

[32] Okay, listeners, now is a great time to thank one of our big partners here at Acquired, ServiceNow.

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[37] I was at NVIDIA's GTC earlier this year, and Jensen brought up ServiceNow and their partnership many times throughout the keynote.

[38] So why is ServiceNow so important to both Nvidia and Microsoft companies we've explored deeply in the last year on the show?

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[45] platform.

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[47] So if you want to learn more about the ServiceNow platform and how it can turbocharge the time to deploy AI for your business, go over to servicenow .com slash acquired.

[48] And when you get in touch, just tell them Ben and David sent you.

[49] Thanks, ServiceNow.

[50] All right, David, you're ready to take us in with the acquisition, I suppose the IPO, history and facts.

[51] Well, there will be lots of acquisition offers back and forth as we go here.

[52] There were, which I didn't know until I started reading.

[53] Dave and I both read this.

[54] There's a great book by Gina Keating called Netflixed.

[55] Netflixed.

[56] Yeah.

[57] This is really fun.

[58] 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.

[59] We want to do like a big, important splashy episode.

[60] Let's do one of the fang companies, Netflix.

[61] I thought, you know, Netflix seems pretty straightforward.

[62] like Reed Hastings like very solid dude you know is 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 all right stop teasing us and go in all 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.

[63] But let's start with the founding.

[64] So as I was alluding to, most people know or think they know the founding story of Netflix.

[65] Nothing too controversial.

[66] It's the classic Silicon Valley startup story.

[67] We go back to 1997.

[68] A successful former enterprise software guy from Santa Cruz, of all places, is fed up with movie rental late fees.

[69] These are the VHS days still.

[70] 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.

[71] Of course, I'm talking about Mark Randolph, not Reed Hastings.

[72] This is a truth statement, the illustrious CEO of Netflix.

[73] The illustrious CEO of Netflix.

[74] I texted Ben when we started researching this and reading Netflix.

[75] The parallels to Tesla here are like unreal.

[76] It's pretty awesome.

[77] 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 graduate school at Stanford.

[78] Yes, but really he was the founder and CEO of Netflix.

[79] I think it was closer to two, but I'll have to go through my notes here as we dig through.

[80] Let me give you two other wild Mark Randolph facts from his background.

[81] One is that he helped to found Macworld magazine.

[82] Yes.

[83] Love that.

[84] And two is he is currently on the board of Chubby's shorts.

[85] Yes.

[86] And Looker, I believe, Data Analytics tool.

[87] And Liquor actually came out of Netflix, I think, which would make sense.

[88] Okay.

[89] So here is the official story.

[90] If you listen to Reed Hastings, if you listen to Netflix, the official founding story, the lore.

[91] We're going to give you that.

[92] Then we're going to tell you the true story.

[93] so official story read hastings he has been a successful technology entrepreneur in the enterprise base 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 you know how your founding story can just change yes just change how it can just not just change whether it was true or not We've seen this many times.

[94] So he's returned the movie to the local video store, and he's so fed up.

[95] He comes up with this magical subscription model alternative when he's on a treadmill at the gym.

[96] 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.

[97] Remember Apollo 13?

[98] So good.

[99] Great film.

[100] I remember the fee because I was embarrassed about it.

[101] That was back in the VHS days, and it got me thinking that there's a big market out there.

[102] 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.

[103] It was a long 24 hours until the mail arrived back at my house.

[104] I ripped them open, and they were all in great shape.

[105] That was the big excitement point.

[106] another another fun element on this story is the reason that he talks about being on the treadmill is because 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.

[107] You know, we've talked about this a bunch on the 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.

[108] So, you know, this is...

[109] And something like this happened.

[110] It just wasn't as clean.

[111] Yeah.

[112] So, okay, what's the real story?

[113] One note, as we dive in here, it is helpful to be familiar with Bay Area Geography when discussing Netflix.

[114] So for those of you who are, you will intimately understand this.

[115] For those of you who aren't, we will try and guide you along the way.

[116] So it was 1997.

[117] Reed Hastings was involved, but as also, of course, was Mark Randolph.

[118] And they knew each other because they worked together at a company called Pure Atria, formerly Pure Software, in Sunnyvale, California.

[119] Which merged with Atria.

[120] Which merged with Atria.

[121] Yeah.

[122] So what was this company?

[123] It was a publicly traded company.

[124] it made bug detection software for developers tools company bed we should also say this was reid 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 not really so go for it all right so uh read 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.

[125] And after he finished the Peace Corps, went and took his first job.

[126] Then his second job was starting pure.

[127] And in between he did a master's in CS at Stanford.

[128] I think he went to Bowdoin undergrad on the East Coast.

[129] But yeah, that's how we got out to the valley.

[130] So he's running pure.

[131] It's going well.

[132] It was sort of predicated on a simple notion that he had around building a better debugger.

[133] He's starting to amass a large team.

[134] They're taking all this money.

[135] They're getting ready to go public.

[136] He tells the board, hey, I want to not be CEO of this company.

[137] I've never been a manager.

[138] It's kind of like, I think for the benefit of myself and all the other shareholders, we really should get a CEO.

[139] The board says no, you should remain CEO.

[140] And he ends up basically learning on the fly and then successfully manages to both IPO this company and then merge it with Atria.

[141] Such like the opposite of what was usually, what boards were usually doing in the day and age, which was firing CEOs as soon as they humanly could are firing founders.

[142] Okay.

[143] So as Ben alluded to, Pure Atria at this point is publicly traded.

[144] It's basically a roll up.

[145] They'd acquired Atria.

[146] They'd acquired a bunch of companies that are all in the space.

[147] They're rolling up and consolidating.

[148] Randolph, Mark Randolph, had been at one of the small companies that Pure Atria had acquired.

[149] and after the acquisition, he read kind of takes a liking to him, and he gets promoted.

[150] He becomes head of marketing for the whole combined company.

[151] So they're working pretty closely together.

[152] So it's 1997.

[153] One final piece of this roll -up is 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, which is the biggest competitor in the space.

[154] They've just announced they're going to merge public -to -public merger.

[155] it is actually going to be the largest merger in Silicon Valley history at that point in 1997 valued it just under a billion dollars yeah cute cute just under a billion dollars and Reid 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 neither is Randolph and it's interesting to note here Hastings is really bummed about what has happened to the culture And it's important to think about as we talk about Netflix later.

[156] Hastings says that pure like a lot of these other companies went from being a heat -filled.

[157] Everybody wants to be here place to a drone -ish.

[158] And I'm quoting here, when does the day end sausage factory?

[159] And he says, we got more bureaucratic as we grew.

[160] And his thinking at that time is, whatever I do in the future, when the next thing I have to start, we have to think of systems so that we don't end up like that.

[161] And that will come back into play.

[162] Reid is about to become hugely wealthy.

[163] He's still very young, hugely wealthy, and his plan is to basically ride off into the sunset.

[164] He's reapplied to Stanford this time to do the graduate program in education, which is a fantastic program.

[165] By the way, a lot of people do GSP and the education masters jointly.

[166] Reed's going to go do this one -year grab program in education with the intention of he's going to become an education -focused philanthropist for the rest of his life.

[167] Randolph, though, he's not so, you know, not about to become so wealthy.

[168] He has to keep working.

[169] So he decides what he wants to do is he wants to start a company.

[170] And he really admires Amazon, which is public at this point, been around for a few years.

[171] 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.

[172] He chose books.

[173] Randolph thinks, well, I can just choose another category and run the same Amazon playbook.

[174] And it just so happens that in addition to working together, read and Mark, both live in Santa Cruz.

[175] So this is, I said, Bay Area Geography is going to become important.

[176] Santa Cruz is a sleepy little university slash beach slash surfer town over the Santa Cruz Mountains, which separate Silicon Valley.

[177] The valley is on the inland side of the mountains from the Pacific Ocean.

[178] Santa Cruz is on the ocean side.

[179] The mountains are awesome and it's beautiful, but like they're very high and it is very remote.

[180] Like if you live in Santa Cruz, you do not live in Silicon Valley.

[181] And it takes about an hour to commute back and forth.

[182] But just like the whole vibe is like beach town, surfer town, not not, you know, everything we think of is Silicon Valley.

[183] So as a result, Reed and Mark are often carpooling together back and forth between Sunnyvale where Pyr is based and Santa Cruz.

[184] And so Randolph just starts like spitballing ideas with Reed during their car rides.

[185] He's like, what about this category?

[186] What about that category?

[187] What about that category?

[188] And he's convinced he wants to do this.

[189] So he starts a shell company.

[190] He calls it kibble ink.

[191] because the idea is get the dogs to eat the dog food.

[192] So Kibble, hink, dog food.

[193] Yeah.

[194] Anyway.

[195] He starts the shell company.

[196] They're spitballing stuff.

[197] He starts thinking about, as Ben alluded to, he'd worked at Macworld.

[198] He had also worked in the direct mail industry.

[199] That's how he got into marketing.

[200] He's presumably, we don't know this for a fact, but because of that, very familiar with the AOL prodigy, comp, you serve, customer acquisition techniques that I think we've referred to in the past of just mailing out tons and tons of CDs to potential customers.

[201] I mean, how many AOL CDs did you have mailed to your house back in the day?

[202] Oh, my gosh.

[203] And the best thing was every time you'd go to like a movie theater or something, there'd just be another box full of them at the desk.

[204] The whole country and like, you know, when would this been like 95 to 99 was just saturated with AOL coasters?

[205] I'm going to fill somewhere now.

[206] Well, the important thing that I want to say about Randolph here is it basically his background, you know, before Puratria, he's a publishing guy.

[207] He knows the publishing industry inside it out and kind of stacked on top of that.

[208] He's a data and analytics guy, which didn't really exist in meaningful form.

[209] You know, there was no digital data and analytics then.

[210] So he was frequently tasked with things like surveying audience and trying to understand who are our readers.

[211] His philosophy, as he's 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?

[212] And how can we build sort of intelligence into the UI to automatically do things that make the experience of consuming better?

[213] It's funny to see all these different threads that become massive pillars of Netflix today that are in sort of the backgrounds of these founders.

[214] Like you said, those become the pillars of Netflix from Mark Randolph's.

[215] history and background to Netflix today.

[216] So inspired by this, he hears about this coming new video format called DVD.

[217] It's just, just getting launched.

[218] It's in the movie studios and electronics manufacturers are just rolling it out.

[219] It's being launched in a few test markets.

[220] And of course, DVDs come on optical discs that are the same form factor as a CD.

[221] And so Randolph's like, oh, well, maybe we can mail these things.

[222] So they do go.

[223] He does go to a local record store, not Tower Records in Santa Cruz, buys a CD, goes to a gift card, buys a very, like, large, like, birthday card and stuffs the CD in it and mails it to Reed Hastings House.

[224] The next, you know, day or two, when they're meeting to commute together, Reed's got the mail.

[225] Is it going to come?

[226] Is it going to come?

[227] He's got the envelope and he's like, it came.

[228] It's fine.

[229] Dude, this blew my mind when I read this story.

[230] today when we think about the old Netflix were 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 and then sort of riding it the whole way like they were betting that DVD was going to succeed because they evaluated would this work with tapes and they were like nope shipping costs are too high shipping costs are too high and just logistically, like, you got to store them and catalog.

[231] Like, the CDs are tiny, although not as tiny as bits.

[232] So, Netflix, it's boring.

[233] It's off to the races.

[234] So what happens?

[235] Reed is like, great.

[236] I'm going off to Stanford, but I've got all this money.

[237] I think I'm going to dabble in angel investing.

[238] I'll fund this company.

[239] So just like Elon did with Tesla, Reed leads the first round of funding in Kibble, Inc., which in a little bit becomes Netflix.

[240] Reed invests $2 million.

[241] Randolph becomes the CEO.

[242] Reed is just an investor and on the board.

[243] They recruit the initial team.

[244] They set up their first office in Scotts Valley, which is still on the Santa Cruz side of the mountains, just a little bit north of the town of Santa Cruz.

[245] And the idea is, yep, we're running the Amazon playbook, except instead of attacking Borders and Barnes & Noble, we are attacking Blockbuster.

[246] It turns out that, unsurprisingly, it's actually a pretty good idea.

[247] So the home video industry at this point is now big, than box office for film and television, or I guess mostly film at this point.

[248] It's enormous and the rental segment, so there's both sales and rental of home video, the rental segment is completely dominated by Blockbuster.

[249] There's Hollywood video and a few others, but like Blockbuster is the 800 -pound gorilla.

[250] I want to quote the S -1 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.

[251] It's going to be in your seed pitch deck.

[252] It's going to be in your A pitch deck.

[253] And the second paragraph of the S1 and when Netflix goes public, the first paragraph describes what they do.

[254] The second paragraph is, in 2001, domestic consumers spent more than $32 billion on in -home filmed entertainment, representing approximately 80 % of filmed entertainment, blah, blah, blah, goes on to talk about exactly what David just said that the largest portion is rental.

[255] I was reading the S -1 and I was just chuckling that like the story at any stage is always the same.

[256] What do you do?

[257] Why could it be huge?

[258] Why is it important?

[259] Then how are you differentiated?

[260] Yeah, like it just, it never ends.

[261] The more things change the more they stay the same.

[262] Quick aside, because I think there's an important point here, this whole business of movie rentals is in the first iteration of Netflix's business and the blockbuster business is enabled by a Supreme Court ruling around copyright law of what's called the first sale doctrine.

[263] 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.

[264] You can resell it, you can rent it out, like it's yours.

[265] You have then cleared the copyright.

[266] That was established well before any of these businesses.

[267] But the important point in here is that like regulatory issues and lobbying and getting regulatory issues favorable to your business are very, very important.

[268] I feel like Silicon Valley now knows that, but for a long time forgot that.

[269] And, like, this whole industry is enabled by a Supreme Court ruling.

[270] And fortunately, in a very sort of Bezos way, where Bezos always credits the infrastructure that was laid before him that allowed the company to exist, the internet, UPS, etc. 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.

[271] Infrastructure had been laid for them.

[272] Go vote.

[273] It's important.

[274] Hopefully you already voted in these elections.

[275] Yeah.

[276] I assumed they had to pay some form of royalty back to the content holder every time they rented it.

[277] I mean, then Blockbuster, like before Netflix comes along and you're just fat and happy Blockbuster, that's kind of an amazing business.

[278] I mean, you buy this little store.

[279] It's not that big of square footage.

[280] You pay $15 to $18 or whatever for a movie.

[281] And then you rent it out for, what, like $3 and you run it 50 times or something?

[282] It's an awesome business.

[283] It's the same business as scooters today.

[284] You know, you buy a scooter for $300.

[285] bucks.

[286] You rent it for a couple bucks per ride, and you do thousands of rides, and that's a good business.

[287] Okay, so they're getting started.

[288] Randolph goes to a conference in Las Vegas, the software video conference.

[289] He meets a guy named Mitch Lowe, who's going to come back into the story later.

[290] Mitch owns a 10 -store video rental chain, small rental chain in Marin County, just north of San Francisco.

[291] Again, Bay Area Geography.

[292] This is about as far on the opposite end of the Bay Area as you can get from Santa Cruz.

[293] We're talking like two and a half hour drive with no traffic.

[294] Mitch is entrepreneurial.

[295] He owns these video rental stores, but he's also working on a software tool, a CRM tool for video rental stores.

[296] And Randolph's like, oh man, you are like the industry expert.

[297] Like, I need you to come in and like join the team.

[298] He eventually persuades him to do so.

[299] I assume Mitch then moves from Miranda, Santa Cruz, because you cannot do that commute every day.

[300] But he joins as the video acquisition chief.

[301] So he's now going to be in charge of like inventory and stocking and what DVDs, Netflix is going to buy.

[302] And so it's kind of just like Stitch Fix that we saw there, like getting that early industry DNA on the team, like really has a big impact.

[303] Together, they, and they'd hired a couple people from Pure, a couple folks that they'd worked with in the marketing department there.

[304] They all settle on Netflix as the name.

[305] And Ben texted me the original logo.

[306] We're going to have to tweet this and link to it in the show notes.

[307] Let's just say you don't want enterprise marketing people designing your consumer product.

[308] branding and logo.

[309] I think show notes can be full HTML, so we'll just try and embed this image in the show notes if you swipe over or tap over to it.

[310] It is awesome.

[311] And the best thing is, it was used for three years.

[312] It was 97 to 2000.

[313] you know, Netflix on their next rev kind of nailed it and is basically the same logo they used today, except with a little bit of a nice brand refresh.

[314] But like the first one is it's got this little like swooshy thing and it's very late 90s.

[315] Yeah.

[316] So it's purple.

[317] It's bad.

[318] It's bad.

[319] Okay, Netflix.

[320] So what do they do?

[321] This is brilliant.

[322] And I think this is driven by Mitch Lowe.

[323] DVDs are just getting launched.

[324] Like most people don't have it.

[325] Player machines don't exist out there.

[326] How do they do get their initial customers, do initial customer feedback?

[327] They borrow a future page from Xiaomi.

[328] They go online into product discussion forums of enthusiasts for, like movie technology and like DVD product forums and they just start talking about Netflix there and like people love it.

[329] Because these things are like 600 bucks like getting a DVD player was like ooh I'm buying a catalog.

[330] It's like over a thousand bucks at this point in 1997.

[331] 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 know feedback here.

[332] Isn't it 640 by 480?

[333] Like it's not a lot of pixels.

[334] Like, yeah, I think that, I think it might even be less.

[335] Like, you know, it's, for show research here, we didn't even go back and watch DVDs.

[336] Like, I don't, I don't have a DVD drive anywhere.

[337] I don't know if you do.

[338] Like, no, I sold my old Xbox and I have no, I actually have no means to play any discs.

[339] Yeah, you know.

[340] Me neither.

[341] Huh.

[342] Well, wait, stay tuned for part two.

[343] So they officially launched the product in April 1998.

[344] Remember, they've been building all this momentum and, you know, to early customer lists from these product forums.

[345] And it's just like, they nail it.

[346] Like, the market is still tiny.

[347] But like, talk about product market fit on day one.

[348] The servers crash.

[349] There's tons of demand.

[350] You could buy DVDs from them, right?

[351] Yes, you could both buy and rent.

[352] Yeah.

[353] Yeah.

[354] 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.

[355] And then you can either keep two or keep three, depending on what plan you opt into.

[356] But I didn't realize when they started.

[357] You could also just order DVDs from them and pay for them and keep them.

[358] Yeah, totally.

[359] Well, that part of the business is going to 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.

[360] We're talking Sony, Toshiba, Panasonic, like all these Japanese and some U .S. I forget which ones are U .S. companies.

[361] Anyway, like these guys are dominant.

[362] They're so, and they know the DVD machines, like that's their next drug that they're they're going to sell U .S. consumers.

[363] So they're pushing it hard.

[364] Best Buy is pushing it hard.

[365] Circuit City's pushing it hard.

[366] Netflix goes and they do deals with these consumer electronics manufacturers to get Netflix promo coupons inserted into the boxes with DVD players.

[367] Like talk about an awesome distribution hack.

[368] Like it doesn't get any better than that.

[369] And this was a big part of their customer acquisition for many, many years.

[370] And it works amazingly.

[371] The only downside is they're giving away a free month of Netflix.

[372] as the promotion.

[373] That ends up coming back to bite them in terms of that cost them a lot of money, 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.

[374] Like, you know, we're just going to stick with VHS.

[375] It feels short -sighted to me in a different way than we normally rip on big companies that get disrupted.

[376] 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 would 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 could 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 as we'll see 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 divvics were battling it out against one another and it wasn't clear in the beginning who was going to win.

[377] Whoa, I forgot about Divix.

[378] Yeah, Divix.

[379] That's like way lesser known that even like Betamax or HD DVD or any of these alternatives.

[380] It was the Betamax of the optical disk era.

[381] 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.

[382] Netflix bet the company on DVD over Divix.

[383] I don't know why.

[384] Maybe they just were like, oh, DVD, we'll go with that.

[385] But fortunately it worked.

[386] And Divix ended up becoming like a digital, like a not.

[387] stream but like it was like a file encoder format and I used to have like a divix player on my Mac that I could like play divix files if I was downloading them from the back of a truck somewhere and oh the early 2000s 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 there are already at a million dollar revenue run rate like that's super impressive even today like startup you launch here at a million dollar 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 two million dollars well capital official 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.

[388] That's capital efficient.

[389] 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.

[390] They have to package these things in mailers.

[391] They have to ship them.

[392] They have to do all the labor to do that.

[393] They have to do the customer support.

[394] It gets really expensive to operate this.

[395] And the more you grow, the more expensive it gets.

[396] They realize that Netflix actually had this perverse aspect of their business model in the DVD streaming era that their very best customers who use them the most cost them the most money.

[397] So they realized pretty early on.

[398] Before the streaming era.

[399] Before, oh yeah, in the DVD era.

[400] Because if you're constantly rotating discs in and out, you're costing Netflix a lot of money in operations to do that.

[401] So they figure out that they need to funnel customers to really obscure niches of like back catalog titles because those don't turn over as much.

[402] Like I might really love some like random thing.

[403] It's unlikely somebody else.

[404] does.

[405] So I'm going to rent that, keep it for a long time, and then I don't have other demand for that unit.

[406] So that's how they start working on the recommendation algorithm and the personalization.

[407] As a result, it's not big new releases that drive Netflix in the early days.

[408] It's the back catalog.

[409] So Bollywood movies become huge.

[410] And this is funny.

[411] Softcore pornography becomes huge, as with all video formats, the aphorism that pornography drives innovation.

[412] Also true here.

[413] It's going to come back in a sec. So they raise a series A. There is a six million dollar series A from IVP in August 1998 to finance all of this.

[414] Reed is still finishing up at Stanford.

[415] He's just the investor, the angel investor.

[416] He's just on the board.

[417] He's not super involved.

[418] Once he finishes his master's, he gets into education philanthropy as he wanted to.

[419] He also starts this thing called TechNet, which is a lobbying group for the technology industry.

[420] It's still the largest tech industry lobbying group.

[421] I didn't realize Reed Hastings started it, like pretty cool.

[422] Um, so he starts that.

[423] He's running that.

[424] January 1999, a couple things happen.

[425] One, there's some, uh, Reed is very liberal in his politics and other people in tech, at least at that point time and still weren't.

[426] And they were like, you're running this lobbying group.

[427] You're very liberal.

[428] Like, I'm conservative.

[429] Like, this should be more bipartisan.

[430] So Reed ends up leaving TechNet.

[431] He wants to get back into the entrepreneurial game.

[432] He's like, oh, Netflix, my angel investment is kind of working.

[433] I'm going to.

[434] I'm going to to go spend some more time there.

[435] He basically just shows up and announces like, okay, now I'm going to be co -CEO with Randolph here.

[436] And Randolph is apparently not super happy about this, but like, you know, the company's growing.

[437] And Reed is great.

[438] So like everybody kind of gets along.

[439] And they initially divvied up that Randolph's going to be in charge of marketing and content acquisition.

[440] And Reed is going to be in charge of engineering and ops.

[441] This is where Reed really starts building like a world class technical team, technical and ops team at Netflix.

[442] I think this is the time when they actually name their algorithm, the Cinematch, and they start having a company -wide metric around 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.

[443] Yep.

[444] Obviously, we'll get into the Netflix challenge way later, but this is really when it starts to become really, in a lot of ways, pioneering modern data science and data engineers.

[445] Yep.

[446] And remember, they're still in Santa Cruz in Scotts Valley at this point.

[447] So Reed shows up and he's like, okay, a few things need to change around here.

[448] So one, even though they just raised this series A, they're still burning cash so fast because they're growing so quickly.

[449] They realize they need to fundraise again really quickly or like do something or they're going to go bankrupt.

[450] So the first thing that the board and Reid and Mark think is like, maybe we should just sell the company, like do a quick flip here.

[451] they and who would be the natural acquirer 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 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 Bezos is like I'll give you 12 million dollars to buy the company um 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.

[452] Netflix is like, come on.

[453] We're not going to sell the company.

[454] But how about we do a cross -promotion deal with you guys where we've got this business where we're selling DVDs?

[455] We're realizing that that's not super core to our subscription model.

[456] How about we give you that?

[457] So whenever anybody on any Netflix customers want to buy DVDs, we'll just kick them over to Amazon to buy DVDs.

[458] And in exchange...

[459] I think this.

[460] happened to me once.

[461] Oh, really?

[462] I'm now like recalling, it was in that era of Amazon doing these weird partnerships.

[463] Like when...

[464] Toys R Us and Target and all that, yeah.

[465] Yeah.

[466] Oh, man. It's crazy imagining Amazon today doing some gigantic co -branded corner of their store like that.

[467] Serious.

[468] Well, especially given what we'll see in part two with Amazon and video.

[469] So in return, Amazon is going to advertise Netflix on the homepage.

[470] Remember, this is the...

[471] era of portals and Yahoo. Which is now the most valuable real estate in technology.

[472] Crazy.

[473] So that happens.

[474] On the back of that, they start fundraising.

[475] And as they go out to fundraise, Reed is like, okay, like, I'm the successful past entrepreneur here.

[476] I'm going to take over as the only CEO.

[477] I'm going to do this fundraise.

[478] I need to be the face of the company.

[479] Come on, investors at this point need to bet that I'm going to do it again.

[480] Yep.

[481] He also, he's like, and we got to move out of Santa Cruz.

[482] We're going to move to Silicon Valley.

[483] So they compromise.

[484] they move to Silicon Valley, technically, but they move to Los Gatos, which is like as far south as you can possibly get in Silicon Valley.

[485] So probably another 30 plus minutes south of Palo Alto and Mountain View, I would say.

[486] And Netflix is still there today.

[487] 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 101 commuting.

[488] Incredible.

[489] This is a good time.

[490] So it's a pretty special a company to work for.

[491] When you think about why do people do this two -hour commute, I'm actually not sure when this notorious deck started in its first revision, but the Netflix culture is extremely unique.

[492] 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.

[493] To illustrate the point, there's two interesting things that I'll mention from Netflix's culture, one of which is that Hastings doesn't ever refer to it as a family.

[494] It's not welcome to the family.

[495] The more appropriate analogy is a sports team that we don't have unconditional love for each other.

[496] We have conditional love.

[497] 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 an amazing employee on a team, you don't.

[498] The second tidbit is that out of respect for everyone else on the team, they hold every seat to a really high regard.

[499] And so you will be let go from the company if you are not performing really well.

[500] And it's not because they're punishing you for that or anything.

[501] It's out of respect to everyone else who is still at the company because they deserve to work with an eight player.

[502] And they take the burden on this and say, we're extremely generous with severance, but we're extremely opinionated that, you know, you need to be an extremely high performer to have that seat.

[503] Otherwise, you need to make it available for someone else out of fairness.

[504] I've always thought, like, the way that all this is sort of like phrased and they came up with this is so both opinionated and thoughtful.

[505] And every little detail considered.

[506] Now, Hastings has released the deck on slideshare.

[507] And I think it might be like the number one viewed deck on slide chair.

[508] Many years ago, it was released on slide chair.

[509] And it's still.

[510] Yeah.

[511] Yeah.

[512] 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.

[513] I mean, for the right set of people.

[514] That's why they did it.

[515] Yeah.

[516] Moth to a flame.

[517] Yeah.

[518] Yeah.

[519] So one of the things that makes them different.

[520] You see Reed's personal history and shaping reflected in this culture.

[521] Like, as all companies, right, are like my partner Riley at Wave is, he always says, like, company cultures are like reflections of pure reflections of the founder, you know, personalities.

[522] And, you know, as a guy who was in ROTC was going to join the Marines and then instead did the Peace Corps and then went to Silicon Valley and became an engineer and then a CEO and then a philanthropist to like it's just all like 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 dot com crash they're like oh Reed Hastings you're raising like, how much money can I give you?

[523] He raises, within a few months, raises $100 million.

[524] Or rephrased from our last LP bonus show, how large of a percentage ownership can I have in your company?

[525] Yes, exactly.

[526] And I don't care what the check size is.

[527] Right.

[528] He raises $100 million, mostly from TCV.

[529] And we'll see, TCV ends up being an enormous shareholder in Netflix at IPO and several other firms.

[530] One of the first hires he makes after becoming full CEO of the company is Acquired superhero who has showed up in at least one other episode, probably many more.

[531] Barry McCarthy who he hires as CFO of Netflix and Barry becomes critical to Netflix's success and then does his short detour at Klingle before going to Spotify.

[532] Yeah, fast forward through that or DVD skip through that.

[533] So Barry's fame from folks who have listened to the Spotify episode is that he's the guy who's sort of conceived of and then executed the plan for the direct listing where Spotify did not actually issue new shares at IPO.

[534] They had a direct listing.

[535] Huge, huge hire.

[536] As well as several other folks, they hired Tom Dillon from Seagate to run ops for the company.

[537] Remember, ops is super important here.

[538] And then together, this new leadership team, like they all kind of figure out like sort of similar to Amazon and Prime that delivery speed for rentals, movie rentals, when DVD rentals when you order them, is huge.

[539] 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.

[540] But most importantly, that drives word of mouth and organic distribution.

[541] Like when you click rent and you get, remember this is, yeah, 1998, 99.

[542] you get that DVD in your mailbox the next day, you're going to tell all your friends.

[543] It's funny, like, how archaic it feels now because now I'm like, how could it not be, you know, actually instant?

[544] But I am remembering, I'm trying to think what year it was, probably 2000, it was the summer of 2008 because I was doing my internship in North Carolina for Cisco, and my roommates and I did a Netflix plan for our apartment because none of us were 21 yet, and so we were like, what do we do every day after work?

[545] And so we just got a really fat Netflix plan.

[546] 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 the company of the company of course but they figure this out and they realize 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.

[547] They start, like, they get really analytical about it.

[548] Like, where's our customer base?

[549] Where's it growing?

[550] Where are word of mouth hotspots?

[551] 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.

[552] Also helps them better manage inventory, everything.

[553] And then, of course, this leads to the recommendation algorithm becoming super, super important.

[554] Did you ever manage your net?

[555] Did you ever manage your Netflix queue.

[556] I'm like remembering old features now that were like critically important to the service.

[557] Did you were you were you a subscriber back then?

[558] No, I subscribed way late.

[559] I'm not I don't watch a ton of movies so it was I was not in the target market.

[560] I remember being obsessed and actually comparing my queue with friends.

[561] It was two things that were important to like compare with friends.

[562] One was like all my ratings.

[563] I'm like a completionist when Twitter was not algorithmic.

[564] I tried to read every tweet and I think I did between like 2009 and like 2017.

[565] And so like I tried to like rate every movie I'd ever seen and find it on Netflix and rate it.

[566] And I had a group of friends that totally prided themselves on doing that of being very opinionated about each of these movies.

[567] 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.

[568] And I thought, I mean, both of those systems were just genius because 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.

[569] 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.

[570] And lay the groundwork for Netflix today in streaming.

[571] One real quick, funny aside, I mentioned pornography being a big part of Netflix in the early days.

[572] Reid in 2000, he gets appointed to the California Board of Education.

[573] He's like, we need to get out of this pornography thing.

[574] So let's just, let's just, that never happened.

[575] So another thing you will never find in Netflix history, but did drive a bunch of their growth in the early days.

[576] Okay, it's 2000.

[577] Growth is great.

[578] Everybody's high flying, high -fiving.

[579] They got an A -team, you know, built at the company.

[580] They filed to go public.

[581] McCarthy's going to take them public.

[582] They have 120 ,000 subscribers.

[583] They're shipping 800 ,000 DVDs a month.

[584] Everything is great.

[585] But then the dot -com crash happens before they can actually get out and get public.

[586] they postpone the IPO.

[587] But again, they're still growing.

[588] And again, as they grow, they're burning all this capital so much so that they've burned through the $100 million that they've raised.

[589] Fortunately, the existing investors were so excited before the IPO.

[590] They wanted to buy in and get more of the company and get a pop.

[591] They invest another about $50 million before the IPO and before the crash.

[592] It turns out to be super necessary capital.

[593] But the crash happens and they're like, I don't think we can survive.

[594] Once again, they try and offload the company and sell it.

[595] time not to Amazon, they go to Blockbuster.

[596] Blockbuster.

[597] And this is where Blockbuster enters the story.

[598] So they go to Dallas, where Blockbuster is headquartered, Dallas, Texas.

[599] They meet with them and they're like, you know, we need to sell the company.

[600] We want to sell it for $50 million.

[601] I meant 50.

[602] This company's raised like $150 million at this point.

[603] Like, imagine if this transaction had happened.

[604] Blockbuster's like, eh, you seem kind of desperate.

[605] I don't think so.

[606] We're just going to crush you.

[607] Unreal.

[608] Absolutely unreal.

[609] totally unreal so for the companies that made it through the dot 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 totally and again blockbuster are not idiots they're they're really not like they at this point see DVDs are already in the market and they also see the online subscription business model and how good it is.

[610] They're like, this is why they don't buy them.

[611] They're like, we could spend $50 million on buying you, or we could spend slightly less than that and just copy you and build you and use the Blockbuster brand.

[612] And they build Blockbuster Online, which is a clone of Netflix.

[613] And it's really good.

[614] Like, you know, initially it's not so good and Netflix kind of makes fun of them.

[615] But like eventually, like it gets really good.

[616] Yeah, like the website was terrible.

[617] There's actually a really good, I recommend, so friend of the show, Caro over at Wondry.

[618] They did an episode or a little series called Business War.

[619] was about Netflix versus Blockbuster.

[620] 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...

[621] They got Accenture to build it.

[622] They didn't hire their own engineers and like, but they overcome it.

[623] They actually make it good.

[624] I mean, well, think about this.

[625] 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.

[626] 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 stores because they franchise the stores so the franchisee owner of the stores 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't offload this thing we're I guess we're going to have to soldier through so they do this is we're going to say these things, but like, I want everybody to like really think about this.

[627] They do a 40 % layoff, a 40 % riff of the company.

[628] Four out of 10 people, they lay off.

[629] Remember, just a couple months ago, they were going to go public and everyone was high -fiving.

[630] Having lived through my first two years in the working world of the 2008 recession, like, I know what this feels like.

[631] Like, bad times are bad.

[632] Like, we have been in good times for the last, you know, 10 years.

[633] Imagine that.

[634] Like, 40 % of your co -workers just gone in one day and Netflix does this.

[635] But this is what they have to do.

[636] And the way that they did it too, he called a immediate urgent company meeting.

[637] They made this decision.

[638] He calls an immediate company meeting and says 40 % of you are going to be laid off today.

[639] And then people go back to their offices to wait and see if their manager comes to talk to them or not.

[640] Harrowing.

[641] Totally harrowing.

[642] But managed about as well as well.

[643] You know, it's just like in times like this, it's either the company's going to die because you're going to go bankrupt or you need to cut the burn.

[644] This is wartime, you know.

[645] And this was also is interesting reading that Netflix book.

[646] The way that Barry McCarthy sort of was looking at this is 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.

[647] So they definitely needed that mezzanine round that they thought was just going to be to, let those investors buy a little extra equity.

[648] But it was really about what story were they going to go tell the street when they were able to IPO in 2002.

[649] Yeah.

[650] And I think they weren't quite profitable when they IPOed, but they were on track to be profitable the next year.

[651] And they needed to show that even if they were a very lean organization and they needed to be in this dot -com burst era, that they could still execute their business.

[652] Yeah.

[653] And also when it comes to this, I mean, like, such 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, dows and cut your way into it.

[654] McCarthy and Hastings are like, no, we're cutting to the bone, we're doing it right now.

[655] This is one example.

[656] There's another example we'll get to in this episode.

[657] And then there's a third example that we're going to save for the second part of this Netflix set.

[658] But Reed Hastings and Netflix management are awesome at executing these like, we made a decision.

[659] We're going to go hard at it.

[660] I know it seems insane, but we have very sound logic for why it needs to happen, and it's happening.

[661] I'll foreshadow that the next two are related to either spin -offs or spin -outs from Netflix.

[662] Indeed.

[663] Well, okay, the next year, May 2002, they finally do the IPO.

[664] This is still nuclear winter for the tech world, but they need the cash.

[665] They've gotten a profitability.

[666] They're like, we're just going to do it.

[667] We're going to go public.

[668] they raise $82 .5 million in their IPO at a market cap of just over $300 million.

[669] So they sell over a quarter of the company in the IPO.

[670] I mean, like, can you imagine that these days it's like 7 to 10 percent?

[671] Like, you know, like, oh.

[672] Well, and they're not IPOing for $300 million these days either.

[673] I know, I know.

[674] Crazy.

[675] Yeah, I joke to David and I messaged last night.

[676] Like, wow, it's a really nice, nice series B post.

[677] Yeah, seriously.

[678] Seriously.

[679] But the business is capitalized, and then, you know, they have no debt.

[680] They don't need to raise any more money and they don't, they eventually do take on debt, but I believe not until the streaming era.

[681] I think they did a tiny secondary the next month and just sold a little bit more in sort of an additional stock offering.

[682] But yeah, to your point, nothing meaningful for a while.

[683] Yeah, they're fully capitalized.

[684] So remember Randolph, the original CEO, and Lo, the guy who was running the video stores in Marin.

[685] Now that the IPOs happen, they're like, okay, great, we're going to go focus on new things like initiatives within the company now.

[686] And they start testing kiosks, Netflix kiosks, that they're going to put in grocery stores.

[687] And they're like, this is going to be a great new growth initiative.

[688] And Hastings and McCarthy, they're like, guys.

[689] And actually, Hastings at first agrees about the problem they're trying to solve.

[690] So an important detail is that Netflix is convenient in a way because you don't have to leave your house.

[691] but it's inconvenient in a way that you can't have it now.

[692] Like they constantly were struggling with this existential problem of instant is not a part of our value proposition to date.

[693] And so, you know, this is sort of Lowe and Randolph's brilliant idea of like, maybe this is the way to solve instant.

[694] Yeah, maybe this is the way to solve instant.

[695] Well, maybe it is.

[696] But eventually McCarthy and everybody, they're just like, guys, we just did a 40 % riff.

[697] We finally got public.

[698] We got to stay focused.

[699] There are no new initiatives that we're doing right now.

[700] They kill it.

[701] And wait, wait, before they kill it, though, this is great.

[702] Lowe and Randolph are so obsessed with this idea.

[703] 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.

[704] And this is so awesomely startup -y.

[705] They decide it's not worth our investment in figuring out how to actually build a vending machine that's going to vend DVDs.

[706] So we are going to task a Netflix employee to just stand there behind a lot of little like kiosk.

[707] 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.

[708] And to oversee this, Loew and Randolph actually got an apartment and moved there for a month to kind of like be a part of standing up this operation.

[709] I mean, they were stoked.

[710] It is awesome as we will see.

[711] But you can also understand why McCarthy and Hastings are like, guys, guys.

[712] Not now.

[713] The second thing that happened before they killed it is that Lowe went and talked to the CEO of McDonald's and was basically like brokering a deal.

[714] It was like, this guy freaking loved it.

[715] 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.

[716] And so Lowe brings this back to Hastings.

[717] And Hastings is like, are you freaking kidding me like our first brand impression with the majority of america that doesn't use us yet is not going to be in mcdonalds when they're waiting in line 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 macdonalds all right david take the curtain off what did this become and how did it become that so randolph and low they're demoralized Netflix has changed so much.

[718] Randolph, you know, he started this thing he was CEO.

[719] Like, you know, it's, it's time for us to go.

[720] They go.

[721] Randolph gets full time into an investing.

[722] And as we talked about chubbies and, and, and looker and all that.

[723] Lo, he can't stop thinking about this kiosk thing.

[724] He's like, I'm going to make this happen.

[725] He's like, I'm going to start a company.

[726] That company becomes Redbox.

[727] Wild.

[728] Wild.

[729] Which is now an actual very significant competitor to Netflix.

[730] Yeah, I actually don't know what's happened to it now.

[731] Like, does it still exist in the streaming world?

[732] I think it is now part of something called Outer Wall, which is they own Redbox, CoinStar, Eco -Atm, Gazelle, a bunch of these other things.

[733] Outer Wall stands for the Outer Wall of the grocery store.

[734] And it was basically rolled up.

[735] I think it's actually a Bellevue -based company.

[736] Yeah, yeah, because CoinStar was in Bellevue.

[737] Yeah, yeah.

[738] Yeah, I think maybe CoinStar expanded to become Outer Wall when it rolled up all this other stuff, something like that.

[739] But Redbox is now part of that private equity family.

[740] Yeah, crazy.

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[761] So back to Netflix.

[762] We're now in March 2003.

[763] Things are going great.

[764] The company hits a million subscribers.

[765] They announced this on their earnings call.

[766] Everyone's high -fiving once again, as we'll see, this doesn't last long.

[767] McCarthy, he's like, this is great.

[768] I've gotten, landed the plane.

[769] I really want to go be the CEO of my own company.

[770] I'm going to leave by the end of the year and do that.

[771] But I want to give everybody plenty of notice, want to give the street notice.

[772] So he announces that.

[773] almost immediately afterwards, Blockbuster fully launches, they've been testing, they fully launch Blockbuster Online.

[774] The week that they launch Blackbuster Online to the general public, Netflix market cap drops 60 % in one week, like a rock.

[775] And as we said, like it actually becomes a pretty good product.

[776] Plus they have all the marketing power of Blackbuster.

[777] And so what happens is very quickly, all of the market of going to subscription based online movie rentals, DVD rentals, Netflix was the only player until now.

[778] Every new customer in America who came to do this had to do Netflix.

[779] Blockbuster gets 50 % of new sign -ups, so of new people coming into the market, which is where the vast majority of the market is still coming in, Blockbuster takes 50 % share immediately.

[780] Yeah, and if you think about the timing on this, so when Netflix IPO, they had 500 ,000 subscribers, it's interestingly not that big of a number on the number of movies.

[781] It was 11 ,500 movies.

[782] as they say in their S -1.

[783] So it's now 2003.

[784] Netflix is barely profitable.

[785] They just turned their first quarter profit.

[786] Blockbuster launches this.

[787] This is exactly at 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.

[788] Like there is now $200 DVD players.

[789] America is buying DVD players.

[790] Our bet was right.

[791] This is just fueling our business.

[792] This is amazing timing.

[793] And so for blockbuster just nail it and launch it exactly this time is like, kneecap to them.

[794] Yeah, this million subscribers that they have up from 500 ,000 at IPO is, you know, there's what, 200 million households in the U .S. or something like that.

[795] Like, anything that happened before is irrelevant and what matters now is new sign -ups in the future.

[796] Yep, exactly.

[797] Not only does that happen, they've got a second problem, which they're even more worried about.

[798] They get word that Amazon and their one -time potential acquirer is going to come into the market and is working on building a Netflix competitor.

[799] Remember, not streaming.

[800] We're still in the DVD rental market.

[801] They announced this.

[802] They're like, we got to be honest about this with the street.

[803] They announced this on their Q3 analyst call that they think Amazon is coming.

[804] They're going to get ready for it.

[805] And McCarthy says, I'm not leaving.

[806] I'm staying.

[807] I'm going to stick it out and fight here.

[808] He actually says, on the investor analyst call, you don't leave your friends in the middle of a knife fight.

[809] This is just awesome.

[810] What a hero.

[811] And he literally like swashbuckling comes rides back in.

[812] In anticipation, not a blockbuster, not in reaction of Blockbuster, but in anticipation of Amazon coming in because I think Amazon's going to follow the Amazon Playbook and just undercut everybody on price.

[813] Netflix cuts their subscription price by almost 20%.

[814] For the first time, it's like sub -20 dollars for the big plan.

[815] Yep.

[816] unfortunately, this turns into a full -on disaster.

[817] A, Amazon actually never ends up entering the market.

[818] They do in Europe, but not in the U .S. Blockbuster sees this, and they're like, oh, Netflix is starting a price war.

[819] So now Blockbuster and Netflix get locked into a price war, and Blockbuster further undercuts Netflix, and things go like haywire, because remember, the cash burn cycle is super important here.

[820] And Blockbuster has a much healthier balance sheet at this point, too.

[821] So Blockbuster is like, wait, Netflix just cut prices?

[822] Why?

[823] Like, we can outspend them.

[824] Okay, I guess we'll cut prices.

[825] Yep.

[826] Well, they can and they can't, as we'll see.

[827] So McCarthy and Hacy, they're like, okay, we need to model out exactly because Netflix has a bunch, or Blockbuster has a bunch of debt from their old stores.

[828] And they used to be part of Viacom and then they'd spun out.

[829] There was a whole complicated transaction.

[830] So yes, they have resources, but they, They also have debt covenants.

[831] 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.

[832] And so they're like, okay, we think we have about six months.

[833] David, can you go into what debt covenants are a little bit?

[834] If you have debt, there are agreements on the debt called covenants that basically say you have to maintain certain financial health.

[835] of financial health.

[836] 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.

[837] So it's like, you don't want to do that.

[838] Now, you can go back and renegotiate with them.

[839] Anyway, lots of detail, and all this happens with Blockbuster.

[840] And just to drive the point home and put a super fine point on the on the cash cycle here, yes, there's a bit a million subscribers acquired.

[841] They hope to acquire, you know, another 100 million in the future.

[842] They're dramatic.

[843] accelerating marketing spend to be able to bring people on at a faster rate every quarter than they had been before.

[844] 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.

[845] So it's like, you know, to your point, that timing is tricky.

[846] Plus there's advertising dollars that you're spending to get those new customers.

[847] So what does Blockbuster do?

[848] They run a Super Bowl ad.

[849] And Netflix is like, oh my God.

[850] But they keep cool heads.

[851] They're like, the market is still growing.

[852] We're still getting subscribers.

[853] If anything, Blockbuster is just educating the market.

[854] They don't cut prices further.

[855] They don't get further drawn into the price war.

[856] And it basically works because we will see here, if Barry McCarthy is the acquired superhero, the acquired supervillain steps into the scene here.

[857] Carl Eichen.

[858] Of Marvel fame, of where else is he showed up?

[859] in our episode so far.

[860] I don't think we've talked about memory he was with Apple with like this guy oh my God hedge fund billionaire 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 files a proxy battle basically at the Blockbuster annual shareholder meeting to elect a separate slate of board directors that are all of his cronies he wins crazy again blockbuster is actually like being smart here their management is actually pretty good carl iken just like replaces the whole board with like iken cronies he starts bringing his son to board meetings who's just like some 26 year old dude and he's like you should give product feedback you know it's insane it's insane but fortunately the blockbuster management they managed to kind of like keep things on track and they decide with all this going on they need to raise prices back up.

[861] So Netflix and Blockbuster both raise prices back up.

[862] The tide is rising.

[863] Both companies are coexisting here in the market.

[864] Things go pretty well.

[865] Netflix is still the leader.

[866] They end 2005 now.

[867] They have over 4 million subscribers.

[868] They have a market cap of over a billion and a half.

[869] So up, what's that, 5x from the IPO three years ago.

[870] They launched the Netflix prize in 2006 that you alluded to, which is we probably don't have time to cover it in a full detail here.

[871] Maybe in the, maybe in part two, but super awesome get a ton of PR.

[872] Can any brilliant computer scientists out there beat our algorithm by, was it 10 %?

[873] 10 %?

[874] Yep, yep.

[875] Yeah.

[876] Everybody thinks that like it's going to happen very quickly.

[877] It ends up taking like three years before it finally does get a, it's 2009, I think, when the, when the prize is finally awarded.

[878] But anyway, all this is happening.

[879] Blockbuster, like they're still growing, but they realize like the bricks and mortar business is, you know, not long for this world online.

[880] And we're now in the mid 2000s.

[881] They really need to go all in.

[882] Management decides on online.

[883] And they think, what is, what is the one thing we have that we can beat Netflix on?

[884] They've realized that the turnaround time on rentals is super important.

[885] And this is actually pretty brilliant.

[886] They come up with this concept called that they market as total access, which is essentially you sign up for, yeah, this is at the end.

[887] You sign up for blockbuster online, which is essentially just a Netflix clone.

[888] And 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.

[889] So this is like what Amazon is doing with, you know, Amazon Go and Prime Now and like, this is actually like pretty visionary.

[890] It's risky because it does involve a lot of capital, a lot of ops.

[891] You know, it's like people are very skeptical that this could work.

[892] But if it does, Netflix can't match it.

[893] They have no physical footprint and blockbuster as stores all across America.

[894] Netflix is super, super scared when this happens.

[895] This is in 2006.

[896] So scared that at Sundance in the beginning of 2007, well, and they get scared, it actually makes a huge impact.

[897] So Netflix growth flatlines.

[898] Not only do they stop growing, they start losing subscribers.

[899] This has never happened.

[900] Like remember, they've just been adding subscribers, you know, quarter after quarter after quarter.

[901] It's like watching Snapchat or something.

[902] Totally.

[903] This is like, this is the Instagram stories moment.

[904] And they're so worried Sundance 2007, Reed Hastings meets with the Blockbuster CEO.

[905] And he offers essentially a merger of the two companies.

[906] And he says, Netflix will buy Blockbuster's online business from you for $600 million.

[907] So it'll be essentially like, I guess what's that like two thirds Netflix, one third Blockbuster is the ratio.

[908] I assume would be all stock and Blackbuster rejects it.

[909] They're like, no, man, we got you guys on the ropes.

[910] We have a structural advantage you don't have.

[911] We're back in the game.

[912] And then history like turns on a knife point.

[913] This is crazy.

[914] Like Blockbuster was going to win if they could execute this.

[915] But Carl Eichen.

[916] Oh my God.

[917] Oh my God.

[918] This is literally, this might be the worst self -inflicted wound in like the history of business.

[919] This makes like the Uber thing look like child's play.

[920] Carl Eiken and the Blackbuster 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 Ikin pushes him out.

[921] I can then hires a new CEO, this dude from 7 -Eleven who this guy.

[922] 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.

[923] should be paying yourself that much.

[924] Yep, exactly.

[925] And the Blockbuster CEO is like, I'm like successfully navigating this.

[926] I'm about to beat Netflix.

[927] They just capitulated.

[928] They just offered a merger and I think I'm going to beat them.

[929] And the this guy who Carl Lichen brings in, I don't even remember his name.

[930] It's not worth it.

[931] Basically like we try to be pretty even and balanced on Acquired.

[932] This guy is a total idiot.

[933] Like he is a complete moron.

[934] This is, this is like, this is like, Like, he doesn't, he says he doesn't believe in online businesses.

[935] This is 2007.

[936] Like, it's pretty clear that online businesses are a thing.

[937] Google has been public for three years.

[938] Like, you know, this is insanity.

[939] He doesn't believe in online businesses.

[940] He, his plan, he's going to totally defund Blockbuster online.

[941] He thinks Netflix is a joke.

[942] Nobody's going to do it.

[943] He wants to bring back the heyday of bricks and mortar.

[944] Wants to make bricks and mortar great again.

[945] He wants to attract.

[946] Bring back coal, David.

[947] He wants to attract the kids.

[948] to come to Blockbuster stores by selling pizza and soda at the stores.

[949] He has a plan for this.

[950] He calls it Rock the Block.

[951] God, if you were Reed Hastings, it's like, you, you got to hear this news and just have your jaw drop and be like, we're saved?

[952] We're saved?

[953] Here's the kicker.

[954] Here's the kicker.

[955] I remember this.

[956] I was working on Wall Street when this happened.

[957] Circuit City is like on the brink of bankruptcy.

[958] Best Buy does manage to survive this, but they're also at the brink of bankruptcy.

[959] Amazon is eating everybody's lunch.

[960] Again, online businesses, they work.

[961] This new CEO of Blockbuster, he's like, we're going to buy Circuit City for a billion dollars.

[962] You literally cannot make this stuff up.

[963] You know it's better than one failing business.

[964] You put two of them together.

[965] We're going to tie two anchors together and drop them into the ocean.

[966] Oh, my God.

[967] It's ridiculous.

[968] everybody, it doesn't actually happen because even Carl Eiken is like, I'm not sure that's a good idea.

[969] Have you been to one recently?

[970] Yeah.

[971] So basically everybody good at Blockbuster who was running the online business, they just resign.

[972] And it's crazy.

[973] Like in the book, they talk about the guy who was running the online business.

[974] He was really good.

[975] After all this happens, Reed Hastings calls him up and he's like, hey, let's like get dinner.

[976] And they get dinner and they talk about everything.

[977] And then he invites him out to Netflix.

[978] he does like a town hall at Netflix and they talk about the whole history and what Blockbuster Online was doing when Netflix was going.

[979] It's crazy.

[980] They all resign.

[981] We know what happens.

[982] Blackbuster goes bankrupt.

[983] All of the momentum they had around total access, it just dies.

[984] They defund the whole thing.

[985] Netflix wins.

[986] And it's amazing because like all of this.

[987] Again, once again, Netflix was at the brink of death.

[988] A miracle happens.

[989] 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.

[990] So by spring of 2009, Netflix now has 10 million subscribers.

[991] They're thriving.

[992] Nobody's canceling during the recession.

[993] They're on the top of the world.

[994] It's amazing.

[995] And that is where we're going to leave part one, because there's another thing on the horizon coming.

[996] I thought Netflix was such a like stable, boring business.

[997] So not the case.

[998] You can't stay on your laurels for long because streaming is coming.

[999] What a good place to leave it.

[1000] When we were going back in fourth last night on where should we leave it?

[1001] Should we go into quickster or not?

[1002] I'm really glad that we, uh, this feels like such a good place to, to hang.

[1003] Oh, totally.

[1004] I just like, circuit city, circuit city.

[1005] I mean, again, like, the worst, the worst.

[1006] All right.

[1007] I'm emotionally exhausted, but we have other sections.

[1008] Should we do narratives?

[1009] Yeah.

[1010] Going into narratives, I want to recap just a couple things.

[1011] things from reading the S1 last night because I think they're interesting.

[1012] So they sold 27 % of the company in this IPO, raised $82 .5 million.

[1013] No net income yet, only net losses, but about to have their first quarter of net income.

[1014] The cap table is fascinating.

[1015] So Reed Hastings owns 20 % of the company, which will get diluted down to about 15 % after the IPO.

[1016] TCV, technology crossover ventures in two different vehicles.

[1017] I'm pretty sure I'm reading this right, has 46 % of the company.

[1018] Yeah, crazy.

[1019] Pretty rare to see that at IPO, a single firm with that much ownership.

[1020] Totally different era.

[1021] You look at what they did there.

[1022] They were able to raise, I think in that, including that second little offering, close to $100 million.

[1023] They made no real promises in their S -1 about sort of what they were going to do with that in any substantial way.

[1024] 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 selection that they had.

[1025] I mean, it wasn't like when we talk about what did they do with this capital.

[1026] 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.

[1027] You know, in looking back, we tend to do this narrative section where we do Bulls and Bears.

[1028] Unlike other times like Facebook or like the SNAP IPO, it's not like there were people.

[1029] people running these articles of doom and gloom.

[1030] I mean, it was pretty, hey, this thing seems to be going pretty well.

[1031] It's not clear if it's going to work yet, but they're IPOing and it's not a huge IPO.

[1032] Well, to jump into the bear case here, all that's true.

[1033] And like, yeah, I mean, if you really looked at it, like, this was a really good business.

[1034] I mean, there was potential headwinds in the future of Blockbuster.

[1035] It was one of the only tech companies, because people had just watched all these dot coms go bust.

[1036] It was one of the only tech companies that was posting, you know, nice financials and was about to be profitable.

[1037] I mean, there's like this huge, you know, wow, it's a real business.

[1038] You should buy it.

[1039] Yeah.

[1040] But I think the bear case is, yeah, people are just still so, you know, God, human psychology hangover from the IPO crash.

[1041] They're like, oh, this CEO, like, was the largest merger in, you know, Silicon Valley history in the bubble era.

[1042] And now, like, your guys are losing money and like, I don't believe in online businesses, you know.

[1043] And also, to be fair, a fair bear case.

[1044] was, I don't know, don't count out Blockbuster.

[1045] And as we've seen, Blockbuster very well could have won here.

[1046] You know, hard to know.

[1047] But yeah, the bookcase, like you said, like, this is a good business.

[1048] Subscription businesses.

[1049] Like, could be a thing.

[1050] If they work, if you can get them to work, they can be very challenging to scale.

[1051] But like, this is why cable companies are so good.

[1052] And cable companies will come back up in part two of the episode.

[1053] Like, if you can get consumers locked in to paying you a certain amount, every month.

[1054] You can build a very stable, very predictable, very good cash flow business around that.

[1055] Yep.

[1056] All right.

[1057] What would have happened otherwise?

[1058] Let's do it.

[1059] I struggle to find any other way that this could have worked out for Netflix.

[1060] 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.

[1061] That would have been a takeout.

[1062] Carl Lichen.

[1063] Yeah.

[1064] If they hadn't opportunistically raise some cash right before they thought they were going to IPO, then they probably wouldn't have weathered the storm.

[1065] If they didn't IPO when they did, then they probably wouldn't be able to properly fight Blockbuster.

[1066] If they didn't do the 40 % layoff, like, you know, yeah, just a lot of things went their way here.

[1067] Companies, it's skill and luck.

[1068] Yeah, totally, totally.

[1069] I think maybe there is a world where they could have kept delayed the IPO long.

[1070] longer.

[1071] You know, they were at profitability.

[1072] That would have been the wrong decision, I think, because Blockbuster was coming into the market.

[1073] And access to capital in the private markets didn't exist like it exists today.

[1074] Yep, totally.

[1075] Yep, they had to do this.

[1076] Yeah.

[1077] Tech themes?

[1078] Let's do it.

[1079] The first one that I'm thinking of is like, and we've beat this to death on this episode, so it's not going to be like surprising to anyone.

[1080] But Tabula Rasa, if you come up to me and said, what wave did Netflix take advantage of to really launch them as a company?

[1081] I'd be like streaming.

[1082] But like the fact that DVDs were a wave is still a little bit mind -blowing to me that it's just very, I think how fast as humans we forget the very recent past and what was a big deal and what wasn't is striking.

[1083] Totally.

[1084] And yeah, just timing.

[1085] Like not only a big wave, but like Netflix timed it so perfectly.

[1086] And this is why we ended up breaking this episode into two.

[1087] Like these are two different businesses, the DVD part of Netflix and well, foreshadowing They really are two different businesses.

[1088] Did you know you can still go to DVD.

[1089] Actually, so they bought the domain.

[1090] Netflix has DVD .com.

[1091] Oh, no way.

[1092] And you can go and access their DVD offering there.

[1093] Huh.

[1094] Yeah.

[1095] Wow.

[1096] I wonder, I mean, there still are people who, I think they still have a few million DVD subscribers to this day.

[1097] I think, and interestingly enough from DVD .com, this is how muddle this stuff gets.

[1098] You can rent Blu -rays.

[1099] What about Dibbick?

[1100] doubtful.

[1101] Okay, I have a couple.

[1102] The biggest one, though, we glossed over a lot of stuff as we had to in this story.

[1103] This is part of why we're doing our LP program and bonus host is to get deeper into like, who are the people that like actually build these things?

[1104] And one of the decisions along the way that like operationally helped make all this happen.

[1105] 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.

[1106] Netflix is that the people in finance and marketing, and we did talk about McCarthy at Netflix, at these first generation internet companies were so good.

[1107] Like Barry McCarthy, Joy Covey at Amazon, Leslie Kilgore who ran marketing, analytical marketing at Netflix.

[1108] Like, we didn't get to talk about her, but there are so many people that are just like really, really, really good.

[1109] They tended to come from like the CPG world, like from Procter and Gamble.

[1110] And I think that's where Leslie Kilgore came from.

[1111] I could be wrong on that.

[1112] But there are a bunch of these folks in Amazon, a bunch of these folks in Netflix, and they're just so good.

[1113] And I feel like that's like a piece of DNA that's now missing in the valley is like this combination of finance and marketing.

[1114] You know, and there's like growth, quote unquote, which is sort of the successor to this.

[1115] But, um, cowboy marketing.

[1116] Yeah, it's become so cowboy.

[1117] And it's become also just so dependent on Google and Facebook.

[1118] Like, although the good growth people would find ways and tell you that their way isn't different on Google and Facebook.

[1119] There are still good people.

[1120] But, you know, this is the Barry McCarthy modeling out Netflix's online business to a T. Like he knew what month they were going to have to raise prices.

[1121] The Netflix program with consumer manufacturers of consumer electronics manufacturers to put the coupons in the boxes and modeling out exactly what that was going to cost, exactly what their growth rate was going to be.

[1122] You know, the going population, subscriber center by subscriber center, with the one -day delivery being driven by where word of mouth is occurring, like, all that stuff.

[1123] Like, that's the company -building stuff that built Netflix into, like, a great business.

[1124] And Amazon did the same thing.

[1125] So that's what I wanted to call out here.

[1126] I have two trends that I want to call out that were stated in the S -1, because one of the things you commonly see in these S -1s is it's an area called trends, but it's basically why should you believe that the wind is at our backs?

[1127] And one is one that I hadn't really thought about that much, which was the very first one I call out is the shift to viewing in home instead of in theaters.

[1128] 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.

[1129] But there was already a trend where people were like, gosh, why, you know, I can go rent it at Blockbuster.

[1130] Why would I, you know, I'll wait to see it on video and it'll be cheap on video.

[1131] And this was killing movie theaters.

[1132] But this trend was starting to accelerate.

[1133] 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's 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 cinematch and the cinematch algorithm was really good at telling you what movie you probably want to watch next.

[1134] And so they actually cited that as a sort of trend and advantage to Netflix in their S -1 to shareholders, which was interesting.

[1135] And I've got a few more, but we're going to save those for part two.

[1136] All right.

[1137] Should we grade this?

[1138] And we're going to grade the IPO here.

[1139] Yeah.

[1140] So I was thinking about this.

[1141] And I'm like, okay, let's say they didn't, because we've already covered, like, they needed the IPO to have the cash to be able to win the war that they won.

[1142] and they were close to losing the war against Blockbuster.

[1143] So even that aside, okay, why IPO?

[1144] What's the point of that?

[1145] You've got the cash position they're sitting in is $15 million in the bank.

[1146] They're not going to be profitable this quarter, but maybe the next, and it's going to be super thin.

[1147] So like you need cash from somewhere.

[1148] Why does this business need cash?

[1149] And what is the flywheel?

[1150] 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.

[1151] yet, but there's got to 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.

[1152] And you can buy deeper in the tail when you have more customers.

[1153] They eventually do do deals with movie studios as they get bigger to buy DVDs at a discount.

[1154] Yep.

[1155] So that gets you more and better content, which then makes you able to inherently, that improves the product offering, which then lets you go get more customers.

[1156] And so, I mean, it really, it's a flywheel business that they're raising cash to pour onto it.

[1157] 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 flywheel faster.

[1158] They sold 27 % of the business.

[1159] Like, good move.

[1160] 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 macroeconomic climate they were in.

[1161] So the way I look at this, they raised the most money they could, which was the good idea, even if they didn't need it for competitive reasons, which they did, it was a good idea timing -wise and amount -wise.

[1162] So, you know, it's not an A -plus for me because those are reserved for exceptional circumstances, but this is a solid A. Yeah, I think one thing I wanted to add on to the flywheel aspect, we thought about this a lot at Rover, actually, which is not a subscription business, but has some of the same dynamics.

[1163] 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.

[1164] 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.

[1165] You're not making that back in terms of the revenue you're getting from your subscribers.

[1166] You're spending more than the money you're getting back.

[1167] 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.

[1168] They're generating so much cash that you now, like, your economics tip over into the positive.

[1169] 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.

[1170] Because for anybody else to come compete with you, they'd have to.

[1171] spend the same amount that you spent along the way to get there.

[1172] Now, Blockbuster could credibly do that.

[1173] Amazon could credibly do that, but nobody else could.

[1174] And once Netflix did that, that's when, as far as the DVD business concerned, it was concerned, that's when they tipped until like, we are a awesome business, very stable cash flows.

[1175] It's the same thing with cable companies.

[1176] This is how they work or worked.

[1177] So yeah, I think it was like they absolutely needed that capital to do that.

[1178] I think, yeah, I debate A or A minus.

[1179] um certainly a range because they needed to they executed it was great they did what they had to do just the market conditions were so bad like selling that much of the company like you know um so 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 carvouts 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 N .K. Gemison's sci -fi trilogy, the Broken Earth trilogy.

[1180] These books are amazing.

[1181] Amazing.

[1182] If you haven't read them yet, if you're a sci -fi fan, even if you're not a sci -fi fan.

[1183] So three books in the trilogy.

[1184] Each one of them, the first one won the Hugo Award in 2015, I think, 15 or 16.

[1185] The second one won the Hugo Award the next year.

[1186] The third one won the Hugo Award the following year.

[1187] So, so, so good.

[1188] And just like a perfect societal commentary for, you know, the era we're into where like it's a persecuted people have an immense power that can save the world.

[1189] But they're persecuted and like so you have to give.

[1190] Anyway, it's really, really good.

[1191] Must read.

[1192] I have one.

[1193] I had a list of articles that I've read recently that I thought were good.

[1194] And then I was like, you know, I should do one that's just like something kind of fun.

[1195] And I thought it was going to be completely unrelated to the episode.

[1196] But I'm now realizing it's not at all.

[1197] there's a Netflix show that I've been watching called The Good Place and it's with Kristen Bell it is really goofy but really good and really good sort of just like popcorn you know watch it for a half hour before you fall asleep it's that it's basically like a heaven and hell 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 just like it's very tongue -in -cheek but really good.

[1198] And when I picked it, I didn't realize that it was a Netflix show, but Netflix original content coming soon in the next episode.

[1199] Awesome.

[1200] Our sponsor for this episode is a brand new one for us.

[1201] Statsig.

[1202] So many of you reached out to them after hearing their CEO, Vijay, on ACQ2, that we are partnering with them as a sponsor of Acquired.

[1203] Yeah.

[1204] For those of you who haven't listened, Vijay's story is amazing.

[1205] Before, founding Statsig, Vijay spent 10 years at Facebook where he led the development of their mobile app ad product, which, as you all know, went on to become a huge part of their business.

[1206] He also had a front row seat to all of the incredible product engineering tools that let Facebook continuously experiment and roll out product features to billions of users around the world.

[1207] Yep.

[1208] So now Statsig is the modern version of that promise and available to all companies building great products.

[1209] Statsig is a feature management and experimentation platform that helps product teams ship faster, automate A -B testing, and see the impact every feature is having on the core business metrics.

[1210] The tool gives visualizations backed by a powerful stats engine, unlocking real -time product observability.

[1211] So what does that actually mean?

[1212] It lets you tie a new feature that you just shipped to a core metric in your business and then instantly know if it made a difference or not in how your customers use your product.

[1213] It's super cool.

[1214] Statsig lets you make actual data -driven decisions about product changes, test them with different user groups around the world, and get statistically accurate reporting on the impact.

[1215] Customers include Notion, Brex, OpenAI, FlipCart, Figma, Microsoft, and Cruise Automation.

[1216] There are like so many more that we could name.

[1217] I mean, I'm looking at the list, Plex and Vercel, friends of the show at Rec Room, Vanta.

[1218] They literally have hundreds of customers now.

[1219] Also, StatsSig is a great platform for rolling out and testing AI product features.

[1220] So for anyone who's used Notions' awesome generative AI features and watched how fast that product has evolved, all of that was managed with Statsig.

[1221] Yep.

[1222] If you're experimenting with new AI features for your product and you want to know if it's really making a difference for your KPI's Statsig is awesome for that.

[1223] They can now ingest data from data warehouses.

[1224] So it works with your company's data wherever it's stored.

[1225] so you can quickly get started, no matter how your feature flagging is set up today.

[1226] You don't even have to migrate from any current solution you might have.

[1227] We're pumped to be working with them.

[1228] You can click the link in the show notes or go on over to stat sig .com to get started.

[1229] And when you do, just tell them that you heard about them from Ben and David here on Acquired.

[1230] If you like listening to Acquired and you just want more or you want to help us support the show and make it even better and somehow we just keep doing more deeper research.

[1231] And I've been super, super excited about the guests we've had on.

[1232] So if you want to help us do more of that, you can become a limited partner.

[1233] So go to kimberlite .fm, that's K -I -M -B -E -R -L -I -T -E dot -F -M -Aquired or click the link in the show notes to join.

[1234] Thanks, everyone.

[1235] And we will see you next time.

[1236] We'll see you next time with Part 2.