If you ever need clear evidence of a business's success, look for when its brand name becomes so ingrained in everyday language that it replaces a verb. Not convinced? You can Google it. It’s one of the reasons why many were perplexed by Twitter’s rebranding – millions of us “tweeted” daily, but when was the last time you “Xd”?
This puts Netflix in a rather unique linguistic and cultural, er, position, thanks to the phrase “Netflix and Chill” entering the lexicon as far back as 2009. They say all publicity is good publicity, right? And this is just one of the fascinating aspects of the story of one of the most remarkable companies of our time.
While researching for my recent blog on The Lean Startup, I learned about the fundamental rules a new business should follow to survive its early stages. The next challenge was to see how they played out in real-world scenarios with a well-known brand. As it happens, Netflix recently made headlines for "winning the streaming wars" and "having the edge over Hollywood," despite fierce competition from platforms like Disney+.
These days, the red Netflix logo is as instantly recognisable as Coca-Cola or Colgate. But unlike those iconic brands (or dear old Disney), Netflix didn’t exist 30 years ago. As startup stories go, it’s one worth binge-watching from the start. So, let’s hit PLAY on That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea, written by Netflix co-founder Marc Randolph.
Part-memoir, part-startup guide, it’s an entertaining tale of how Randolph and his small team survived those tricky first years. Here are five key takeaways as to how Netflix adopted lean startup methodology to become the company it is today…
1. Minimum Viable Product
Among the key principles of the lean startup methodology are “Validated Learning” and “Minimum Viable Product.” This approach centres around launching a functional product into the market as soon as possible to test its viability and gather feedback.
This was certainly true for NetFlix (note the somewhat awkward capital ‘F’ in its original branding), where the excitement of hearing the first 'ping' of online rental orders quickly turned to despair when the server crashed on launch day.
Who knew a “grand total” of two PCs would lack the processing power to handle DVD rentals for the entire USA?! As Randolph wryly notes: “Two servers was like trying to cross the old West with a single mule. Wasn’t going to cut it”.
A few trips to the local electronics store later, and Netflix was up and running with eight PCs and a printer that jammed when churning out address labels. Nobody could accuse Marc Randolph and his team of being held back by perfectionism!
Yet it was only by going live that these issues surfaced. Netflix’s customer base of about one hundred early adopters provided enough insights for the team to learn, improve, and grow. Meanwhile, Randolph’s emotional intelligence allowed him to avoid getting too caught up in short-term challenges and to keep his focus on the bigger picture.
His reflections on that time encapsulate the spirit of the lean startup:
“We’d designed our site so that the impact of even the slightest change could be measured and quantified. We’d learned, before launch, how to test it effectively. It didn’t matter, in the end, how great a test looked – there could be broken links, missing pictures, misspelled words, you name it. What mattered was the idea. If it was a bad idea, even more attention to detail in our test wasn’t going to make it a good one. And if it was a good idea, people would immediately fight to take advantage of it, despite obstacles or sloppiness at our end.”
2. The Build-Measure-Learn cycle
The next lean startup principle that applies here is “Build-Measure-Learn.” In other words: test a product in the market, measure the results, and iterate based on the feedback received.
Netflix had been built, but the metrics weren’t looking promising. Despite numerous introductory offers, the lack of repeat custom – people who actually paid for their DVD rentals – became unsustainable. To solve this, they needed to reach the owners of DVD players, which meant thinking big: they struck deals with Sony and Toshiba to include Netflix vouchers with every new machine sold.
Was this a masterstroke of “pivoting” (another lean startup principle) to grow the business? Absolutely. Was it a flawed scheme where people could simply pop to their nearest electronics store, jot down the serial numbers of all the DVD players, and claim multiple free DVDs from a bewildered startup? Also, yes!
Rogue orders aside, partnering with these electronics industry giants proved to be an ingenious move for the Netflix brand, providing access to thousands of customers with a clear demand for their product. “Sony made us credible – even at an incredible cost,” writes Randolph, who would later partner with Amazon for similar reasons.
3. Pivot or Persevere?
These weren’t the only instances when Netflix made the right call about whether to “pivot” – taking the company in a new direction based on what they learned – or to “persevere” – staying the course with an idea, even when the initial results weren’t obvious or positive.
Netflix’s original team astutely observed that customers of physical video stores were not always treated well, often facing the burden of late fees. Co-founder Reed Hastings’ (albeit apocryphal) origin story involves being fined for an overdue VHS copy of Apollo 13, leading him to declare that enough was enough.
While those fines were a lucrative source of revenue for rental giants like Blockbuster Video, it seems obvious in hindsight that this was not an ideal business model for cultivating strong customer relationships.
Netflix were wise to persevere with the DVD format, which was growing in popularity, but were wiser still to pivot to a no late-fees, subscription model.
Netflix was one of the first startups to recognise that customers were willing to share their valuable 16-digit card details if it meant receiving something with the magic word “unlimited”. This model allowed customers to rent DVDs at their convenience and return them whenever they chose. Ironically, it was this faceless digital company that extended more trust than the bricks-and-mortar video stores run by real people.
As well as being a brilliant “pivot”, it proved to be a tipping point for how we would consume services in the brave new world of the 2000s.
Another lesson from Netflix was dubbed “The Canada Principle”. Specifically, should they expand the fledgling Netflix service to the Great White North? At first glance, this seemed like a no-brainer: a neighbouring country that shares a common language, significant cultural overlap (including movie preferences), and convenient transport routes.
Yet what may have appeared to be a quick win and an opportunity to expand the potential market of DVD renters was, in reality, fraught with problems...
Canada has a different currency, also called the dollar, which Randolph pointed out “threatened to be a communications nightmare.” Additionally, French is the primary language in certain regions, leading to potential “translation headaches.” And for a startup whose business model revolved around stuffing DVDs into lightweight sleeves, navigating Canada’s postage costs and the need for different-sized envelopes presented further complications.
The wisdom to resist such an enticing path of expansion may shed light on why Netflix.com was one of the few startups of its time to survive the burst of the “.com bubble” at the beginning of the new millennium. They kept things simple, focusing on their core market and refraining from expanding beyond their technical capabilities.
4. Innovation Accounting
For all its smart moves, if Netflix had relied solely on the money in the bank as its guiding metric, it would have folded within weeks. Fortunately, with generous investors, including co-founder Reed Hastings, the company had the luxury of adopting “Innovation Accounting.” This approach emphasised that learning is a much more crucial metric in the early stages of a business than the figure at the bottom of a ledger sheet.
This learning took many forms, including the observation that early customers favoured purchasing DVDs outright (a single transaction) instead of renting, which would have allowed for multiple returns from the same disc.
While many companies might have superficially learned from this and opted to become DVD retailers, Netflix chose to double down on its rental operations and eliminated the option to sell discs altogether. This focused approach established the template for the service that followed: you can rent (or later, stream) from Netflix, but you can never own the content they provide.
Moreover, with its aim to transition a physical product to the online world, capturing subscribers and their data ultimately became a more significant measure of success. Rental customers generated a sophisticated data trail of tastes and trends, offering insights that went far beyond those derived from one-time purchases.
Fast forward a few years, and this is where the Netflix subscription model was born: pay $19.99 per month for unlimited DVD rentals. This game-changing approach laid the groundwork for the entertainment giant (and data goldmine) we know today. According to Statista, Netflix currently boasts 277.65 million paid subscribers worldwide.
5. Patience and Long-Term Vision
That kind of global reach seems a far cry from those crashed PCs and faulty printer. However, Netflix’s instincts and capacity to foster sustainable growth can be traced back to those early days.
Randolph wisely anticipated that the emerging technology of DVDs would be immensely popular and moved quickly to establish Netflix by collecting at least one copy of every DVD in existence. The lesson here goes beyond merely recognising an opportunity; it emphasises the importance of taking decisive action to position yourself as a dominant player, even as a startup.
And perhaps this is where diverging from lean startup methodology paid dividends... There was nothing “lean” in pursuing the best DVD archive in the U.S.; after all, they could have settled on stocking a handful of the most popular titles. However, this comprehensive collection later provided leverage for their partnership with Sony and Toshiba. Such major brands were reassured that they were working with a company that possessed a complete DVD library – a testament to the idea that Netflix’s determination and willingness to embrace at least one aspect of perfectionism would ultimately pay off.
Conclusion
In addition to offering invaluable insights into Netflix as a startup, That Will Never Work serves as a personal memoir of its co-founder.
Marc Randolph comes across as someone who embodies candour, honesty, and a significant degree of self-awareness. When it comes to “pivots,” his is perhaps the ultimate: just as Netflix was on the verge of global dominance, he chose to leave the company, realising (possibly with a nudge from Hastings) that he thrived more in the hands-on excitement of startup life than in overseeing a mature business from the ivory tower of the boardroom.
Indeed, even at the point of receiving a hefty payout, Randolph emphasised: “It wasn’t about the money. It was about what we did before we ever knew we’d get it”.
This is where Randolph’s humanity – and the value of lean startup methodology – shines through. That Will Never Work serves as an ironic nod to the naysayers who dismissed the Netflix concept. Perhaps the lesson for us is that, ultimately, the real key to startup success lies in emotional intelligence: the empathy and insight to discern not only what will work but also what won’t.
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