Netflix vs. the World (2019) - full transcript

When you're
starting a company,

you labor in obscurity
for what feels like years.

You tell your friends
what you're working on

and they kind of glaze
over or don't understand.

No one recognizes the name.

And you wonder, "Who
am I doing this for?"

- I think I remember writing
30 different bullet points

about why it wouldn't work.

- At that point, DVDs
were a rich man's game.

- Well, the worst
thing that can happen

is you divvy up the
DVDs and you come home.



- Are we actually
gonna make it?

- And he said, "I don't know
why you're taking this job.

"They're only
shipping 2,000 a day

"and they need to ship
100,000 just to break even.

"That'll never happen."

- At that time, the
studios thought,

"Oh, there's gonna be a
huge amount of piracy."

- We all believed in it
early on, and maybe blindly.

- Your parents and your spouse

are looking at you
like, "What the...

"Why are you doing this?!"

- He'd say, "Ah,
because I believe."

- Netflix began mailing DVDs

in those red
envelopes back in 1997.



Today, it brags about being

the world's leading
internet television network.

- The company better known for
renting and streaming movies

is offering TV viewers
a whole new way

to enjoy first-run shows.

And the Oscar goes
to "Icarus",

Bryan Fogel and Dan Cogan.

- Thanks to Ted Sarandos, Lisa
Nishimura, and Adam Del Deo,

our incredible
partners at Netflix.

- And the Oscar goes to...

"Roma"!

- Streaming giant Netflix won
big at the Oscars last night,

with its film "Roma"

taking home three
of the golden trophies.

- Well, and it's
changing Hollywood.

I mean, look what
happened, Disney and Fox.

Their studios won a lot
of awards last night.

They're merging because
Disney's about to launch

their own streaming service

that they're hoping is
gonna compete with Netflix.

And Apple, in the
next few weeks,

they're gonna launch their
own streaming service.

♪ The money on my mind ♪

♪ A great deal
of it will fix me ♪

♪ All I've ever desired ♪

♪ The money on my mind ♪

♪ The money got my mind ♪

♪ The money got my mind ♪

As we
approach the 21st century,

a new means of
communication is emerging.

One day, we will all be
connected to the internet.

- When I was at
Berkeley in the '80s,

I had a roommate who was a

computer science
guy and he said,

"Okay, hey, Corey, you've got
a Mac, you've got a modem.

"Let me show you this
thing called the internet.

"Whatever your
weird-ass little

hobby or
favorite things is,

"you're gonna find
2,000 other people

"who love that same thing,"
and that was hugely powerful.

- In 1981, only 213 computers
were hooked to the internet.

As the new year begins, an

estimated 2.5
million computers

will be on the network,

serving as many
as 20 million people.

- Back in the olden
days before the internet

and technology companies
created instant millionaires,

companies, publicly
traded companies,

were judged on
old-fashioned metrics

of profitability and
reliable returns.

And Netscape really sort of
reset investor expectations

and really marked
the beginning

of the dot-com boom era.

- Has the 1990s boom
shattered old assumptions

about how the economy works?

The internet evolved

into a commercial phenomenon.

Since 1991, the
economy has expanded

in what's about
to break the record

as America's longest boom.

- And it really did
mark the beginning

of Silicon Valley's first wave
of investment speculation.

Investors were
drawn to the market,

not necessarily by underlying
market fundamentals,

but rather by the promise or
the promise of a technology.

- At least at the time, it was
so nuts working at Netscape

that we had financial advisors
sending out alerts saying,

"Listen, if you've got a
Netscape bumper sticker

"on your car, take that off

"because people are jumping
in front of vehicles

"because they assume that
it's billionaires driving 'em

"and people are
looking for payouts."

- Some of these celebrities
of the tech industry

sort of distilled
what American

culture loves the most:

youth and brashness.

Nerdy dudes who
might have struggled

to get a date in high school
were suddenly rock stars

in the eyes of
the media world.

Jeff Bezos was finding himself

on the front page of
the Wall Street Journal.

- Was that initial excitement
all just a fictitious,

if thrilling,
children's story?

Or is the next
chapter for Steve Jobs

likely to be his gaudiest?

- He was in disgrace
in Silicon Valley.

He'd been booted
from his own company

and he had received a call
from an old friend of his,

George Lucas at Pixar.

George was going
through a divorce

and needed to raise some
money pretty quickly,

so he actually went
and met with Lucas

and saw some promise
in the technology

that Pixar was cultivating.

At the time, it was just
animating commercials,

but he saw that there was the
opportunity for storytelling

and for him to make
his mark in Hollywood.

- When Toy Story came out,

Toy Story was treated
like a foreign object

more than a precious

here's-a-precursor-to-the-future.

- I think it is fair to say
that Hollywood was blindsided

by the success
that was Toy Story,

its enormous box
office performance.

- Well, you know, Toy Story

has really exceeded
our expectations.

It's about $180
million right now,

I think, in
domestic box office.

It's being released
internationally as we speak.

- Yeah, well, if you
hadn't shown up

in your stupid little
cardboard spaceship

and taken away everything
that was important to me...

- Don't talk to me
about importance.

Because of you, the security
of this entire universe

is in jeopardy.
- What?!

- I would argue that
Woody, the cowboy,

and Buzz, the
brash space explorer,

they were sort of emblematic

of Silicon Valley
and Hollywood,

which needed one another,

but were apprehensive
about one another.

- So, the Netflix
story actually,

as most of these stories do,

begins quite a
distance in the past.

- Back in the early days,

Marc actually worked
for Reed Hastings

at a company
called Pure Atria.

- Reed also lived where I
lived, lived in Santa Cruz.

And a bunch of us every
day would carpool to work.

So, not only was I
working for Reed,

but also I was getting to
know him reasonably well

in this one-hour
commute each direction

from Santa Cruz
over to Sunnyvale.

- Marc called me one night and
he said, "Listen, Christina,

"I have found this
great company.

"We're gonna do
corporate marketing.

"It's gonna be 9-to-5.

"Come have fun."

And I right away said yes.

Five days later, he
said, "I have some news."

- Our big software
company was acquired

by an even bigger company.

I didn't get a job with
the new company.

I was fired.

And a smile here
because I was fired

in that wonderful
kinda Silicon Valley

golden handcuff-sy kinda way.

And what happens in that case
is they come to you and say,

"Marc, we're no longer
gonna need your service,

"but you need to stick
around for maybe six months

"helping us figure this out
in case we have a question."

And I go, "That sounds
actually pretty good to me."

And I said, "I am delighted.

"I'm gonna actually
use this opportunity

"to start my next company."

And Reed, he was
being made redundant.

But unlike me, Reed said,

"I don't think I wanna
start another company."

Reed, I believed, really
wanted to try and change

the world of education.

But once an entrepreneur,
always an entrepreneur.

Reed said he wanted to keep
his hand in, so to speak.

- So, Reed called
me in to Marc's office

and Reed looked and said,
I'm gonna be your angel.

I'm giving you $2 million
to start a company.

- This is back in 1996-97.

The internet was still
in its infancy then,

but people were
starting to experiment

with selling things
over the internet.

- At that point in time, the
only thing on the internet

was entertainment,
finances, shopping.

Amazon was not
even two years old.

And so, we started
looking at big markets,

and Marc was
particularly interested

in what was going to shift.

And so, we started looking at

all the brick-and-mortar
businesses.

The day-to-day reality of
actually how this ideation

and then validation happened
is it would happen in the car.

Reed and I had an hour
ride to Sunnyvale every day

and then we had
an hour ride back.

And so, he'd pick me up at
my house up in Scotts Valley,

which is just north
of Santa Cruz,

and I'd hop in and
we'd get in the car.

And almost
immediately, we'd

jump in to talking
about ideas.

And eventually we
kinda stumbled on video.

We said, "But
what about rental?"

That's an $8-billion business.

And even better,
people hate it.

According to
Consumer Electronics magazine,

video is clearly on the verge
of a mass market breakthrough.

By the end of 1982,
there were five million

video cassette recorders
in the United States.

Sony Corporation is projecting

a total of 40 million
video cassette recorders

in the US by 1990, an increase
of 800% in only eight years.

As this growth takes place,

it will create a demand for
convenience video stores,

stores that'll provide video
equipment, accessories,

software, and rental movies to
a neighborhood customer base

much the same way that
convenience food stores

provide groceries
and other items today.

- My dad was a
serial entrepreneur.

And in around 1980,

he opened the first video
rental store in Louisiana,

in a town called
Lafayette, Louisiana.

And it started as a
wall in a pharmacy

and bought 70 movies and
put 'em up on the wall

and had the pharmacist kind
of rent 'em out to people.

And it took off so much

that eventually the pharmacy
became a video store

and that video store became
five more video stores

and eventually
became a franchise.

- Independent stores popped
up all over the country.

And not only were
they renting VHS tapes,

but a lot of 'em were
renting the VCRs.

Because it was so
expensive to buy one,

a lotta people
couldn't afford them.

- You have to remember,
in the early-'80s,

most people didn't know
what video rental was.

This was a new
concept to everybody.

People didn't know that you
could actually own a VCR

or a device that
could play movies

and there's a place where
you could go and rent them.

So, one of the things my
parents would do at the stores

is create events to draw
people into the store

and then kind of expose
them to all the options

and kinda the
movie consumption

that could happen there.

So, they would do
things like, for kids,

have a Strawberry
Shortcake day

and have somebody dressed
as Strawberry Shortcake

who could come in and kids
could come and take pictures

and sign autographs and
they could highlight

all the different kid-friendly
movies that the store had.

Or when a new title came out,

they could have a theme around
that title, like M♪A♪S♪H.

- Your options at that
time were supermarkets,

some convenience
stores rented them.

There was a lot
of independents,

and the independents typically
were small operations

and not great real estate,

which really provided
the opportunity

for the superstore
concept later on.

- Pre-Blockbuster,
most video stores

were small mom-and-pop

operations in
bad strip centers.

The interiors
were nothing fancy.

The movie selections
often were really bad.

You were lucky if they
had one or two copies

of the top new release.

You would see huge
Playboy displays

in the middle of
a store, which,

for a store that would kids
movies and family movies,

to then suddenly have a
giant Playboy display,

now, looking back, doesn't
seem to make a lotta sense,

which is one of the
really smart things

that Blockbuster did
when they launched

was taking that
element out of the stores

and really focusing being a
family-friendly environment.

Welcome to Blockbuster Video.

Blockbuster
Video gives you

over 10,000 videos
to chose from

in over 30
different categories.

- The story is kind of

legendary in the
video industry

is that David Cook had
opened one of the first

true video superstores.

There were others
in the country,

but he opened one in Dallas.

- And then
Blockbuster came along

and literally decided
they were gonna be

the superstore
of video stores.

And they did it through
having more titles,

more copies of
the new releases.

- The great thing
about Wayne Huizenga

and the start of Blockbuster

is that he knew how to ramp up
a business unbelievably fast.

When Huizenga bought
the Blockbuster chain

from David Cook in Dallas,

the first thing he did is
he started buying chains

because he knew
that he couldn't

open stores fast enough.

He had to open
corporate stores,

he had to open
franchise stores,

and he had to acquire stores,

and that's how he was gonna
take over the business.

And his whole plan from day
one was to take it national

and do it faster
than anybody else.

Imagine
the perfect video store.

It would have a
great selection, right?

Right!

Over 10,000 videos!

Three-evening rentals,
so no rush, no hassle.

Fast checking.

24-hour quick drop return.

Open late every night.

Well, the perfect
video store...

- Welcome to
Blockbuster Video!

Is popping
up all over the country.

There's one near you.

♪ Blockbuster Video ♪

♪ Wow, what a difference ♪

- There was a business
model in place at the time

that I later called
manage to satisfaction

because the popular wisdom
in the video business

was people come
to a video store.

They don't expect to get
the movie that they want.

They'll trade off to
a different movie.

They'll rent that.

And they'll come
back two weeks later

and rent the movie
that they want

because they now can get it
'cause demand is lessened.

- Hi.

How's it going today.

- It started okay.

- Well, when
you got a good

video, it's bound
to get better.

Take care!

- My day'll get better when
this line starts moving.

- Yeah, I mean, one of the
things we were disrupting

was waiting in line,
walking up to a 17-year-old

who had no customer
service experience

who was trying to sell you

popcorn when all
you wanted to do

was rent a movie
that wasn't there.

- Being mad when the five
movies were already gone

and then having to
pay your late fees.

- So, we started looking at

who was renting
movies at that time.

The biggest was Blockbuster.

- And it turns out there's
probably a pretty good reason

why you didn't wanna do video
rental as an e-commerce play,

and the reason is
the VHS cassette.

They are big and
they are heavy

and they're not very durable.

- The movie studios,
their concept was,

"Okay, we'll put movies
out on a VHS tape,

"but it's gonna cost the
consumer up to $100,"

because from
their perspective,

if a whole lotta
people can watch it,

we're gonna get a lot for it.

- And you can make
back $100 on a rental

when you're
turning it every day,

but we wanted to
try mailing things.

So, we knew we had two or
three days mailing it out

and they keep it for
a week or whatever

and then they mail it back.

That wasn't gonna work.

And video rental
by mail went the way

of all of our other
ideas, which is discarded.

- The innovations that come
in different technologies

usually come from
some entrepreneur,

somebody who sees an opening.

The question is only
are the studios run

with enough sophistication
to spot the trends

and jump into them early?

- One day, Reed read
about a technology

that was being test-marketed
in San Francisco

and some other
cities called the DVD.

And the DVD was this small,
light, thin medium for movies.

And we were going, "That's
really kinda interesting."

- When DVD launched,
the studios realized,

"Hey, there is a market

"for us to sell these
direct to consumers

"and in some ways take the

power away from
the video stores

"and have our own
relationship with consumers

"and just sell direct."

- I really remember it

completely like
it was yesterday

that Reed and I were
probably halfway up

over the mountains
to Sunnyvale

as we were talking
about this and we said,

"There's an easy
way to figure out

"whether this is
gonna work or not,"

and we turned the car around

and we drove back down into
Santa Cruz and parked downtown

and went to one of
the used record stores

in downtown Santa Cruz

and went in and
bought a used music CD

and then went two doors
down to a stationery store

and bought a little envelope,

the kind of envelope
that you would use

to mail a
greeting card in,

and put the CD
in the envelope,

addressed it to Reed's
house in Santa Cruz,

and then we walked to
the other end of the mall

and went to the
Santa Cruz Post Office

and went up and bought a stamp

and then dropped
it in the slot

and then drove to the office

and didn't think too
much more about it.

But I think it was
the very next morning

and Reed comes to pick me up,

and he didn't even
need to say anything.

He just kind of handed
me this envelope

with an unbroken CD in it

that had gotten from the
Santa Cruz Post Office

to his house in just one day.

And I think that
was the very moment

when Reed and I said, "Huh,
this just might work."

So, it got to this point
in about September of 1997

where it was
put up or shut up.

Reed wrote us a big check,

my mother actually
wrote a check,

some other friends
wrote small checks,

and that was the start.

Now, where you start from
is a different question.

After all those years
of me having to drive

from Santa Cruz up over the
mountains to Silicon Valley,

dammit, I was gonna
try and have a company

actually that I could get
to in less than 50 minutes.

So, Scotts Valley it is.

But our very first office was
not actually an office at all.

There's a Best
Western in Scotts Valley.

And we made an arrangement
with the Best Western manager,

considering he didn't
have many conferences,

that we could use
his conference room

as our very
first Netflix office

and eventually decided we
need a little bit more space.

- When we set up our
offices in Scotts Valley,

we were in a
small office park.

We brought in folding tables,
we brought in beach chairs.

We did go and buy computers
and bring those in.

We had green carpeting,
which we thought was lucky

because it was
the color of money.

- It was about the size
of an average house.

- It was messy with
papers everywhere

and drawings of the system

and how it all's
supposed to look like.

- Yeah; in fact,
we were so cheap,

we actually kept the DVDs
wrapped in their cellophane

in case we ordered too many
and had to return them,

because we were just
making it up as we went.

- So, we had this old, I
guess it musta been a bank

'cause we had this old
bank vault in there,

like a big steel round door.

That's where we
put all the DVDs.

- The funny thing is that
we copied Blockbuster

in every step of the way

and we actually
used Blockbuster

shelves in our bank vault.

At the time, when
we launched Netflix,

there were only 3,000
DVDs in circulation,

so we had to have at least one
copy of 3,000 different DVDs.

Well, when you put one
copy and more of 3,000 DVDs

in a thousand-square-foot
space, that's a problem.

- But I did realize
it would be helpful

to have someone had
had at least an inkling

what the video
business was all about.

Then began this six-month
courtship of Mitch Lowe.

And now,
here's a special announcement

from the Video Software
Dealers Association.

From every major studio and
independent video supplier

to distributors,
accessory companies,

and thousands
of video retailers.

- The industry association

that was the Video Software
Dealers Association,

it had a board and
Mitch was on that board.

- I was going, "I've gotta
get this guy involved.

"I've gotta get
him to help us."

- I was just totally
fascinated by Marc and Reed.

I had been working behind
the counter in a video store

for, I think, by that
time, 13-14,000 hours

talking movies with people.

And here were two guys
who knew technology

and knew marketing.

And so, all I wanted to
do was to work with them.

- Our introduction to
Mitch and Mitch coming on

and teaching us the
video rental business

was the key to us
feeling confident

that we could go
into that space.

He introduced us to studios.

He brought us to events.

Mitch gave us all of that
background information

so that we could
create a web store

that matched their experience
going into a physical store.

- The intellectual stimulation

of just interfacing with Marc
and Christina were great.

We were battling it out,
and I was the naysayer.

"Hey, let's just start
with the number one thing:

"this thing's gonna
break in the mail."

- As with any of these things,

we were incredibly
lucky in our ignorance,

because it turns out
that the post office

has a totally different
mail flow for local mail.

So, local mail gets
pulled outta the stack

and they go, "Oh, it's in
the Santa Cruz Post Office,

"it's for Santa Cruz, so
we're just gonna put it

"right into the mail
carrier's route,"

and off it goes to
the person's house.

What we didn't realize

is that once we began
trying this at scale,

that mail was no
longer working that way.

It was now going to
a central post office.

- We put our first
disc test in the mail

and through the machines,

but the envelope machine is
a 40,000-letter-per-minute

steel drum roll separator.

You can imagine
all these envelopes

from all over the
world sticking together.

They had a machine
that would make sure

you separated the
envelopes together

so the sticky parts of
the envelope didn't stick.

Imagine your disc
going through there.

It was crushed.

I actually thought
we had failed

when I found out
that all envelope mail

went through that machine.

- But it just goes to show

that sometimes you're
lucky in your ignorance.

If that first disc had
been mailed in Sunnyvale,

then it might've gone through
the mail, it might've cracked,

and Reed might've come
in the morning and said,

"Oop, there's another one.

"Let's think of
something new."

- So, what we discovered

was if we could
package the DVD properly

and we could
barcode it properly,

we would know
with certainty

that that DVD
was going through

the machine that we
wanted it to go through

and it would not get broken
at the US Post Office.

- One of the first things
that we needed to do

when we started setting up
offices out in Scotts Valley

was we needed to
incorporate the company,

and so we had to
come up with a name.

And so, Marc named us Kibble

because he always said
that we needed to make sure

that we were
building something

where the dogs
would eat the dog food.

- One day in one of our
whiteboarding sessions,

we decided we needed a
better name for the company.

- To start, you've gotta
come up with something

which is evocative
and creates emotion

and communicates what it
is you're trying to do

and signals what
market you're playing in.

But there's some other
more mundane requirements.

It's gotta be a name
that you can actually get

the domain name, you
know, the dot-com, for.

It's gotta be a name that
ideally you can trademark.

It's gotta be a name that's
not being used some place.

It's gotta be a name that
doesn't mean something

deeply offensive in
some other language.

- And so, it had
to say internet

and it had to say movies,

and so we spent a very
short amount of time

going into Marc's office, and
on one side of the whiteboard

we'd list all the things
you would call the internet.

And then, on the other
side of the whiteboard

we'd list how do you refer to
entertainment, movies, video?

- There were several names.

There were 30
names on the board

and we did the classic
exercise of who likes what,

and eventually we
stumbled on Netflix.

- Netflix actually had a
yes in all the columns,

except someone else
had Netflicks, C-K-S.

And the other
problem, of course,

is people always find
problems and they were saying,

"Now, 'flix, '
doesn't that

kinda remind
you of skinflicks?

- I actually thought
Netflix at first

was a bit too
almost porn-related,

the 'flix' part of it.

I didn't like it
because of that.

- We came to a day where we
had to make up our minds.

We just had to name it.

- And so, Netflix it was.

And it's kinda grown on me.

- It was a very
interesting proposition

launching this new service.

- Before we launched,
Marc actually sent

the very first Netflix
DVD to himself

just to test the process.

He sent himself "Casino".

Everybody's gotta
watch everybody else.

And the eye in the
sky is watching us all.

No one was watching us.

That let us fly under the
radar before we launched.

- I mean, I think
it's fair to say

that when Netflix
launched in the '90s,

Hollywood was
really fat and happy

and no one really thought
much about this little threat

coming from
Northern California.

- Launch day comes.

And for us, it was
on April 14th, 1998,

and we all had gathered
in my conference room.

And we had a table set up at
one end with a computer on it.

And Eric Meyer,
CTO, had set it up

so every time an order
came in, a bell would ring.

And at the
other end of the

room, we had
set up a big table

and we had champagne
and champagne glasses

and we were all set to
kinda toast our success.

- That challenge of
launching the company,

introducing
something to the world

that nobody had ever
known that they wanted,

that was exciting.

That was exactly
why I do startups.

I knew where to go to find

the first set of
customers for Netflix.

I knew what the online
groups, the forums were.

I knew who the influencers
were in each of those.

And if I could get
them on our side,

I knew that we could launch

with just an
unprecedented goodwill

and enthusiasm and excitement.

- And as we were kinda
getting ready for the launch,

which was at 9 a.m. sharp,

we were all kind of placing
bets on what was gonna happen.

And so, 9 o'clock came
around and Eric leans over

and hits a few keys on the
keyboard and we're live.

And then we're all kinda
looking around expectantly.

And all of a sudden, ding!

Our first order, and
everyone cheers

and we all go over and begin
breaking open the champagne.

And mid-pour, ding-ding!

Two more orders,
and we all cheer again.

- The entire Netflix website
is just engulfed in people.

I mean, just
orders of magnitude

greater numbers
of visitors

than the team had predicted.

- And then,
ding-ding-ding-ding!

And we'd cheer again.

And then we're all waiting...

And waiting...

And waiting...

- We were watching
what's happening

and then the server
started going down,

so it was kinda
short-lived for

excitement of
the first day.

- We didn't have
enough capacity.

We were sending people
to Fry's Electronics

to buy more computers.

- We bought about 10
machines, I remember.

- In addition to the
two that you only have.

Addition to the only two

that we have
already in the office.

- And, boom, melts down again,
and it just keeps happening,

these cascading failures,

'cause it's such
a huge success

because it was just exactly
what that community wanted.

- You had people ripping
open cellophane packages

and just throwing boxes
all over the place,

'cause you didn't need the
box once you opened it.

We weren't shipping the
box to the customers.

We were just
shipping the discs.

It was that kind of chaos.

- We were trying to
figure out how you put

a "Sorry, we're closed"
sign on an internet store.

We did not know what to do.

We were wildly
successful on launch day.

- And we closed that
first day with 108 orders.

I mean, that was my budget
for the whole first month.

I couldn't believe
that a hundred people

had ordered from us.

- I first heard about Netflix
from my partner, Sam Bloom,

who was running business
development at the time.

He came in my office and said,

"There's a new
startup called Netflix

"and they're delivering
DVDs through the mail."

And truth be told, at the
time I was like, "Eh, okay.

"Interesting.

"We'll start keeping
an eye on it."

'Cause at the time, I
ran competitive analysis

across our competitors,

so we started to track
Netflix at that point.

- So, that first summer
was actually pretty good.

We were actually
starting to get business,

we were starting
to get traction.

And I think it was sometime at
the end of that first summer

that we had our
first $100,000 month,

and that was a
big accomplishment

'cause a $100,000
month is a

million-dollar
annual run rate.

The bad news was that
almost all of that $100,000

was selling DVDs.

- It was about that
time that Reed Hastings,

while he was on our board
and our angel funder,

he also came in and was

spending a little
bit more time

with us in the offices.

His biggest concern
was that selling movies

was going to be a problem.

- That was bad because we knew
it was just a matter of time

before Amazon sold DVDs and
then Walmart would sell DVDs,

then your local gas
station would sell DVDs.

And this nice,
healthy business

would have its margins
taken out from underneath it

and it would go to nothing
and we'd be outta business.

So, now, rental, that
was a great business

in that it had
potentially high

margins, really
defensible.

But nobody wanted to do it.

We could barely get
someone to rent once,

so we'd never hear
from them again.

And even worse was doing
both of them at the same time

was brutally difficult.

I mean, if you think about
it, you'd come to our website

and you'd be
instantly confused.

"Well, we rent movies
and we sell movies."

And then, some of the
titles could be only sold,

some of the movies
could be only rented,

and some could be both.

I mean, think of
the checking out.

We had to set up a system
that allowed someone

to buy a movie, but
also to rent a movie.

And then the
warehouse had to be able

to package some of them in

packaging to go
out and stay out

and some when in packaging
to go out and come back.

And we kinda came
to this realization

that if we were gonna be
successful, we had to focus.

We had to pick one
thing and do it well.

But of course, that then
begs the question, which one?

Do you bet
everything on selling,

which is paying
99% of salaries,

but over a matter of time
is gonna go down to zero?

Or do you bet
everything on rental,

which, if you
can make it work,

could be a great business,

but there is no
indication whatsoever

that that's gonna happen?

When you decide overnight

to walk away from 99% of
your revenue, it has a way

of focusing your mind
on the problem.

There comes a point, even when
you're testing exhaustively,

that you begin
to run outta time

and you begin to
run outta money.

And we were getting
to the end of the rope

and we still had three big
things that we wanted to try.

So, one thing we had noticed

was we have this
huge warehouse

and it's full of DVDs.

Maybe we could store them
at the customers' houses.

Maybe they just keep them

and when they're
ready for another one,

they mail it back and
we'll give 'em another one.

That could be
kinda interesting.

And we have another idea.

Right now, when
someone mails one back,

they've gotta come
back to the website

and pick their next movie.

Well, that's pretty
awkward; no one does that.

So, how about if we
have them make a list

of all the movies they
want and then we know,

when a movie comes back,

we'll just send the
top one on the list.

We'll call that the queue.

And we say, "But why does
it have to be a la carte?"

Maybe we just set
up some program

where you can do it as often
as you want, these exchanges,

and we'll charge you a
monthly subscription fee.

And Reed, in his
impatience, goes,

"We're not gonna
test these sequentially.

"We're outta time.

"Come on, chop-chop.

"We're gonna test all three
of these at the same time."

So, we launched this
three programs at once.

And amazingly, it worked.

All of a sudden,
people are renting.

And not only are they
renting, they're coming back

and they let us hit their
credit card the next month

and the next month and
they're sticking around.

And that was the moment

where we kinda
stopped being a startup

and kind of realized we've
figured something out.

If you don't
watch a lotta movies,

you may never learn
certain valuable things,

like what to do when
an animal talks to you.

- Hey, kids, Jimmy needs
your help down by the lake!

- It talks!

- Kill it!
- No, no, no, wait!

Jimmy...
- Let's make a hat out of it!

- Hold on, hold on,
everybody take a deep breath.

- Let's cook it and eat it!

But if you
watched a lot of movies,

you'd know.

- Hey, kids, Jimmy needs
your help down by the lake!

- Let's go help Jimmy!

Thanks, prairie dog!

Netflix:
all the DVDs you want,

20 bucks a month,
and no late fees.

- I was the home
video industry

and I learned
about Netflix

the way most people
in the world did,

I bought a DVD player and
I opened up a DVD player

and there's an
offer for Netflix,

which I had never
heard of at the time.

But I was
intrigued by what

they were doing
professionally,

so signed up and
was blown away

by the
DVD-through-the-mail service.

- One of the biggest
things that we did

which triggered this
recognition at this early days

was trying to jump on
top of current events.

And there was one
particular current event

that we thought would be a
great thing to latch onto.

- I'm not going to
answer that question

because I believe it's a
question about conduct that,

whatever the answer to it is,
does not bear on the perjury

because oral sex
performed on the deponent

under this definition
is not sexual relations.

- We found out one afternoon
that, lo and behold,

all the testimony was
actually gonna be released

of President Bill
Clinton's testimony

in the Monica Lewinsky case.

And we said,
"This is fantastic.

"Let's do a DVD."

- So, we actually
made that DVD

as an exclusive
for our customers

to see if anybody wanted it.

- I had never seen any title

fly off the shelf
like that before.

Every single order had a
Clinton/Lewinsky DVD in it.

And we were the
only ones who had it

and it was great
for PR because

suddenly we
were on the map

and a lotta people
were signing up,

'cause you couldn't order
unless you signed up.

- But first, we had to
actually get the DVD.

And now, Mitch was like
pulling his hair out

trying to figure out
how to make this happen,

how to download
the actual material,

how to get that material
to a DVD mastering company,

how to get the master made,

and then how to
have it all duplicated.

And he was under
so much time pressure

that we decided to
cut some corners.

And so, one of the
corners we decided to cut

was we're gonna
go without a label.

- Unfortunately,
the manufacturer

who printed those discs

got 'em mixed up with
some Chinese porn

that they were
printing for

presumably a
different customer

and we ended up
mailing those out.

- Then we begin getting
these very curious emails.

They're saying, "I'm not sure

"this is what you
meant to send me."

We're going, "Huh?"

- We thought, "Surely
that can't be right.

"Here, give me one of
this discs, let's try."

And then, "Oh my god!

"What is going on?!"

And so we sent out

a full spindle of
Chinese pornography

to people who were requesting

President Clinton's
Monica Lewinsky testimony.

And in some ways, that
wasn't that far off.

- The openhandedness,
the openheartedness,

just saying, "Well,
that was a big mistake.

"We're super sorry."

And the recovery was quick
and honest and sincere,

which then led to another
sort of brand expansion

where people said, "Oh, these
Netflix kids, you know what?

"When they make a mistake,

"they own up to it and
they rectify it quick."

And that remains an attribute
in place to this day.

- So, when the dot-com
boom happened,

it was also boom times
for advertising agencies

because all of those
brands all of a sudden

really needed agency partners

to help 'em develop
their campaign.

They had huge budgets,

and many of 'em actually had
their eye on the Super Bowl.

- Being a cat
herder's probably

about the toughest thing

I think I've ever done.

EDS, managing the
complexities of e-business.

♪ Ooh, girl ♪

♪ I just want you to stay ♪

- Early on, I think
we didn't invest

in marketing and branding

like most early
internet companies did.

We invested everything in
the customer experience.

- And it's sort of ironic

that the more successful
a company gets,

the more money it needs.

If you're adding
customers like crazy,

you lose money on customers
in the first few months.

It takes a while
to recover that.

And so, as you're successful,

the needs for financing are
dramatically emphasized.

Unfortunately, that was
accelerating into a time

when it was a very bad time
to try and raise money.

It's described

as nothing short
of breathtaking,

a points drop never before
seen on the US markets.

This closing bell might as
well have been an alarm,

so savage was the selling.

Technology stocks
even harder hit.

The Nasdaq Index in
free-fall, down nearly 10%.

It lost a quarter of its
value in just one week.

- Well, advertising
has played a big role

in the growth of most brands,

including all of
these tech brands.

So, interestingly, advertising
probably sped the death

of a lot of bad
dot-com products.

Nothing kills a bad idea

more than getting
100 million people

to take a look
at it right away

and decide that it really
doesn't do anything of value.

- When the tech-com bubble
burst and all of a sudden,

oh, the mad money
that had been spent

on Super Bowl commercials,

the 17 commercials
went down to three,

and E♪TRADE
had a little bit of fun

at its own industry's expense

in a spot that captured the
detritus of the dot-com era.

- One of the concepts in
investment in the Valley

is the critical importance
of who's running the company.

It was obvious to
Reed and myself

and our board and other people

that Reed had a very,
very different profile

amongst the investment
community than I did.

- Reed Hastings
sort of recognized

this kind of frothy
environment in Silicon Valley

of the late-'90s.

He used to joke that you could
walk around with a tin can

and have people drop
$50 million on you.

And after the bottom
fell out in 2000,

that was not the case.

- And it was clear

that if we were gonna
successfully raise the money

we needed to get
to the next level

that it probably was gonna
take someone like Reed.

- I just remember
when Reed started

and a lot of
buzz in the office

and a lot of people trying to
understand what was going on.

Was Marc being outed?

Was this disrespect
in some way?

What was happening?

Why were we shifting?

- It was difficult when we
started transitioning the team

over to Reed's team.

I felt bad for Marc
because we didn't get to do

everything we set out to do.

- It's such a common
story in Silicon Valley

is the notion of you have the
early-stage entrepreneurs,

people who have the vision,
the drive, the madness

to think they can actually

change the world
in whatever way.

And then, money people send
in the designated grownups

who can scale a
business better.

- And that ended up
being, in retrospect,

a smart thing for us to do,

because in fact
that was a time

when if we had not raised
that money, we would be gone.

And we raised that
money almost entirely

on an interpersonal,

one person
saying, "I'm willing

to bet on another person,"

and that was certainly
one of our close calls.

Almost 2001, and
the technologies that bring us

telephones, TV, and
computers are merging.

- Five years from now,
we're not gonna have

distinct cable and
telephone industries.

It's going to be one industry

and they'll be
companies carrying bits,

little pieces of information
from point A to point B.

There are also
interactive TV channels

where people order
movies on demand

instead of driving to
the local video store.

- Even though the
video rental business

was going pretty
strong in 2000,

we were really
looking at other ways

of delivering movies
and content to people.

This is a demonstration

of the graphic user interface

for the Blockbuster Enron
video-on-demand service.

Along about 2000, a company
called Enron came to visit us.

And they basically said,
very simple proposition,

we'll provide all
the technology.

All you have to do is
get the content for us.

On the right-hand
side of the screen,

again, there's
several categories.

'Just In' is basically,
as we click on it,

it is a listing
of the most

recent additions
to the service.

Enron had these
set-top boxes invented

and we actually installed
them in people's homes

in the San Francisco Bay Area.

Well, some of the boxes
actually caught on fire

in people's homes.

And not long after that...

- Congressional hearings
begin this morning

in the Enron investigation.

- Enron's fired Arthur
Andersen auditor David Duncan

will take the Fifth
Amendment today.

Members want to question
him about his role

in the destruction of
financial documents.

- And that was
the beginning of it.

In a matter of
days, it all blew up.

Guilty
verdicts in the biggest case

of corporate fraud in history.

38 counts of fraud
and conspiracy.

Lawyers for Jeffrey
Skilling and Kenneth Lay

threw around
complicated notions

about margin calls
and short-selling.

- So, in the fall of 2000,

Netflix was about
two-and-a-half years old.

And by some measures, we
were doing pretty good.

We had just finished a year

approaching $5
million in revenue.

And in fact, 2000 looked
like it could be a year

north of $30
million in revenue.

Now, the bad news was we
had accumulated losses

exceeding $50 million.

And if you can remember
what 2000 was like,

that was not a good climate
to have lost $50 million.

And so, being prudent
entrepreneurs like we are,

we decided this was
the time to pursue

some strategic alternatives.

In other words, how do we
get the hell outta this one?

And the obvious strategic
alternative was Blockbuster.

And now, Blockbuster was in
a very, very different place.

We were about
to do $30 million.

They were about
to do $6 billion.

- Blockbuster, circa
2000, we had just overcome

some difficulties, got the
business back on track.

Rental business
was growing again.

We were opening
stores and, at that point,

had about 8,000
stores internationally.

- We were nothing to them.

And so, when we
called Blockbuster

trying to get a meeting

or when we called Blockbuster

trying to explore
this, nothing.

Crickets, for months.

Until finally, about
two months later,

we were on a
retreat at a little ranch

in the hills outside
of Santa Barbara,

and we took the
whole company away.

And, you know, in Silicon

Valley, people
are pretty casual.

But on retreat, even more so.

And I think all that
I really had with me

was a couple of tank-tops
and I had flip-flops

and I had shorts, and everyone
else was dressed similarly.

And of course,
this is the moment

when Ed Stead from Blockbuster
calls Barry McCarthy

and says, "We'd
love to see you.

"Tomorrow.

"In Dallas."

And we were not
a rich company,

but we chartered
a private jet.

And to paint this
picture, I'm in a tank-top

and shorts and flip-flops, and
Reed is in a Hawaiian shirt.

So, him and Barry McCarthy
and I, we arrive in Dallas

and we take a car over
to the Renaissance Tower.

And for years, that was the
biggest building in Dallas.

And we get in the elevator,

go up to the, I don't
know, 36th-37th floor,

and we come into this room
and it's a football field

and one of those
huge endangered

hardwood board tables.

I mean, everything short
of having rhinoceros heads

on the wall.

- So, Blockbuster's
headquarters were, I think,

fairly typical for a
company that size.

I wouldn't say palatial,
but not Spartan either.

- And the Blockbuster
guys come in.

It's John Antioco
and Ed Stead.

And he's wearing like a

$73,000 suit,
so stereotypical.

- I can tell you
quite categorically

I've never worn a suit to
the Blockbuster office.

So, I have a feeling that

whoever the guy
was in the suit

wasn't John Antioco.

- And we all get
around the table

and we talk and we kinda
make our pitch to them.

We go, "We think there
is great synergy here.

"We could run your online

business, you'd
run the stores.

"This would be a
great combination."

But they finally said,

"So, what do you think
we should pay for you?"

And I remember Reed kind
of screwing up his courage

and doing the swallows,
but he goes, "$50 million."

I'm sure my memory's
playing tricks,

but I swear they
were all kinda doing

that little holding
a laugh in.

And if they weren't, they
may as well have been

'cause they found
that so ridiculous.

- I could see why
someone like Ed

would take a look at
a business of Netflix,

which was, I think,
losing money at the time

in the midst of the dot-com
bubble explosion, if you will,

and say, "Eh, I don't
think that's something

"we wanna mess with."

- So, we slunk out quietly
outta the building,

tail between our legs,
got back on the plane,

like this totally quiet
ride back to Santa Barbara.

And I swear to god I
remember sitting there going,

"Ugh, god, now we're gonna
have to kick their ass."

You know what
the best part is?

You know what
the best part is.

- When Netflix
came on the scene,

we felt vulnerable because of
the messaging they were giving

because it was emphasizing the
poor pieces of Blockbuster.

But we couldn't
work out economically

how they were
gonna make it work.

And we certainly didn't

understand the
subscription model.

I mean, "Subscriptions?

"What are you talking about?"

- So, I started to get
concerned about Netflix

when we took a trip
to San Francisco.

So, we went up
there to understand

what was driving the
subscription business

and the movie industry itself.

And so, we took
50 Netflix customers

and we interviewed
them in focus groups.

And what we heard was
fantastic customer loyalty,

even on product
they had to

wait three, four,
five days for.

What's interesting for us is
our executive team at the time

couldn't get their
head around the fact

that it wasn't sort of an
immediate gratification.

But what we heard from
Netflix customers was,

"It is immediate
gratification.

"It's in my house."

And that for me was
a sorta aha moment

that said, "No, this is
actually instantaneous.

"It just takes a
little bit of planning."

- There was this
wonderful young woman

working in our fledgling
sort of PR group

and I said, "How
are you doing today?"

And she started
crying and she said,

"If this company folds,
it'll be the fifth one

"that's folded that
I've worked with,

"and I don't know if
I can do this again."

And that's when
it kind of hit me

that this is really real and
personal for a lotta people.

- We started
running out of money

and we did I don't know how
many rounds of financing,

three, four.

- When companies go
through rough patches

where all of a
sudden you hit a point

where what you expected
to happen doesn't,

the revenues don't come in,

the new customers aren't

acquired, and
you have to adjust.

- At some point, we had to let
go of about 40% of employees.

That was pretty tough.

- The management
framed that very well,

that this is a rough time,

every company
needs to do this,

and what we're doing is gonna
make us survive the long-term.

The week leading
up to the layoffs,

there were a lot of
closed-door meetings,

but all our rooms are glass,
so there were a lotta suits.

And Netflix at that
time was very casual.

I think a lot of us thought
Blockbuster was gonna buy us

or Microsoft was gonna buy us.

And people were like,
"Oh, do we go to Seattle?"

And we are all
trying to speculate.

And then, the morning of,

I noticed there were Kleenex
boxes in the glass rooms.

- It was a necessity
at that time

to survive that
full-frontal attack.

Every department had to cut
a certain number of people

to protect our cashflow.

It shocked people
to their core.

- And what makes
it especially tough

is that the people that
you have to fire sometimes

didn't do anything wrong

'cause these are people
who quit their jobs

to come and take on something
unsurmountable.

- I didn't think it was
gonna be me, but it was.

And Reed talked to us and
we went in and had a meeting

and it was sad because
you love your job

and you wanna be there
to see how it turns out.

- I think a lot of us
felt really dysfunctional

for days afterward, you know?

Just a massive
amount of survivor guilt,

because we were so tight-knit.

- And going around that room

and asking people one after
another into your office

and they know what's coming
just breaks your heart.

But all I can do is to the
people that I've brought in

and said, "Thank
you and I'm sorry,"

is to have them feel
the same pride that I do

in what we all built together.

- There's a better
way to rent movies,

as many as you want for
just 20 bucks a month

and no late fees.

Make a list of the
movies you wanna see.

And in about one business
day, you'll get three DVDs.

Keep them as long as you
want without late fees.

Then, when you're done,
look: prepaid envelopes.

Return one and they'll
send you another movie

from your list.

It's easy.

Netflix:
All the movies you want,

20 bucks a month,
and no late fees.

- The thing about late
fees, two-edged sword.

Late fees were great
as a source of profit,

but they were the single
biggest irritation to a guest.

- Forever, late fees
are the most hated thing

about video rental.

And Blockbuster
being the big player

in the video rental business,

we got the blame
for late fees.

- So, we were now building
up all of this horror

of guests saying, "I know
I've gotta go to Blockbuster

"'cause I've got nowhere
else, but I don't like it."

And then in comes Reed
on his white Charger

and he says, "These guys
charge you late fees.

"We're gonna figure that out.

"You're gonna
pay a subscription,

have as much as you like."

And to most people who
didn't bother doing the math,

they go, "Well, that's easy.

"I don't have to get
outta my armchair,

"I don't pay late fees, and
all this stuff gets delivered.

"And those guys down there

"who've been charging
me a fortune forever,

"I don't wanna do business
with them anymore."

And so, we had
to deal with that.

- The most important
thing we could do

is enhance the brand image

because it was that brand
that was going to launch us

into the next level
of this business,

which was gonna
be digital delivery.

So, one of the rationales

behind getting
rid of late fees,

it would be very
popular with customers,

it would
eliminate the thing

most dreaded
about Blockbuster,

but it was a major decision.

No more late fees!

No more late fees!

No more late fees!

No more late fees!

No more late fees?

- What I remember most vividly

is Nick Shepherd and I walking
outta the Blockbuster office

after just seeing the
rough cut of the commercial

that we were going to
announce the end of late fees.

And all of a sudden,
they broke into song.

♪ It's over ♪

♪ It's over ♪

♪ It's over ♪

Someday, you'll
remember where you were

when you first heard

that there are no more
late fees at Blockbuster.

If you need an extra day or
two with your movies or games,

you go right ahead.

Take 'em.

Relax.

Enjoy more time
and less stress.

♪ It's over, it's
over, it's over ♪

- It's so beautiful.

- Thank you.

♪ It's over ♪

The end of late fees.

The start of more.

The new Blockbuster.

- But as we were going out
the door, I said to Nick,

"You know, it's over stuff,

"I'm not sure if we're
talking about late fees

"or our careers, but I guess
we'll find out."

- You don't do this
job for the money.

It's a long haul.

The odds are extremely low

that your company's gonna

survive, no less
be a big success.

But when
everything goes right,

it ends up aligning
everybody in success.

- I was even too young to
really know what it was.

I had never been
in an IPO before.

- But I think everyone
recognizes that an IPO

is like high
school graduation.

It's big at the time.

But with hindsight,

it's only really a
beginning of something else.

The celebrations
might someday return

to other Silicon Valley
technology companies,

but Netflix represents
one of the few successes

in an otherwise desolate
technology sector.

Oh my gosh,
these numbers are just,

not type of numbers you
let yourself think about.

- It's commonly the case
when companies go public

in Silicon Valley that a bunch
of people make a lotta money

and you start seeing fancy
cars in the parking lot.

That never happened at Netflix

because we never felt that

sort of success
and prominence.

We were under attack almost
immediately by Walmart,

and then, of course,
Amazon and Blockbuster.

- And from an
online perspective,

we were just looking
at this small company

growing double digits,
almost triple-digit growth.

And Netflix, it was
still pretty small

at that period of
time compared

to a Hollywood
or a Gamestop

with thousands of locations
and billion dollars of sales.

- We used to love when
people wrote us off.

There was a couple
Antioco quotes

where he said stuff about
us being niche market.

I think that's the line

that we all used to
always joke about.

We were great 'cause we
didn't get attention.

No one really
was re-engineering

us, and we loved it.

- The customer
affinity to that brand,

the loyalty that
brand had was so high

and the word of mouth on
that product was so good

that clearly we
should address it.

- Reed's sort of
a big-picture guy

and he wasn't worried
about the pennies

on a day-to-day basis.

He knew that if he could get
an installed base of users

that he could keep them and
he could eventually figure out

how to make money from them.

And he would also be able
to work with the studios

to make it worthwhile
for the studios.

And so, he went all out
just to build a user base.

Now, that user base had
to come from somewhere.

Well, guess what: It
was coming from us.

And so, on the one
hand, we've got a model

that the guests don't like.

And on the other,
he's got a model

that the guests kinda like.

- I mean, one of the
biggest motivating factors

was disrupting Blockbuster,

making the world a better
place to rent movies.

- And it actually
took a guy like Shane,

who eventually sat
a number of us done

and said, "You
oughta think about this.

"Think about how
this might play out.

"Think about the economics
of not being in our business

"versus the economics of
being in our business."

And he made it brutally clear:

If we didn't get into the
online business and fast,

our economics would tumble.

- In 2002, we recognize
we need to have

an offering
against Netflix,

there's no
question about that.

- So, after listening to
a lot of heated debate

for quite some time, I said,

"Look, here's the
way to solve this.

"I'm gonna give
Shane a budget."

And as I recall,
it was $25 million,

and I'm gonna say, "Get
a small group of people,

"get an office, get offsite,
and get this business going."

- Luckily, our parent
company, Viacom,

owned a building down the road

in an area of Dallas
called the West End.

There was a building called
the Paramount Building.

- And so, for us, it
was like a gift, right?

We get $25 million, we
get the Blockbuster brand,

and we get to get away from
what you would consider to be

sorta this corporate culture

that may sorta hold
down a startup business.

So, for the
Blockbuster Online team,

we were part of this
giant $6-billion company,

but we really felt like
we were the little guy

going up against the giant.

Everybody knew
Netflix at the time.

- We don't have
any subscribers.

They've got well
over a million.

We have no idea
what we're doing.

They're a
well-operated machine.

And we now have
to figure out a way

to build a culture that
wants to attack them,

that wants to kill
them, basically.

- And at the same time, you
can't market in our stores,

you can't use
our customer list.

You have to do this
truly on your own.

- So, we had to come up with
the best consumer proposition

to compete against Netflix,

so we came up with
two main objectives.

One was have more titles.

They had 20,000 titles.

We were gonna
launch with 25,000 titles

and have an
in-store component.

You could get
unlimited discs online

and two free in-store
rentals when we launch.

- So, we had to be scrappy.

And so, like
David and Goliath,

any rock we could find
we throw, we'd throw.

- To get to 25,000
titles was no small feat.

Now, to get that many, there's
just not that many around.

I think we had one

that was a fireplace
burning on a television.

We also were
hampered a little bit

because we couldn't put more
risque movies out there.

The Blockbuster brand
was a family brand.

- So, we had a team
of guys in our office

who would watch these movies

to make sure they
were Blockbuster

appropriate and approved.

- So, there were certain rules
that we had at Blockbuster

that you could have
and you couldn't have.

So, for instance, you
could have frontal nudity,

but you couldn't
have full-frontal nudity.

- So, literally, our film team

would have to watch these
movies through a hood.

So, you would
walk through the hall

and there would
be a team of folks

looking through a monitor,

watching movies at high
speed with headphones on

to try to determine

if they were Blockbuster
appropriate or not.

And the saddest
thing in our office

is when you would have a guy

who would watch
two hours of a movie,

and then in the
last few minutes

you would hear
him scream in agony

because it would
cross the threshold

at the end of the movie.

- We've got six months

and we are now gonna
reverse-engineer Netflix.

The first thing we do

is just rip apart their
website, obviously.

This was not a static website

that you could just go
in and copy the words

and copy the layout
and copy the pricing

and think that
you've now caught us.

What you're
missing is the data.

You're missing all
that understanding

that comes from
knowing the reason

why this headline
is in 18-point type

and this one's in 12,
rather than vice-versa.

- Netflix had a
huge headstart on us

from an online perspective.

They knew how to acquire
our customers effectively.

They knew how movie ratings
and recommendations work.

There was a lotta
things that they knew

that we basically
had to try to learn

in a condensed time period.

- We made it so that when
you showed up at a website

or I showed up or
someone else showed up,

everyone got a
different experience.

It was personalized.

And it wasn't
just personalized

based on what you
might like as a movie.

It was based
on things like

what movies do
we have in stock?

It was based on

what movies do we have
better financial terms on?

It was based on, once
we had regional hubs,

which movie do we
have in stock near you?

And all these things
would go into the choice

that of course happens on
the internet in an instant

of what 10 movies
we choose to pop up

and have you pick from.

- Obviously, the distribution
operations was a big deal.

They were starting to
get overnight delivery.

And everywhere they
had overnight delivery,

their penetration rates
were significantly higher

than when they didn't.

So, we sent people into
their distribution centers.

And we didn't do it under
any false pretenses.

We went there and said, "We
are subscribers of Netflix.

"We think it's fantastic.

"We saw where the
return envelope was.

"We just wanted
to check it out."

And they opened the
door and they let us in.

Not only that, they
let us take pictures.

They described exactly
how the discs came in.

They described exactly
how the discs went out.

They described how they
cycle-counted a disc,

how they kept
track of the discs.

It was a real good
education for us.

They did figure it out though,

because we want back
a couple more times

and they finally said,
"No, no, we're done.

"You can't tour the
facility any longer."

Later, we actually hired
a person from Netflix,

and he was on
a conference call

with one of
their operators

and they were not
happy with the fact

that Blockbuster got a
carte-blanche movement

through their
distribution centers.

- What we learned was that
Blockbuster had sent people in

to look at our facility
and see what we did.

And we did the same thing, not
as much perhaps as they did.

But at one point, I sent
some of my hub managers over

to interview for
jobs at Blockbuster

and they would give
'em the grand tour

and then they'd come
back and report it all.

When our people looked at
what Blockbuster was doing,

it looked like it
was two years

behind what we were doing.

- This machine is a standard
first-class mail postal sorter

that Netflix rebuilt
to do many things.

We put these DVDs
in this machine,

and the barcode on the
DVD is read right there.

And from there, it's sorted
for various purposes.

- Netflix had a lotta media,

and so, obviously, their
PR strategy was brilliant.

And one of the things they did

is they had videos of their
distribution centers online.

They also had a lot of photos
of their distribution centers

and the packing material

and the machines that were
kicking stuff in and out.

So, in fact, we
used those pictures

to call the same firm
to build our machinery.

- We knew that we had lots
of press coming through.

And to make
sure no one knew

where our
automation came from,

we relabeled all the equipment

with fake names
and fake cities

so that if they went to go
and try to buy it from there,

they'd discover
it doesn't exist.

- Hey.
- Hey.

- Your movie came today.

"Alien", right?

I'm not quite sure where I...

What is this?!

What's happening?!

It's coming outta my...

You're gonna like it.

- So, before we launched

Blockbuster
Online to the public,

we had what's
called a soft launch,

which is basically the
service was operational,

not available to everybody,
and we sent invites

to limited friends and
family and employees

to stress test the system.

- Funny enough, we see
Reed Hastings sign up.

We see Barry McCarthy sign up.

So, we see a whole
bunch of Netflix URLs

start to make its way into
our Blockbuster Online signup.

And so I said, "Apparently
we have their attention."

It's July 2004, we're
about to launch,

and Netflix announces that
they're gonna take their price

up to $21.99.

And we are like
it's Christmas.

One, we've done all
this market research

that says anything
about $20 is bad news.

And two, we're gonna
launch at $19.99

and be underneath them.

- So, I remember the launch
day for Blockbuster Online.

- We had organized
a giant launch party

at the Granada
Theater in Dallas.

This is it!

This is a sign!

- This is your
wake-up call, pal.

We have this big launch party.

We're not sure we should
go to market yet or not.

- Challenge was the site
was maybe not quite ready

for public consumption.

- And so, we launch,

and every 30 minutes we
have to restart our servers

so the system stays up.

- Literally, it was
almost like the hamster

turning the wheel behind the
scenes to keep the site up.

- They had a great brand.

I mean, they were the one
company that we all feared.

In fact, there was this

analyst who
still is out there,

Michael Pachter,
who called them,

we were like the little dog

yapping at the
heels of the big dog.

- One of Reed's quarterly
messages to the company

was how to take
down Blockbuster.

- We needed to do a lotta work

to figure out what
flexibility we had on pricing.

We had taken it
up, and we were

gonna have
to take it down.

- And then Netflix drops
their price to $17.99.

We clearly now
have their attention.

So, we now have to make a
decision: What do we wanna do?

I wanna drop the
price point to $17.49.

- "Shane, that's kinda
kissing your sister, right?

"If we're gonna undercut them,
let's go for it: $14.99."

"14.99?!

"You're crazy!"

- John was always a guy who
wasn't afraid to move on price

if he thought there was a big
pickup in volume to be had.

- We had an inferior product.

We didn't have as many
distribution centers.

We couldn't get the
movies to the people

as fast as Netflix can.

- John's logic is we
don't have that many,

they've got a lot; they can't
drop the price to get us.

- Netflix has two
million members.

If they drop their price $5,
that's $10 million a month.

That's about
$120 million a year

at their existing
subscriber base.

I don't think they'll do it.

- His bias was always just
go right to the customers,

give 'em great value,
give 'em a great something

that really plays back
into a lower price.

Lower price, more value;
the customers will love it.

I mean, it's that simple.

Don't over-complicate it.

- "And as a matter of fact,

"let's go on the Super Bowl
with a commercial at $14.99."

- I'm gonna pick up a
movie from Blockbuster.

- Okay, drive safely.

Now, Blockbuster
is as close as your mailbox.

Introducing
Blockbuster Online.

Choose your movies online.

Receive and
return them by mail.

Enjoy unlimited rentals and
keep them as long as you want.

Plus, get two free in-store
rentals every month,

all for just $14.99.

- So, I've got a Blackberry.

So, every hour on the
hour, I get an update

as to how many
subscribers we're getting

on the Super Bowl itself.

- And so, literally,
in that next hour,

we signed up the same
number of subscribers

we were normally
seeing in a day.

Then the next hour,
that number doubled.

Then the next hour,
that number doubled.

And basically, the day
within the Super Bowl,

we signed up as many people

as we had signed up
in the previous month.

- And I remember
looking at Ben

and saying, "We
got something here."

- With the price increase,
there was two sides.

There was circle the
wagons and do what's right

and let the model show that
they couldn't handle it.

And then, of course, the other
option was to lower prices

and get into a price
war with Blockbuster.

- Even assuming that they
were as efficient as we were,

we knew actually
that those early months

were gonna cost 'em a lot

and they were aggressively
underpricing us.

- So, we could model what
Blockbuster was getting

from their customers.

But at the lower price, they
were never breaking even.

They were burning cash.

- When we left Viacom,

we had a board that was a
pretty supportive board.

And that all changed
after the proxy fight.

- Motorola is a
perfect example

of how Carl
Icahn operates.

He's been making demands
in order to jolt up

the sagging stock price.

First one: Dump the CEO.

That happened in December.

Then break up the company.

- All Carl could see was,
"You guys are very expensive,

"you make a lotta money."

And so, when we
were talking to him

about how we're saving costs,

I remember
talking to him about

how we were
closing stores,

integrating stores, and
how that saved money.

And it was like, "We
don't believe in numbers."

His goal is always the same:

to reap a heft
profit for himself.

He's been successful,
say Wall Streeters,

because he's
intimidating and relentless.

- So, now you have Carl coming
in with a couple of his guys,

didn't listen to anything.

And Carl, I mean,
you couldn't get Carl

to kind of focus on anything.

And so, they didn't
come in and say,

"Let me understand
your business."

They came in to tell us
how to run a business.

And I can remember sitting
in the first board meeting,

which was meant to be
an acclimation meeting,

help them understand
the business.

I don't think I had
gotten to slide two

before these guys
are throwing ideas

and, "You guys
haven't tested this

"and you should
be doing that."

And one of the guys
said, "People buy jeans.

"Why don't you take
some movies off the wall

"and put jeans on the wall."

And you go, "Genius; I wish
I'd thought about that one."

- We had launched
our online service

and I was desperately
looking for a way

to leverage the stores as
part of an online service.

So, in a meeting with
Shane, we talked about,

"Wouldn't it be nice
if our online customers

"could exchange their
movies in our stores?"

- Our observations
and our research

showed that this was actually

really interesting
to consumers,

the idea that you can
get a movie in the mail

and take it in the store and
immediately get another movie.

One of the things that we
always knew about our services

is that you couldn't get
instant gratification.

You actually had
to wait for the mail.

And we optimized
our distribution centers

so that it would be
one day each way,

but that's as good
as it would be.

Well, you could just drive
to the store and do it.

So, that was actually scarier.

- We read the results.

The results were fantastic.

We've put the media together
to launch Total Access.

We do a big to-do with
Jessica Simpson in November

where John and
Jessica go out there

and she talks about how Total
Access is the best thing ever.

- They hired Jessica Simpson
to be a spokesperson.

Netflix couldn't
afford a celebrity

of her caliber at the time.

So, this was a pretty
intense competition.

- I never understood the
financial market support

of Blockbuster through it all.

I mean, they kept
giving 'em money.

And we were struggling
month-to-month,

but we had the better model.

- We had I wanna say
a half-a-million subs,

it mighta been 750,000
subs in two months,

and absolutely pupt
Netflix on their heels.

And so, we now get
into the first quarter

and they go negative for the
first time in their history.

In the second quarter, we pick
up 115% of the market share.

We have absolutely got
them dead to rights.

- I mean, at the time, the
stock went down to $1.50.

There was a lotta questions

if we were gonna survive
three major attacks

from Amazon,
Blockbuster, and Walmart.

But we were confident
in what we had modeled.

We always believed that
anybody could get into this,

but that nobody else
could make money

and offer the service
as successful as we did.

- Thank you.

Change is inevitable.

And some people fight it,
and some people embrace it.

- Sundance, to Blockbuster,
was a pretty big deal.

- So, we went ever year.

We got to meet
with the studios.

- And for me, what it was is,

"Hey, this is an
opportunity for Blockbuster

"to intermingle with
the film community,

"to look at opportunities
to acquire content,

and quite frankly
to kinda relax

and do a little skiing
when we weren't working.

- Once we started
getting kinda big,

we would take the whole
company out to Sundance,

people going on skiing
trips and taking lessons

and coordinating huge
dinners for everyone,

and it was a lotta fun.

- Netflix had made Sundance

one of their key
pillars early on

and they would take
lots of employees there,

so we wanted to
see what type of vibe

was around Netflix
at Sundance.

- So, we're strolling
the streets of Sundance.

It was one of my
favorite times of year

to bask in all that
Hollywood kind of stuff.

I was walking with Nick
Shepherd and his phone rang.

And so I said, "Hey, Nick,
what was that about?"

"It was Matthew Smith.

"He just got a call from
Ted over at Netflix,

"and Reed would
like to see you."

"He does?"

I said, "Okay.

"So, I guess, set it up and
I'll go see Mr. Hastings."

- You have to understand,

Netflix just won't
even recognize

that we have an
online business, right?

So, it was very,
"Blockbuster who?"

- I mean, Reed
said a lotta things

that were basically poo-pooing
Blockbuster's ability

to get into this business.

- But that particular
Sundance,

so we'd just had a
couple of quarters

where we'd sort of
whooped on Netflix.

- We put a million
subs on in six months,

which is the fastest
subscription business

to a million people
you've ever seen.

And so, we finally
have their attention.

- Next day, it's off
to see Mr. Hastings,

and we drive to his villa.

And I enter the premise
and Reed says, "Hi, John.

"Congratulations."

I said, "What's
that about, Reed?"

He said, "Total Access,
having an impact."

Both Netflix
and Blockbuster Total Access

give you the
convenience of movies

delivered right to your home.

Except, with Netflix,

to get new movies, you can
only return by mail and wait.

But with Blockbuster
Total Access...

- Hey, I don't have to wait!

You can also
return movies at the store

and exchange them for new
ones at no extra charge.

- So, you get
new movies faster.

Yay, more movies!

- Total Access was different.

It was really problematic

because Blockbuster was
leveraging an asset,

the stores, that
we didn't have,

and we had no
way to match that.

- And at that point, he said,

"Well, you guys really
don't have any business

"being in this business,

"so why don't we just
buy your subscribers?"

- The thing was we'd
lost our confidence

because here these insurgents
have come into our business.

They were picking us off

because of things
we'd done in the past,

things we hadn't got right.

And they were making
a kind of big deal

of stuff like late fees and
all of this sorta stuff.

And then, all of a sudden,

"No, no, we're stopping
them stealing our business."

Now we're getting it right
and they can't get it right.

So, we felt pretty
good about that,

so now our confidence
has started to come back

because you go, "There's
a future for our business.

"They're wrong.

"We can get this business
really motoring."

- I personally never had
an interest in selling it,

but felt like I
had an obligation

to talk to the board about it.

- John calls me and he says,
"Netflix has made an offer.

"We need to go
talk to the board."

At the time, a lotta
those board meetings

were in New York
in Carl's office.

Carl asked me, he said,
"Well, what do ya think?"

And I said, "I wouldn't
sell at this point

"because we're
pushing 'em so hard

"that they're either
gonna pay more later

"or we're gonna be profitable.

"One of those two things
is about to happen, Carl.

"At five million subscribers,
we're profitable.

"We're at two-and-a-half now,

"we're gonna be at four
by the end of the quarter.

"Or Netflix comes
in and offers

us well over $1 billion."

So, at that point, we make
the decision not to sell.

Now, what I also don't know

that happens at
that board meeting

is Carl decides not to pay
John has agreed-to bonus.

- It didn't sit right with me.

Honestly, if they'd
come and they'd said,

"You know, this is
a significant bonus;

"the stock price didn't
have a great year,"

I don't know, I mighta
given it some consideration.

But it wasn't going
to be unilaterally

them deciding to
violate my contract

and not pay me what I earned.

- When we first heard
about John Antioco

facing off Carl Icahn, we
knew he had his hands full.

- We didn't have
any control over it,

so we were just watching,

not really knowing
what was gonna happen.

- You can't have a business
that's fighting for its life

in an environment
which is changing daily

and not have a board who
aren't supporting you,

challenging you,
but supporting you.

The agendas were different.

I don't know quite
what the agenda was,

but it was certainly
wasn't the agenda

of making
Blockbuster successful,

'cause they didn't
contribute to that.

- It was time for a change.

I'd been successful
enough financially.

I was at a time in my life

where I wanted to spend more
time at home and family,

so it just seemed
like the right time

to transition the
business to someone else.

- John sits us all down.

He says he's gonna leave,

which is a tough
day for all of us,

it was like knife
in the heart,

and says they're
gonna launch a search

and bring in a new CEO.

And we're all thinking digital
expertise, movie background,

something to transition
us into this new space.

- My hope was that
they would give the job

to Nick Shepherd,
the president

and COO of the company,

who understood the business,
understood the challenges,

and, I think, understood
what Blockbuster had to do

to move forward
in the business.

Instead, they made
a different decision.

- Jim Keyes, now our CEO,

gets us all up to
Rough Creek Ranch.

First question he asks us,
he gets us all in a room

and he says, "Who here
thinks Blockbuster's

"in a lotta trouble
and going bankrupt?"

And everybody raises
their hand but me.

And Jim looks at
me and he says,

"Shane, how are you
not raising your hand?"

And I said, "Well, Jim,

"we have the offer
to sell the company.

"If we're going to not invest
in the online business,

"let's just sell the company

"and we'll get rid
of all the debt."

- You do the math,
that's a billion dollars.

And so, that's a very
attractive number,

especially if you've got
$720 million worth of debt

on your balance sheet.

- Jim had a billion-dollar
tagline that he wanted to say:

"Movies any way."

And in that
billion-dollar tagline,

you had to keep the online
business operational

because you could
deliver it in the store,

you could
deliver it digitally,

and you could
deliver it by mail.

- Working 18-, 20-hour
days for months on end,

and to have that,

being told that we're gonna
be done with the online deal

and we're gonna
reengage in the stores

felt like kind of a
losing proposition.

- When we heard Jim Keyes say,

"We're gonna make
the stores great again,"

we thought, "Really?"

- The day was coming for
the end of the store.

That was the point
where we realized,

"Okay, we think
we've won now."

- When he exited
Blockbuster Total Access,

I knew it was not a good sign;

in fact, so much
so that I said,

"I'm gonna buy some
Netflix stock," and I did,

and I bought a
lot of Netflix stock.

- I remembered poor Jim Keyes
was gonna buy Circuit City,

and that was just like, "Wow."

That was like the Titanic

is gonna merge
with the Hindenberg.

It was just like, "What
are you thinking?"

- I remember being on
my back porch, crying.

We spent three years and we
developed a great product.

We had 'em.

We were gonna be that retailer

that actually
cannibalized itself,

that moved from a store
business to a digital platform

and transitioned
out, and Jim ended it.

- It wasn't long after we
sort of won that battle

and all of a sudden we
were starting to work on

what at the time we
called downloading,

which didn't
materialize that way

because the studios
wouldn't let the movie

be captured on a device, so it
became the streaming project.

We never gushed profit.

We were always operating
very leanly and efficiently

and Wall Street always
wanted more from us.

So then, it pivoted
to, "What do you do

"about this opportunity
to stream movies

"and how much
we spend on content

"and where are we gonna get it

"and how are we
gonna get it to the TV?"

- I remember most
is a lot of conversation

about trying to figure out
how to convince consumers

that this made sense

and wasn't the craziest
thing they'd ever heard.

- The first two
years, it was free.

At that time, no one knew
how to hook up their internet

to their television
in their living room,

and so there was a
whole kind of learning,

like, "Is it worth it?

"How do you do it?

"Can I only watch
it on my laptop?"

- The first thing,
again, that I did

was I sat down with
a lot of TV executives

to try to figure out
what is this right

that we're trying to acquire?

- And the studios began to
strike distribution deals

that they considered
found money.

They were taking advantage
of the dupes at Netflix

by charging
exorbitant fees for

the right to
stream content.

And Starz was one of the first
to strike a deal with Netflix

that provided access to Disney
films and to Sony films,

like Spider-Man 3.

- I know what it feels like.

Feels good.

The power.

- This was a pivotal moment

in the development of
the streaming service.

It finally gave Netflix access

to mainstream cinematic
content that it could use

to build and popularize
its streaming service.

- This was a
wonderful, easy payday.

I license content to Netflix.

I get money.

I make my quarterly numbers.

This is great.

What they've discovered
though as they've gone further

is that, at a macro level,
what they were doing

was actually helping
Netflix get big,

that Netflix got big on
the backs of their content.

And then, once they
were big enough,

they were able to
create their own content

and they didn't need
the studios as much.

- I mean, a real key
moment for Netflix

was when it realized it should
be on every single device,

from your phone to your PC

to your gaming console
to your streaming box.

Xbox 360 will
be the only game system

that lets members who are
also Netflix subscribers

instantly watch more than
10,000 movies and TV episodes,

more than doubling our
current content offering.

- By 2010, it was pretty clear

that you did not really
have a new hardware platform

unless Netflix was on it.

And so, it was
completely logical

that when Apple announced
the first iPad that year,

they really played up Netflix
being one of the first apps.

Later in 2010,
Apple had an event

where they had Reed
Hastings come out on stage

to talk about the fact

that Netflix was
arriving on the iPhone.

- And it's my
pleasure to introduce

Netflix CEO Reed Hastings.

Thank you, Steve.

Thank you, Reed.

- Two months ago, we launched
the Netflix application

for the iPad, and it's been
a tremendous success for us.

It's now one of our
fastest growing platforms.

It's just incredible.

The customer ratings
in the App Store

are some of the highest
of any application.

It's been one of the top 10
most downloaded applications

in all of the App Store.

And in particular, in the
entertainment category,

the Netflix has
been the number-one

most downloaded application.

- Well, Blockbuster
is getting ready

for a bankruptcy filing
in mid-September,

according to the LA Times.

The home rental
company informed

six major Hollywood movie

studios about
the plan last week.

Blockbuster has lost more than
a billion dollars since 2008.

It's carrying about the
same amount of debt.

Now, the paper says that
Blockbuster plans to close

between 500 and
800 stores this year.

- There wasn't any great joy

or there wasn't any
backslapping or anything.

It was like business as usual.

- Not that Netflix
did anything

other than not
go out of business

while Blockbuster
was screwing up.

- It's a shame, but it's
the reality of the business

that Blockbuster was in,
in the store business.

There was nothing
that was going to save

video rental stores.

- Hello, welcome
to Blockbuster!

Can I help you find something?

I can't find Turner & Hooch.

Where is Turner & Hooch?

- Oh, I believe we
have that over in the...

Oh; oh, I get it.

Video stores are so old
they have ghosts in them.

Okay, thanks.

I get it.

But you're wrong!

- I do remember the
South Park episode.

The common perception
was we were going away,

and that was just, that was
their way of talking about it.

- It was really sad to
see that a Blockbuster,

and there were
plenty of other chains,

got put out by Netflix.

That, I think, was the first
indication by the industry.

They're like,
"Oh, these people

"are doing
something innovative."

- Reed Hastings is brilliant.

Reed is a visionary.

- At the strategic points, I
think Reed brought that vision

with the subscription, with
the focus on downloadable.

From the beginning, that was
in his head and in his ideas.

- You know, Reed is the
smartest guy I've ever know.

- Every time he had an
idea, it was just exciting

and it was like, "Well,
maybe that will work."

- He was really a visionary
who saw the streaming.

- In the context of this time,

where Netflix
had just launched

very successfully
in Latin America,

growth was at expectations,
US growth was off the charts,

everything Netflix
did turned to gold.

Netflix was invincible;
it was unstoppable.

And we kinda knew that.

- We never, at any point
in the streaming business,

said, "You have to
protect the DVD side."

We said, "Let's
grow this business,

"and it might have a
little impact on DVD.

"It might have a negative
impact on our DVD business,

"but it's gonna
grow the overall."

- Eventually, in
2010, the belief was

you could separate
out the two services.

And of course, that was a
huge challenge at that time.

There was the
raising of the price.

There was the
separating of the services.

- We're making
this video today

to apologize in person,
or at least on camera,

for something that
we did recently.

- The video, Reed apologized
for the price increase,

admitting that he
slid into arrogance

and said that that was,

"We wish we had announced the
price increase differently,

"which is why we're now
taking the time on video

"with Andy Rendich

"to explain how DVD and
streaming are separating."

- We think that the DVD
service needs its own brand

so that we can advertise it.

So, we've named our
DVD service Qwikster.

- Qwikster was
the name given to

what was to be the
DVD-by-mail company.

All the DVD-by-mail
subscribers

were gonna go have
their own account.

It's gonna be its own company.

Andy Rendich was named CEO.

They had their
own office space.

They moved outta the building.

Netflix management
meetings were separated.

And it was truly a division
of the two entities.

And consumers hated it.

It was the right strategy,

but it was implemented
far too aggressively.

I remember actually
more of the fallout

than the actual filming

because Saturday
Night Live did a parody

of the video that Reed
and Andy Rendich shot.

- Did we spell Qwikster
in a normal way?

No, we didn't.
- No.

- Q-W-I-K;
annoying, but easier.

- Right, yeah.

And by the way, we
know it's off-putting

to see the CEO of
a powerful company

rocking a goatee
and teal shirt,

but trust us,
we know what we're doing.

You know you're
a successful company

when you became
the source of parody.

- The whole Qwikster debacle,
that was not the first time

that influencers
turned against Netflix

or that I'd seen influencers
turn against other companies.

That's part of the dynamics.

You're tapping into
people's primal passion.

- There was
significant backlash.

Netflix lost 880,000
subscribers,

almost a million subscribers.

The punishment by
the market was severe.

They devalued Netflix by
about 70% of its market cap

in about three months.

And that lasted
for about a year.

- When I first read
the news about Qwikster

and saw the
community up in arms

about this unbelievable,
horrendous,

disastrous thing
that had taken place,

all I could think
to myself is,

"Oh my god, I know exactly
what's going on here."

Reed was looking at the
business and saying,

"I have to be willing to
sacrifice the business

"which is the past and
put everything I have

"on the business
which is the future."

And where I did that with
several thousand customers,

he was doing it with 30
or 40 million customers.

And I said, "Oh my god."

That may not have
been handled perfectly,

but that is one of the
most courageous things

I've seen an entrepreneur do.

- For us, navigating the
unknown is always the future.

Using this kind of
data that we have,

which can help
us identify great

filmmakers
and great actors

and the size of audiences
for certain shows

and all those things,

we set out to begin to produce
Netflix original series.

And that first one
is "House of Cards".

- When Netflix announced,

"We're gonna start
dipping our toes

"into original programming,"

I think a lot of Hollywood
thought, "Wait a minute.

"These are the guys who
just mail us our DVDs

"and they're streaming
movies now too,

"but what does this really
mean in the big picture?"

What is it you want?

- Your absolute,
unquestioning loyalty.

- And I remember
seeing this

big billboard with
Kevin Spacey

for "House of
Cards", and I was like,

"What is this new show?"

And I saw it was on Netflix.

I was like, "Well, Netflix,

"that's where I get my
movies from every week,

"but I never thought
of it as a place to go

"to watch original
programming."

- The idea that we had to kind
of out-angle everybody else

to get it on Netflix,

the story
behind that really

was us convincing
David Fincher

that this would
be a great place

to take this really
risky bet for himself,

coming out of feature
film and into a TV series.

And the way that we got
him excited about it

was pointing out to him how
different it was gonna be

from every other
kind of television.

- They actually outbid HBO.

HBO was kinda
vying for that as well,

the David Fincher series,
'cause it's a big production.

You have David
Fincher, Kevin Spacey.

Who wouldn't want the project?

But Netflix threw $100
million at it for two seasons.

I was like, "Wow, they
just out-punched HBO,"

which I always, for me,

it's the premium of
all premium networks.

So, I was really
impressed with that.

- I know it's changed
how we think about

how we're gonna
watch television.

I don't think anybody's
gonna reserve

a night for a
show from hereon.

I think people are gonna
expect it to change for them,

that if you want any sort of
serialized storytelling form,

then you should
have it available

as the consumer
can consume it.

And we don't have those
lives that we used to be able

to organize around
Thursday nights anymore.

- Yeah, being a part
of something like that

that gets people talking,

whether they
were talking about

it or not, is always nice.

- And they've really
kind of changed

what is water-cooler talk.

It's instant.

People are talking about it
right away on social media.

You look at shows like "13

Reasons Why",
"Stranger Things",

"The Crown", "Orange
is the New Black".

- I think "Orange
is the New

Black" really
set Netflix apart

from your cable
providers and broadcasters

because it had this huge cast
of just really diverse women,

women that we really
haven't seen before,

women that aren't featured
in a lotta content.

Some brand new
actresses were introduced

that people have fallen in
love with over the years.

- A lot of us in the very
first year of this show,

most of us did not have any
fame or anything like that,

and we really went through
this journey together.

- It's also the true
representation

of what the world is.

I know diversity
is a trend now,

but this is what it really is.

And the stories
that are being told

and that we've been
working on have connected,

not only in America but
throughout the world.

- It was a brilliant
move on their part

to go the original
programming route,

because of course we see
where they are today,

this powerhouse.

People want their
shows on Netflix.

- Do you know Will?

Do you know where he is?

- Hiding.

From who?

- Run!

- I work really hard on

everything that
I'm involved in,

and I'm doing it so that
it reaches audiences,

so that when it turns
out to be something

like "Night at the Museum"
or "Stranger Things"

or "Arrival", things
that find a big audience,

that's very, very satisfying

because it means that this
story that I found interesting

connected with millions of
people around the world.

So, that's the best
part of that success.

- I think there's data, they
actually know what I watch,

but I don't think they

recommend
stuff that I'll like.

I think they recommend stuff
'cause they need to justify

that they made
an investment in it,

'cause they love bragging
on earnings calls

about the ROI
on the $90 million

they spent
making "Bright",

which was a piece
of crap, by the way,

as was "The Cloverfield
Paradox," a piece of crap,

and they bragged, "Oh yeah,
Super Bowl ad was worth it.

"We had more
views of that movie..."

Well, had you heard of
"The Cloverfield Paradox"

before the Super Bowl?

No.

I had, 'cause I
cover movie theaters

and I knew Paramount
was making it

and had delayed it
twice and canceled it,

and Netflix bought
a piece of crap

and then recommended
it to all of us.

And they're like, "ROI!"

I think that hurts them.

I think if they have
you watch crap,

you are far more likely to
go, "I hate this company

"and I don't wanna be
a subscriber anymore."

- What's really interesting
about the amount of money

Netflix spends is
they're spending

tens of billions of dollars

on their original
programming and acquisitions.

They're not making that back.

Does it matter to
them right now?

I don't think so.

I think they have a much
longer-term plan in place.

- They can spread out
the cost of their content

over millions and
millions of subscribers.

That gives them the ability
to pay more than a studio

that's got to make money
on that particular film.

So, today, I think they see
them as a huge competitor,

both on the content side as
well as the distribution.

- I do a lot of
work with Netflix

and I like the fact that
stories are stories.

That old idea that, "Well,
there's movies up here

"and then there's TV," no.

That's obsolete.

Now there's just good stories.

And it doesn't matter whether
you watch them on a big-screen

or a laptop or a phone.

The strength of good

storytelling is
everywhere now,

and I think that that's
a really good thing.

- Hollywood talent,
actors, A-listers,

probably weren't taking this
very seriously at first.

- It doesn't affect our
process of making the film

in any obvious ways.

It may, before
we get to shooting,

in terms of what
you're talking about

or does it reach
the most people,

it definitely has
something to do

with the way
films are marketed.

- I think it helps get
films out to the world,

films that I wouldn't see

that are being done in
different parts of the world,

filmmakers from
the Philippines

or India or wherever,

these little movies
that you get to see now

and these filmmakers
that are really talented

that you get to
finally see their work.

And it's inspiring
to see that.

It hurts it only because
they see everything now,

so you have to really
try to challenge yourself

to bring something new

and something
special to the audience.

They can binge all night long.

- The internet is transforming

so many sectors
of our economy.

And we're internet TV,

and that sector has grown
from very small 15 years ago

to starting to be
significant now.

And in the next
10 or 20 years,

internet TV is
gonna be all of TV.

- I think Netflix has changed
Hollywood because their model

is unlike anything
that we've seen before.

- Netflix is not changing
the global market.

It's totally
revolutionizing it.

We have a system in France.

First, the movie are
released in theaters,

and then 18 months
later they're on Canal+

or pay TV or the pay TVs,

and then we have them
on network television.

- I think that
Netflix is a machine

that brings your passions out.

Either you hate
it or you love it.

Let's say if you're a
small distribution company

and you only
distribute theatrical,

Netflix is not gonna
be your friend.

- I mean, the kids, they're
not watching TV anymore.

They're going back to that.

They're watching the
show however they want

on whatever they want,

on the phone, on their
tablets, on their computers.

They don't watch TV anymore.

And when they watch TV,

they watch Netflix on
TV with their parents.

- The studios, they're not
sure what to do about that.

I mean, they do
the tent pole movies.

They make the big Avengers
movies that come out,

and these are the movies

that millions of people
are gonna go see

and make billions of dollars.

But in the long
term, what do we do

to keep people
watching our stuff

in between the
three or four years

it takes to make one of
these tent pole films?

And I think they're
reacting to that.

I think it's causing a lotta
these mergers to take place,

like Fox-Disney and
AT&T and Time Warner,

to compete to pull all
their resources together.

That's why Disney
is coming out

with their own
streaming platform,

because they wanna be like,

"Hey, you wanna
come watch our stuff.

"Not gonna be on Netflix

anymore; you
gotta come to us."

- I mean, Netflix is valued
like a Silicon Valley company.

But as they start to look

more and more like
a media company,

and as media
companies such as Disney

try to take on
Netflix more directly,

at some point you have to ask
yourself whether it adds up

that the valuations
are different.

- Warner Bros. Was
an $84-billion deal.

Fox is a $90-billion deal.

So, Netflix is worth
more than Warner Bros.,

HBO, and Fox combined?

That's crazy.

And if you don't think
these studio heads,

these CEOs of these
companies recognize that,

they're bitter about it.

They're gonna win back
their economic rent.

- All the tech giants are
competing with Netflix

in one way or another.

Amazon is doing
it very directly

with Amazon Prime Video.

YouTube now has YouTube TV,

which is sort of a
cable-TV-type service.

Netflix has such a
headstart these days

that even these
really smart companies

have a pretty steep
road ahead of them.

And Netflix is
doing that well.

They're spending their money
wisely, and you can tell.

I mean, they're
growing every day.

- You're like one of the
big new media disruptors.

Why did the entertainment
industry need to be disrupted?

- I think people
in our industry

gravitate to disruption
because of the challenge,

because it's a sense of change
and impact in what we can do.

And to be able to watch TV
shows any time you want,

it's a nice, friendly
kind of disruption.

- Midnight that Sunday night,
my phone starts ringing,

and ringing, texts
coming through.

"You gotta see this,
you gotta see this.

"You gotta do it,
you gotta do it."

"What are you talking about?"

- Despite the fact
that Blockbuster

filed for bankruptcy in 2010,

there are apparently four
independently owned franchises

still operating in
the United States,

three of which are in Alaska.

- So, I got up the next
morning and watched the clip,

and then I started to
understand what he had done.

- It does sound like something

that we would do;

you know, buy Russell
Crowe's jockstrap

and send it to one of the
last remaining Blockbusters

in Alaska.

Even that sentence
is absolutely

incredible to
say out loud.

- So then, the deal was is
that we wanna buy this stuff

and we think we wanna give it

to the last
Blockbusters in Alaska

to help out their business.

Okay, great deal!

- Are you not entertained?!

Are you not entertained?!

- It did generate
a lotta traffic,

a lot from tourists
that knew about it,

and they would come
in just to see that.

Of course, we'd
try to sell 'em

something when
they came in,

but a lotta people didn't
buy anything.

But, yeah, there's no
doubt it generated traffic.

Unfortunately, it
didn't help it enough.

Alaska's last
two Blockbuster video stores

are calling it quits, leaving
just one store open in the US.

The closures come
just two months after

the host of HBO's "Last Week
Tonight with John Oliver"

sent film memorabilia
to the Anchorage store,

which displayed it in an
effort to ramp up business.

The closures will leave the
Blockbuster in Bend, Oregon,

as the sole holdout.

- The nostalgia effect

of the closure of
these last few stores

has exceeded
anything I anticipated.

And you can see by
all the national press

that picked up these stories,

it added to the negative
emotion of all of it.

But it's business, you know?

We had no choice.

War is a universal language.

- The one true of the
entertainment industry

always has been producers
want to distribute

and distributors want to

produce and
actors wanna direct.

And so, everyone
always has a fantasy

about doing the other thing,

and ultimately
what they wanna do

is to get the best return on
investment for their content,

and Netflix turns out to be

the best way that they can
get that return in this space.

And if they thought
they could do it

better and bigger on their
own, they probably would.

And they have
experimented over the years

and they have always
not worked out well

because it's a different,
very different expertise.

- The reason AT&T is
particularly interesting

is because they
might be able to use

their ownership
over the pipe to say,

"You can get lower-cost
access to my streaming service

"than you could to Netflix

"because with Netflix,

"you're gonna have
to pay for your data,

"whereas with my service,

"I'm gonna give you
the data for free."

- The one company that always
terrified Netflix is Amazon

because Amazon, like
a few other companies,

can subsidize content
through selling dog food

and barbecues
and things like that.

Netflix has a couple

of unique advantages, right?

One is they have
this headstart,

both acquiring the customers
and they've got a headstart

on creating their
own unique content.

They're able to use the
content to attract customers

and use the customers to
attract great creators

who wanna make content.

- I think there's gonna
be six or so big players

like Amazon, Hulu,
Disney, Netflix,

and then hundreds
of niche players

that cater to every
different choice out there.

- I don't know, it's that
whole thing of theater

versus seeing it
on your television.

I'm glad if people see it.

I don't care so
much in what format.

- Well, I think
that's something

you learn early in life.

Movies are for the world.

And I never make a movie
without knowing now

it is gonna travel the world.

- I just hope the
discussion between Netflix

and platforms in general and
theatrical should be over.

I think that those guys should
get together and just realize

that whatever they are
doing with discussion

is hurting cinema.

They both together,
they can elevate cinema.

And more important,

they can create that
diversity in cinema.

- I think the legacy our
founding team gave Netflix

was building a fantastic

foundation of
creative innovation.

- When your company
becomes a verb,

that means you
achieved success.

So, when people started
saying 'Netflixed it, '

it felt really, really great.

- There were proof
points along the way

that we knew that
we were doing our job

of embedding Netflix
in popular culture,

making Netflix a
household name in America.

- It goes back to disrupting
an old way of doing things

and making people's
movie experience better.

And to be part of that is
something that I look back on

and say, "Yeah,
that's pretty cool."

- I'm incredibly
proud of the fact

that this tiny group of
people took a chance.

- I trust that the things
that we established

at the very beginning,

that the fundamentally
important

thing about this business

was provide entertainment
that people love,

that if you can just
keep on doing that,

that as long as people like
consuming entertainment,

there's gonna be a place
for a company like Netflix.

- We were listening to
a Netflix phone call.

- And Reed Hastings gets on
one of the earnings calls

and he says, "They've
thrown everything at us

"but the kitchen sink."

- At which point Ed Stead got
up, left the conference room,

came back later, I don't
know, within an hour

and said, "I just mailed
Netflix a kitchen sink."

- And a couple of days later,
this large carton crate

arrived at the Netflix
office and we pried it open

and it was a kitchen sink.

- I think I remember seeing it

and saying, "What?

"Why?

"Perhaps that's why
they're not doing well;

"they're taking time to do
things like this."

Well done, Ed.

And to Reed's credit, he
sent me an email the next day

thanking me for
the kitchen sink.