by Gina Keating
“We’re small enough that we don’t want to incite World War II or World War III with the incumbents,” Hastings said in early 2011, shortly before Netflix announced that its subscriber base had surpassed that of number one U.S. cable provider Comcast.
Hastings seemed to guide his company by stars invisible to others, often abandoning solid revenue sources or related businesses to pursue the one thing he was determined to do better than anyone—rent movies online.
Where Hastings pursued that goal, Wall Street analysts and the financial press saw only a seemingly simple business model (a software program, a bunch of warehouses, and some DVDs) and bigger companies with the means to buy what Netflix had invented. Their bleak forecasts resulted in frequent meltdowns for Netflix’s stock price, which appeared not to bother Hastings. That his judgment proved correct, even visionary, in the face of market pressures was an added attraction to a story I believed showed the best of entrepreneurial culture in America.
It was in the wake of the terrible stock market crash of 2008 that I began to contemplate writing what I believed was a Wall Street fairy tale, in which the best ideas, a clean balance sheet, and the flawless execution of an inspired business plan allowed a company like Netflix to vanquish a bloated corporate giant or two and come out on top.
I got that and a lot more, starting with a conversation I had with Netflix’s other founder on a bright, windy day in Santa Cruz, California.
• • •
I WASN’T SURE what to expect when we met for the first time at a breakfast joint in Los Gatos in August 2010—no one else had been able to tell me the circumstances that had led to Marc Randolph’s departure from the company he helped found.
The fit, animated man who walked up to my outdoor table dressed in a fleece pullover and jeans showed every sign of enjoying a rather footloose life since leaving Netflix. He sat down, ordered eggs Benedict, and plunged into a tale that upended a lot of what I thought I knew—starting with the story of how Hastings’s late fee for Apollo 13 resulted in the founding of the company.
“That’s a lot of crap,” Randolph told me. “It never happened.”
He explained that the Apollo 13 story started as “a convenient fiction” to describe how Netflix’s rental model works and became confused with its origins, because people wanted “a rage against the machine–type story.”
Six months and several conversations later I persuaded Randolph to show me where the true Netflix founding took place, which was on a quiet stretch of downtown Santa Cruz.
At Randolph’s suggestion I took a commuter bus from Silicon Valley “over the hill,” on winding Highway 17 to simulate the drive he and Hastings made each day from their homes to and from the Sunnyvale offices of Hastings’s software company, Pure Atria. On that commute in early 1997, they tossed around ideas for a new business that Randolph planned to start when he left Pure Atria, then in the process of merging with its largest rival, Rational Software.
Randolph, then head of corporate marketing, had long been particularly fascinated by how consumers respond to direct mail—catalogs, mail-in offers, coupons—or what most people, including Hastings, considered junk mail. Randolph saw in the Internet an instant way to monitor consumer response to such sales pitches, adjust the online “store” to make it more inviting, and theoretically boost sales. “Direct mail on steroids,” he called it.
The drive on the two-lane mountain road through fog and forest was nerve-racking, and I felt as though I had arrived in a quaint Alpine ski town when the bus stopped to let off passengers.
Randolph picked me up in his immaculate Volvo station wagon at the tiny bus station in Scotts Valley, an affluent bedroom community in the foothills of the Santa Cruz Mountains where he had lived for about fifteen years. His Victorian farmhouse, tucked away on fifty acres of forest, is about three miles from Hastings’s former home, a square yellow Victorian about a block from the ocean in Santa Cruz.
We drove to a nearly empty faux Mediterranean office park off Highway 17, where he and a team of about a dozen marketing specialists, programmers, and operations staff launched the Netflix Web site on April 14, 1998.
Hastings, who was studying for a master’s degree in education at Stanford University and running a tech industry lobby group at the time, came that day to wish them luck. The one-room space of about a thousand square feet, where Randolph ran Netflix for nearly two years, was at the back of the complex.
Next we headed three miles south, toward Santa Cruz. Randolph followed the coastal road and pointed out a wide, neatly groomed path curving along cliffs overlooking Monterey Bay, where prosperous-looking adults strode along in pairs and threesomes, wearing baseball caps and fleece jackets bearing tech company logos.
What looked to me like groups of stay-at-home moms and dads taking exercise and sanity breaks actually could have been staff meetings of homeless tech start-ups. Randolph told me that many business plans and deals are hammered out along this stretch of road.
Santa Cruz, especially the section populated by well-to-do residents on the west side of the San Lorenzo River, is vehemently antigrowth and antimansion, and even fought a widening of Highway 17 that would have shortened the hour-long commute to Silicon Valley. The town’s east siders share their wealthy neighbors’ isolationism—not so much to keep out vulgarian McMansion builders as to preserve a surf-shack culture reminiscent of a 1960s beach party movie.
We turned north toward the center of town, near where the Pacific Coast Highway runs inland for a few blocks through a tony little business district, before it heads back toward the California coastline. Randolph parked the Volvo at a meter on Pacific Avenue, and we began to walk—past a vintage movie theater, a few upscale chain stores, and local boutiques.
He pointed out a café called Lulu Carpenter’s, a hip coffee joint where people sat out front at sidewalk tables in the weak morning sunshine. He and Hastings often met at this café to discuss business—and formed the plan that brought Netflix to fruition.
One particular day their debate centered on how to distribute the movies they hoped customers would rent via a hypothetical e-commerce Web site, and they decided they had to test whether the new DVD format that Randolph had heard of could travel across the country on a first-class stamp and survive the hazards of bulk mailing.
They couldn’t get their hands on a DVD, then available in only a half-dozen test markets, but a used book and music store called Logos Books & Records a couple of blocks down the street sold compact disks. When we drove up that day a giant Borders bookstore was liquidating its stock and preparing to shut down, another casualty of the inexorable move to online distribution of media that its parent company embraced too late. I wondered if Logos’s staff had any idea of the role their iconic indie store played in helping Netflix bring down another huge bricks-and-mortar entertainment chain.
A few doors down from the record store was the gift shop where Randolph and Hastings bought a greeting card with an envelope large enough to accommodate the CD after they stripped off its packaging.
They threw away the card, stuffed the CD into the envelope, and addressed it to Hastings’s home. They then walked to the central Santa Cruz post office, where they paid for first-class postage and sent the CD on its short but crucial journey.
They would later learn, through close collaboration with the U.S. Postal Service, that local mail was hand-canceled in Santa Cruz and not sent through postal service sorters—a fact that could have changed everything had they known it then, Randolph told me.
A day or two later, the two met up for their morning commute to Sunnyvale.
“It came,” Hastings told Randolph, as he climbed into the car. “It’s fine.”
“And I thought, ‘Huh, this might work after all,’” Randolph said, as he drove me back to the bus station. “If there was an ‘aha moment’ in the story of Netflix, that was
it.”
CHAPTER ONE
A SHOT IN THE DARK
(1997–1998)
THE DAY HE FOUND OUT he was about to lose his job, Marc Randolph thought, “I’m going to start a business.”
He had no idea what sort of business, only that he wanted to sell something on the World Wide Web. His new company would be the Amazon.com of something besides books. He wasn’t sure what, exactly.
It was early spring 1997, and a few months earlier Randolph had become the head of corporate marketing at a Sunnyvale, California, software company called Pure Atria.
In late 1996, Pure Atria had acquired the nine-person software start-up for which Randolph worked as chief of product marketing. He figured he would lose his job in the merger, but Pure Atria’s thirty-six-year-old cofounder and chief executive, Reed Hastings, had asked him to stay and promote Hastings’s rapidly expanding company.
Randolph spent the dawn of the Internet age at a series of short jobs at start-ups after devoting seven years to building a direct-to-consumer marketing operation at software giant Borland International. He found the intense bursts of highly creative work suited him, especially when the companies were acquired or went public, and he and the other managers exited with healthy severance packages, chunks of valuable equity, and time off.
It was a common dance in 1990s Silicon Valley, a verdant and sunny groove of flat land sandwiched between the southern reaches of the San Francisco Bay in the east and the Santa Cruz Mountains in the west. Start-ups bloomed for a year or so, watered by plentiful venture capital dollars, and were quickly swallowed up by private investors or large, rich companies fishing for the next big innovation in software, biomedical engineering, telecoms, or the ever-evolving Internet. It was the new gold rush, and venture capital investors would pour more than $70 billion into Silicon Valley start-ups before the decade was out.
Things moved so quickly and money was so plentiful that most entrepreneurs had no chance, or any need, to turn a profit, or even run to their companies for long.
The pace was grueling, and everyone was expected to bring his or her top game each day for months of sixteen-hour days, until it was clear whether a fledgling business would fly or crash. The money was easy, but in exchange the entrepreneurs had to return tens, if not hundreds of times the VCs’ initial investment.
Extreme risk was part of the equation and a factor that everyone—down to landlords and office equipment rental companies—took for granted, because the payoffs, when they came, were mind-blowing. And when things didn’t work out, it was no big deal to shrug your shoulders and hop onto the next great idea.
Thinking that he could use a few months off to travel with his wife, Lorraine, and hang out with their three small children, Randolph hesitated to accept Hastings’s offer to stay at Pure Atria.
The company made software for detecting bugs that often cropped up in computer code when multiple developers worked on it. Its customers were other businesses that developed software programs. Pure Atria was founded in 1991 by Hastings and Mark Box and had grown rapidly through a series of acquisitions; it had new offices in Europe and Asia, whose marketing departments would report to Randolph.
He would have felt no fear or stigma at the prospect of being let go with a nice severance—jobs were plentiful in the Valley, and as a cofounder of a glittering roster of start-ups, Randolph knew he was a catch.
Staying at Pure Atria was a high-pressure job, but next to the hectic software development schedules, long days, and chaos of start-ups, the regular hours and steady if unexciting task of promoting Pure Atria seemed like leisure to Randolph. He met with Hastings a couple of times and decided his prospective boss was intense and extremely smart.
Despite having completely opposite personalities, Randolph and Hastings had a lot in common. Both were East Coast transplants from wealthy families who attended small private colleges and wandered about for a few years before settling into careers they were passionate about.
Both had tremendous enthusiasm for the high-tech industry that was blossoming in Silicon Valley, and each was a strong leader in his own way, inspiring protégés to throw around the word “genius” with conviction.
• • •
WILMOT REED HASTINGS, Jr., came from America’s patrician class, and it showed in an easy confidence in his own abilities and opinions. His mother’s family were founding members of the Social Register; their births, marriages, and other life passages were chronicled in the New York Times society pages.
His maternal great-grandfather Alfred Lee Loomis applied a mathematical genius to investing and became one of the few on Wall Street to profit handsomely from the 1929 crash. Loomis was viewed as cold and odd by his wealthy and pedigreed peers, mainly because of his obsession with using physics to develop weapons technology. Loomis lavished his fortune on an experimental physics laboratory in a mansion in Tuxedo Park, New York, and invited the world’s most brilliant scientists to work there on technology for military applications. Their scientific breakthroughs led to the development of radar, the atomic bomb, and global positioning systems. After World War II the federal government formed the Defense Advanced Research Projects Agency essentially to take over the Loomis lab’s role as a pure defense research lab. Scientists at DARPA developed the precursor to the World Wide Web to allow computers at far-flung locations to share data about national security threats in real time.
Hastings’s mother, Joan Amory Loomis, was presented to society at the Boston Cotillion and the Tuxedo Park ball in New York in 1956. She attended Wellesley College and married his father, Wil Hastings, a magna cum laude graduate of Harvard College, in 1958 after both spent a year studying at the Sorbonne in Paris.
Hastings, the first of their three children, was born in 1960. He grew up in the liberal and discreetly wealthy Belmont suburb of Boston, attended private schools, and bucked the family tradition of attending Harvard or Yale, instead choosing Bowdoin College, a liberal arts school in Maine.
Like his great-grandfather Loomis, Hastings was drawn to mathematics, a pursuit he found “beautiful and engaging.” He won Bowdoin’s top math honors in his sophomore and senior years and, after graduating, set out to see the world.
Hastings hoped to attend the Massachusetts Institute of Technology’s graduate computer science program after completing a three-year stint as a Peace Corps math teacher in Swaziland, but he wasn’t admitted. Instead, he earned a graduate degree from Stanford University and found himself swept up in Silicon Valley’s technology boom. He started his first company, Pure Software, at age thirty. Pure went public in 1995 and two years later acquired the Boston software company Atria and Integrity QA, a start-up where Randolph was a founding team member.
• • •
RANDOLPH SAW IN Hastings an equal in entrepreneurial spirit and drive, and so he took the marketing post and moved to Pure Atria’s headquarters shortly before the end of 1996. They began working together on speeches and product launches. On their first cross-country commercial flight together to Atria, Hastings sat down, buckled his seat belt, and turning to Randolph, proceeded to describe that company’s inner workings and his plan for integrating it into Pure—for the entire six-hour trip.
Randolph was impressed with Hastings’s command of the minutiae of his recently acquired subsidiary and his determination that it would not capsize Pure in the process of combining operations.
Warm and voluble, Randolph loved nothing more than to be argued into or out of an idea or point of view. Hastings, cool and analytical, could be stubbornly sure of himself. Somehow, the relationship worked. Hastings’s supercomputer mind perfected the logic of a business plan or organizational structure or product, and Randolph sold it—to customers, employees, or the public.
In spring 1997, Randolph began assembling his marketing staff at Pure Atria. One of his first calls was to Christina Kish. The athletic and pretty
thirty-two-year-old California native was a tightly wound product manager who had gained her direct-marketing chops at the software industry’s biggest names, Software Publishing and Intuit. She had interviewed Randolph at the Mountain View–based desktop scanner manufacturer Visioneer; she had liked the mix of his laid-back style and sharp intellect and agreed he should be her boss.
Randolph had an appealing wit and a sensitivity about people that was uncommon in Silicon Valley’s male-dominated culture. He also possessed unparalleled abilities as a public relations strategist, as Kish learned during their wild ride at Visioneer, which went from struggling unknown to industry leader shortly after shipping its first product, the PaperMax scanner, in 1994.
Cutthroat corporate politics annoyed both of them enough that they left Visioneer after short stays, but Kish had enjoyed working with Randolph, especially appreciating the work atmosphere he created—focused and intense yet collaborative, as if they were throwing a big party together. So when he called three years later to offer her a comparatively low-stress job building a customer database at an established software company, she jumped. She gave notice at the dial-up Internet service provider Best Internet and left for a two-week vacation in Italy with her husband, Kirby, intending to join Pure Atria when she returned.
Next, Randolph wheedled Therese “Te” Smith, another protégé, into leaving Starfish Software’s marketing department. Smith, a baby-faced forty-year-old with long curly brown hair and the broad accent of Boston’s blue-collar North Shore, had been doing consumer-facing marketing for the hot new Sidekick personal organizer developed by Starfish, a former division of Borland. But after Randolph’s call, Smith quit her job and planned to land at Pure Atria in early April, after taking a few weeks off between gigs.