“For more than three years, we have all worked tremendously hard to get Netflix where it is today, work we should all be very proud of. But we’ve all known that there would be days that we had to make hard decisions. I’m afraid that today is one of those days.”
Reed paused and looked around. There wasn’t a sound. From across the park beyond the fence I could just hear the steam whistle from the park railroad, and the scream of excited children. Somewhere, at least, somebody was having fun.
“It should be clear to everyone,” Reed continued, “that the funding environment has changed dramatically over the last twelve months. Not just for us, but for every company in the Valley. We can no longer count on venture money to carry us along. We need to become self-sufficient. We need to control our own destiny. To do so, we have to reduce our expenses such that we can achieve profitability with a smaller subscriber number, and we have to reduce our spending levels to ensure that we have enough money to last us to that point.”
Across the crowd, I could see Joel’s employee, Markowitz, visibly shaken. Face pale, upper lip sweating, he was tearing a napkin to shreds in his hands. I nudged Joel.
“You should probably reassure him,” I said. “Guy looks like he’s about to pass out.”
Joel nodded and weaved his way through the crowd. I saw him take Markowitz by the shoulder, whisper something in his ear.
Instantly, Markowitz’s expression changed. He looked enormously relieved.
Reed, on the other hand, appeared to be wavering. Perched atop the picnic table, above a now visibly restless crowd, he looked like a revolutionary starting to realize that he was failing to inspire the mob. He glanced down at Patty for reassurance. She was looking up at him and slowly nodding.
“There are going to be layoffs today,” he said, gathering his strength. “Some of our friends and colleagues will be leaving us. But this is not because they have done anything wrong—it’s purely because this is what must be done to make the company stronger. Go back inside, and wait for your manager to give you instructions about your particular situation.”
The crowd dispersed noiselessly, and I let myself be swept along toward the entrance and up the main stairs. Something about being surrounded by my scared employees made me see the situation from their perspective: How had it come to this? We were there! We figured it out. No due dates, no late fees. We focused relentlessly on what was important. We got Cinematch off the ground. We figured out next-day shipping. We figured out how to get new customers efficiently. Why retreat now?
As I turned at the top of the stairs, I noticed out of the corner of my eye that there was something different about the conference room I’d checked out not more than twenty minutes earlier. There was now something on the table: a powder-blue box of Kleenex, perched in the exact center, one tissue puffed artfully out of the top.
We even figured out how to do a layoff, I thought, not without some bitterness.
It was all over by 11:30. People stood in small groups, some crying, some relieved, some just shell-shocked. The office was almost empty.
When it started, everyone had been on edge as managers had moved silently through the office, summoning employees to their respective conference rooms. If you were called early in the process, it was pretty clear what was going on. For the rest of the group, each person called away that wasn’t you was one more dodged bullet—until finally a manager would emerge from their conference room and give a relieved “all clear” to their department.
For the people doing the firing, there was no avoiding the discomfort. We had all been through hell together. These were friends. They were colleagues. Some—like Vita, who got the ax that day—had been there from the beginning. And now I was telling them it was time to leave. I cried with all of them.
When it was all over, I just lay there on my couch, emotionally drained, tossing a soccer ball up in the air over and over again, replaying in my mind what I’d done.
My last layoff had been Jennifer Morgan, one of our newer analysts. When I approached her cube, she sat with her back to me, engrossed in her screen, even then able to concentrate on the problem in front of her. I touched her shoulder, and as she slowly turned to me, I saw that there were tears in her eyes. “I knew it,” was all she said, as she gathered up her purse and prepared to follow me to the conference room. “I just knew it.”
Shortly after we were finished, I gathered the remainder of my departments together. I gave them a short talk about moving forward, and the solemn responsibility we had to demonstrate—to ourselves and everyone else—that this layoff had not been done capriciously or cruelly but with the sole focus of ensuring that Netflix survived. We owed it to everyone to make sure that happened.
Later, after everyone dispersed—some for lunch, some for home, some just to do slow laps through the building to see who was still left—Joel came to join me in my corner. We didn’t talk much. There wasn’t much to say. The future could start tomorrow. We just sat there, tossing the soccer ball back and forth, until I noticed a lone figure at the periphery of my vision. Just from the tennis shoes I knew it was an engineer. When I looked up, I saw someone I had hired myself, many years ago: a hard worker, a skilled coder, a nice guy.
He just hadn’t made the cut.
“Sorry, Marc,” he started. “I don’t want to interrupt you, but I wanted to come back and make sure you were okay. This must have been really tough on you.”
I held the soccer ball and cocked my head. I didn’t know how to answer. It didn’t make sense. He’d just been laid off, and he was wondering if I was okay?
“Well, anyway,” he awkwardly continued after a few seconds. “Thanks for everything.”
He turned and started to walk away. But then, just before he passed the end of the row of cubes, he stopped, as if he had suddenly remembered something.
“Hey,” he shouted back, a smile on his face. “Crush Blockbuster, okay?”
And with that he was gone.
18.
Going Public
(May 2002: 49 months post-launch)
IN THE WEEKS AND months following September’s painful layoffs, we started to notice something.
We were better.
We were more efficient. More creative. More decisive.
Winnowing our staff made us leaner and more focused. We no longer had time to waste, so we didn’t waste it. And while we certainly had to lay off some very talented individuals, we’d been left only with superstar players. With superstar players doing all of the work, it was no wonder that our quality of work was very high.
You see this often in successful startups. The business gets off the ground because of the focus, dedication, and creativity of a small group of dedicated people. It hires, grows bigger—and then contracts itself. It rededicates itself to its mission—and often, accomplishes it through the renewed focus and energy of its most valuable members.
Hiring and keeping star players is about much more than just quality of work, however. It’s a culture thing. When you retain only star players, you create a culture of competitive excellence. It’s more fun to come to work when you know you’re part of the handpicked elite. Plus, it’s much easier to attract other elite talent to your team when you’ve established a reputation for superstar talent.
In some ways, Netflix in late 2001 was like June 1998 all over again: a handpicked team of extremely capable people, working very hard on a singular goal: one million subscribers. And just like 1998, we hit it—this time, months in advance. By Christmas.
We reached the finish line early in large part because Tom Dillon had found a way to guarantee quick shipping—next-day shipping—to users all over the country. In many ways, it was an extension of our Sacramento tests—and our old idea about users mailing DVDs to each other. Turns out you didn’t need to build huge, expensive warehouses all across the country to ship DVDs if 90 percent of the DVDs people wanted were already in circulation. Tom had applied to shipping a principle we all understood
intuitively: when it came to movies, people were lemmings. They wanted to watch what everyone else was watching. If you’d finished Apollo 13 yesterday, then it was highly likely that somebody else wanted it today. Conversely, if the next movie in your queue was Boogie Nights, it was just as likely somebody else was returning it that day. Tom’s brilliant idea was to recognize that when a user mailed a DVD back to us, it didn’t need to go to a warehouse the size of a Costco. It didn’t even need to go back on a shelf. It could go right back out the door to someone else! And we could run that business from a shoebox.
Tom analyzed hundreds of thousands of data points to figure out where to place small Netflix shipping “hubs,” basically storefronts the size of your neighborhood Greek restaurant. His data showed that you could service 95 percent of the country with next-day delivery if you judiciously placed about sixty of these hubs all across the country. They weren’t warehouses; they were “reflection points.” Nothing was really stored there. DVDs coming in would almost immediately “bounce” right back out to other customers.
Here’s how Tom’s reflection-point method worked: Customers mailed their watched DVDs to the post office closest to that region’s reflection point. At 9:00 each morning, a local employee would pick up the mail, and for the next three hours, that employee (and four or five others) would use a slitter to open the mailers, remove the discs, and scan each DVD into a Netflix inventory program. The DVDs would temporarily go into neat piles on the table. The employees would transmit all that data to headquarters in Los Gatos, and while they took their lunch breaks, our servers would match up all the DVDs that had come in with all the movies those customers wanted next. After lunch, the employees would scan each disc again, but this time, the system would spit out a mailing label bearing the address of the customer who wanted the disc next.
The process worked obscenely well. Out of every hundred discs that arrived each day, ninety of them had a customer in that region who wanted them, so out the door they would go. Another seven or eight of the hundred DVDs would be new releases or high-demand items that no one wanted that day but which we were pretty sure somebody would want within a day or two. These discs were stored in the reflection point’s tiny shoebox library. Of the hundred DVDs coming in, there were usually only two or three for which we didn’t have an immediate customer—or anticipate there being one soon. These—and only these—were sent back to the mothership warehouse in San Jose.
This might sound like hyperbole, but Tom’s method was one of the greatest innovations in the history of shipping. It was efficient, fast, and cheap. It meant that we didn’t have to waste money on big warehouses. Since we didn’t have movies sitting on shelves—even overnight—our utilization of inventory was exceptionally high. All we needed were a few dozen cheap storefronts, a couple hundred remote employees, and a bunch of shoeboxes and—bingo: next-day delivery to almost every mailbox in America.
We’d survived. We were hitting our goals. But things were different. So many parts of the original founding team were gone. Jim was working for an Amazon affiliate called WineShopper. Te was working for Zone Labs, an internet security startup. Vita had been laid off in September, and so had Eric. Christina had taken time off for a health issue in 1999 and had never been able to return full-time.
The original crew of skilled generalists had been replaced with superstar specialists. I was glad to be working alongside some of the most brilliant minds in Silicon Valley. But as one of the last links to the original team, I was starting to wonder about my future role in the company. Where did I fit? More importantly—where did I want to fit?
By early 2002, I was spending most of my time in product development. To me, that’s where the energy really was. We were, even then, looking toward a day that didn’t include DVDs. The growth of broadband DSL technology in the early 2000s was making it newly feasible to stream content online. We knew it was only a matter of time before streaming began to compete with physical media, and we wanted to position ourselves to take advantage of technological shifts. It was kind of funny, really—we’d finally figured out a way to make our original idea of DVDs by mail work, and here we were, looking ahead to a future without either DVDs or mail.
We knew digital delivery was the future. But how soon would that future arrive? And what form would it take? Would people download their movies, or stream them? Would they lean forward and watch on their computer or lean back and watch on their television? What kind of infrastructure would have to exist before the technology could be widely adopted? And what about the content? Did you start by focusing on a single genre, and if so, which one? And how did you convince the studios that their movies—once in digital form and so easily copied and shared—were safe in your hands?
To answer these questions, I talked to movie studios, television networks, software companies, and hardware manufacturers. A few things were clear:
The first was that the studios and networks were terrified of being “Napster-ed.” They’d watched the music industry fall victim to widespread piracy and cratered sales, so they weren’t very keen to give up digital rights. No matter how many assurances I gave them, they didn’t trust the digital future. The way they saw it, once TV shows and movies were digitized, they’d lose all control of their product—along with any ability to make money off it.
The second was that hardware and software companies were going full speed ahead, digital rights be damned. Apple, Microsoft, and pretty much every other major computer company were working overtime to take advantage of the jumps in bandwidth speed, and were designing products that could conceivably deliver very large files—movie-sized files—directly into viewers’ homes.
Everyone was competing for the same prize: Who would own the portal that would deliver entertainment directly into viewers’ living rooms? Would it be the producers of the content, like movie and television studios? Would it be the developers of the hardware and software necessary to view it in the home? Or would it be the cable companies—which were already delivering content to millions of homes?
I spent a lot of time that fall and winter spitballing with Neil Hunt, who had joined Netflix in 1999 and was now in charge of our programmers. Tall and rail-thin, Neil rarely ventured out of his cube without a coffee cup in his hand—sometimes gliding into a conference room with a full French press, which he would punch down a few minutes later, ideally at the exact moment he was trying to make a point. Neil was soft-spoken, delicate, and somewhat reserved. Many times, when he knew he would soon need to do a code review for a colleague, I would watch from my window as he did laps through the parking lot, steeling himself to deliver the bad news. He was undeniably brilliant. At a company where meetings usually hit decibel levels just short of a Stanley Cup Final, Neil didn’t need to shout. As soon as he began to speak, people would lean in to listen.
Like me, Neil saw the national increase in internet bandwidth as a possibility: a way to use digital means to deliver Netflix movies directly to TV sets and further shrink the time between finishing one movie and getting the next one. Instantaneous streaming wasn’t possible in 2002, and downloads would take hours—but we were betting that even so, passively downloading a movie while you were asleep or at work was still preferable to getting in the car and driving to Blockbuster. In our ideal, spitballing world, customers would always have a few downloaded movies ready to watch in a device on top of their TV, and an even bigger list of movies in their queue. They could choose a movie to watch, and when they were finished, they could just mark it as complete. Then their queue would automatically start downloading the next film on the list.
The next day? Boom, new movie to watch.
Still, it was tough sledding convincing the studios and tech companies that our idea was a good one, and even more difficult trying to convince them that we were the ones to pull it off. As far as they were concerned, we were just a content company that had figured out how to use the post office. Digital delivery? Leave it to the big boys.
&nb
sp; I’ll never forget driving out of Microsoft’s headquarters with Neil after a particularly dispiriting meeting with some of their executives. We were in Redmond, a suburb of Seattle, and I couldn’t help but think of my trip to Amazon with Reed three years before. But this time, instead of a shabby office building in a rough part of town, I was driving through a glittering corporate campus, shaded by towering redwoods and bordered by pristine artificial lakes. Instead of rough-looking men huddled outside a methadone clinic, there were Microsoft employees playing ultimate frisbee on manicured lawns.
Our meeting had been with two of the technical gurus working on their upcoming Xbox gaming station. They were only a few weeks away from launch, but Microsoft was already late to the party and was in a desperate scramble to catch up to Sony and Nintendo. In an effort to leapfrog these competitors, the Xbox would include two killer features: an ethernet port and a hard disc, which would allow the Xbox to connect to the internet and then store whatever it downloaded. Publicly, Microsoft was positioning these features as a way to enhance the gaming experience, but we knew that they were looking into using them for downloading television and movies—and we’d been eyeing a potential partnership. The way we saw it, Microsoft had the technology, and we had the content.
But the whole thing had fizzled. As usual, the answer was cloaked in politesse, but the message was the same: Why do we need you?
“What a waste of time,” Neil was saying, slumped over in the passenger seat as I took the turns in the Microsoft roundabouts at high speed. “Travel all the way up here, rent a car, just to hear a polite ‘no thanks.’”
“No doesn’t always mean no,” I said, and smiled.
Neil groaned and waved off what I’d said as a platitude, a lie to make him feel better. “Stop trying to cheer me up,” he said.
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