The Founding of Netflix

It's a spring morning in 1997 at a blockbuster video in Scotts Valley, California.

36-year-old Reed Hastings walks into a movie rental store with a VHS tape in his hand.

He marches past shelves and shelves, stacked with dozens of new releases and heads straight for the counter.

Reed places the tape in front of the cash register and takes a step back, tapping his foot impatiently.

Reed is a busy man.

He's the CEO of Pure Atria, a Silicon Valley software company that's in the process of being bought out.

The deal is going to make Reed a very wealthy man, but it's also taking a lot of his time and attention.

And that's why he forgot all about the copy of Apollo 13 he'd rented until he spotted it next to the television earlier this morning.

The Blockbuster employee scans the barcode on the box and looks at his monitor.

He says the cassette was due back more than six weeks ago and the late fee is $40.

Reed sighs.

He knew the video was overdue, but didn't realize it'd been quite so long.

He pulls out his wallet and counts his dollars.

He doesn't have quite enough, so he searches his pockets for a few extra coins and puts them on the counter.

As Reed heads for the exit, the Blockbuster employee calls after him, asking whether he'd like to rent another video.

But Reed ignores him.

His mind's already on his day at the office and he doesn't know when he'll have the time to sit down and watch a movie again, let alone come back and return it.

The overdue return of his rented copy of Apollo 13 is little more than a momentary inconvenience for Reed.

The late fee doesn't make much of a dent in the finances of a businessman who's about to become a millionaire.

But Reed won't forget the seemingly unremarkable events of that morning.

His trip to Blockbuster will go on to have a huge impact on the business world because his $40 late fee will spur Reed to invest in a new startup to take on Blockbuster at its own game.

The new company Netflix will prove so successful that it will one day dominate the entertainment industry following a rapid rise after it was officially incorporated on August 29, 1997.

From Noiser and Airship, I'm Lindsay Graham, and this is History Daily.

History is made every day.

On this podcast, Every Day, we tell the true stories of the people and events that shaped our world.

Today is August 29th, 1997, the founding of Netflix.

It's the summer of 1997, on a road crossing the Santa Cruz Mountains, a few weeks before Netflix will be incorporated.

39-year-old Marc Randolph stretches his legs in the passenger seat and watches trees shoot past the window.

As usual, he's carpooling to work with another Scotts Valley resident.

Behind the wheel is his boss and owner of the software company PuraTria, Reed Hastings.

As they make their way to the Silicon Valley hub of Sunnyvale, they volley new business ideas back and forth.

As a vice president under Reed, Marc knows he'll soon receive a cash windfall when the impending buyout of PuraTria goes through, but the incoming new owner has already indicated that he'll bring his own men, and Marc isn't part of the plan.

So Marc wants to set up his own business venture, and he wants Reed to partner with him.

Marc has pitched countless ideas on their shared commutes, from customized baseball bats to shampoo.

Reed has turned them all down, but today Marc has another proposal.

As the car descends into Sunnyvale, Marc outlines his latest idea, movie rental.

Reed's eyes immediately glaze over.

He says he doesn't want to talk about video rentals.

He recently got stung by a $40 late fee from Blockbuster, but Marc doesn't give up.

He explains that a website called amazon.com started selling books three years ago, and now it makes more than $100 million a year in revenue.

Marc thinks that movies could be the next product to be sold online in a big way.

Reed's interest is piqued by the thought of replicating Amazon's impressive sales figures.

So for the first time, he agrees to consider one of Marc's business ideas in greater detail.

After their conversation in the car, Marc and Reed crunched the numbers.

They discover that renting movies online and sending them by mail is unviable.

The cost of purchasing expensive videos and posting the bulky cassettes is just too high.

But Marc still isn't ready to completely dismiss the movie rental idea.

As a tech enthusiast, he knows that a new Japanese technology launched in the United States only a few months ago, DVDs.

Barely any Americans currently own a DVD player, but Marc expects the market to grow quickly since manufacturers and studios have vowed to price DVD players and discs cheap enough to undercut videotape.

A DVD disc is also much smaller than a video cassette, making it cheaper to mail.

With DVDs, the figures on the business plan are more encouraging and Marc's idea is possible, but only if the discs survive the US postal system intact.

So on a Monday morning in August, 1997, Marc and Reed carry out an experiment to see whether mailing DVDs is a practical option.

Together, they strolled into downtown Sunnyvale to purchase the equipment they'll need.

DVDs are still rare in the United States, so as a substitute, Marc buys a Patsy Cline audio CD from a used record store.

He puts it, along with a greeting card, inside an envelope with Reed's home address on it.

After licking a 32-cent stamp, they pop the envelope into the post box.

A few days later, it's delivered, and Reed happily reports that the CD inside is still in perfect condition.

So with proof that their concept works, the two businessmen shake hands on an agreement.

Their next venture will be an online DVD rental store.

On August 29th, 1997, Marc files the paperwork with the state of California to register their new company.

Reed offers $2 million in investment and owns 70% of the shares, but the remaining 30 go to Marc.

He doesn't put any money in, but he does take responsibility for setting up the business, which is a daunting prospect.

Their spreadsheets and business plans reveal that Marc has a lot to do before the new business can be launched.

Right now, their operations are located in temporary quarters, a hotel conference room, rented for $250 a week.

And the two partners haven't yet decided on a name for their new business.

So Marc fills out the forms with a working title, Kibble.

While Marc intends to change the name to something more appropriate, it will be another few months before he finds an alternative he's happy with.

Eventually, Kibble will become Netflix, a snappy title made from two words that sum up the nature of the new company, Net for the Internet and Flix for Movies.

But as Marc comes up with this new name, both the Internet and the movie side of the business will throw up obstacles that will threaten to consign Netflix to failure before it's made a single sale.

It's the fall of 1997 in Scotts Valley, a few weeks after the paperwork was filed to create Netflix.

Inside an old bank vault, Marc Randolph runs his fingers along shelves filled with DVDs.

A few days ago, Marc moved Netflix's office into an old bank building and reconfigured its disused vault as a DVD stockroom.

Right now, there are only 300 DVDs available in the entire United States, and Marc has made it Netflix's mission to stock every single one of these titles, but more are released every day, and getting a hold of them is easier said than done.

So Marc has entrusted the creation of the Netflix catalog to Mitch Lowe, who he recruited from the movie rental chain Videodrome.

Mitch used his contacts in the video distribution industry to track down elusive DVDs from fringe distributors, giving them access to not just recent releases like Jim Carries the Mask and Brad Pitt's Seven, but minor titles like the Sports Blooper Encyclopedia.

Now Marc is checking that Mitch's purchased stock matches what's listed in the provisional Netflix catalog.

Satisfied that it does, Marc walks from the bank vault to a large open office where he winces at the hideous banker's green carpet adorning the floor.

He spent less than $1,000 outfitting the headquarters of his new business and hardly any of it went to furniture.

On top of the shabby carpet, lines of folding tables run down the middle of the room.

Netflix's seven employees sit on a combination of mismatched dining room and folding beach chairs.

The bulk of the $1,000 went on computers linked together by network cables that run along the floor or hang down from the ceiling like vines.

Marc looks over the shoulder of one of his workers who's patiently building the website that customers will use to order DVDs.

In 1997, e-commerce is still in its infancy and Marc and his team must write the website code from scratch.

But their initial versions of the Netflix website have indicated a major problem.

Any potential customers have no way to easily browse the Netflix catalog.

In a brick and mortar video rental store, customers can scan the shelves of available videos and read the description on the back of the case when one catches their eye.

But the Netflix team has struggled to recreate this easy browsing experience online.

Finding a way to simplify and straightforwardly collect and present a title's metadata is at the top of Marc's priority list.

He wants to capture as much information about each DVD as possible and record it on the website.

He imagines customers filtering titles not only by genre, actor or director, but also by content and audience rating.

But putting together such a vast database proves to be beyond Netflix and its small number of employees, leading Marc to outsource to an external partner.

So a month or two after moving into Netflix's new office, Marc travels to Grand Rapids, Michigan to meet with Michael Erlewine, the founder of an entertainment guide named All Music.

There, Marc tours the company's headquarters, which are located in a setting even more idiosyncratic than Netflix's old bank.

All Music is housed in four adjoining houses on a residential street linked by covered walkways.

Inside, every square inch of wall is covered by floor-to-ceiling shelves containing records and CDs.

And in each room, dedicated researchers scour through papers and listen to records, recording data for every song and adding it to the vast All Music database.

Marc knows that Michael wants to expand his guide to movies.

So Marc offers Michael a proposal.

He'll supply All Music with a copy of every DVD that Netflix owns.

In return, All Music will supply Netflix with metadata for its website and retain the database for its own use.

The deal suits both parties, but it's still a mammoth amount of work for All Music's researchers, and Netflix has a tight deadline.

The data needs to be collected and in place by March 10, 1998, a date Marc has selected for Netflix's public launch.

In the end, this schedule will be too tight, and Marc will be forced to delay Netflix's launch by a month, pushing it back to April 14.

But he'll use that extra time to promote Netflix, going online and signing up to message boards and forums populated by moviegoers and tech nerds.

This last publicity push will ensure that Netflix gets off to a positive start, setting up its rise to the top.

Thank.

It's 8:55 a.m.

on April 14th, 1998, at Netflix headquarters in Scotts Valley, California, seven months after the company was officially incorporated.

Marc Randolph gathers his team around a single computer terminal, the one they're about to use to make the Netflix website go live for the first time.

Marc works through a last-minute checklist with his team.

The servers are up and running.

There's a pile of bespoke mailing envelopes in the stockroom.

The printer is full of paper.

The only thing they haven't managed to do is create an email template to automatically acknowledge orders.

Netflix's staff will have to write each order confirmation individually, but that should be manageable since Marc only expects 15 or 20 orders on their first day of business.

With one minute to go, a hush descends over the office.

At exactly 9 a.m., a programmer leans over Marc's shoulder, punches a few keys and announces the website is now live.

Marc fills out the first order to test the system, requesting a copy of Casino to be delivered to his home address.

A moment later, a notification rings on the computer, indicating that Marc's order was received.

Over the next few minutes, the bell rings again a few times, but then it goes silent.

So many people have logged on to the Netflix website that it crashes.

Technical staff run to a nearby computer store and buy eight new machines to act as extra servers, and the website is soon back online.

Netflix takes so many orders on their first day that Marc's team struggled to keep up with the email confirmations.

They're still writing them late at night, long after the DVDs ordered have been taken to the post office.

When Marc finally has a chance to take stock, at 2 a.m.

the next day, he discovers Netflix has shipped 137 orders on its first day, nearly 10 times what he'd hoped for.

Over the coming years, Netflix will continue to achieve sales figures that exceed Marc's wildest dreams.

By 2003, Netflix will post its first profit on the back of $272 million in revenue.

By 2005, the company will be shipping a million DVDs a day.

And beginning in January 2007, Netflix will launch a streaming service to deliver films and television over the internet.

It's a move that will signal the end of physical movie rental and plunge the previous market leader blockbuster into bankruptcy.

But it will spur a second period of growth at Netflix.

Today, Netflix has 238 million subscribers across 190 countries, produces its own original content and has changed the face of the entertainment industry.

A remarkable impact for a company that was founded as Kibble and based in a hotel conference room at the time of its incorporation on August 29, 1997.

Next, on History Daily, August 30th, 1918, socialist revolutionary Funya Kaplan sets off the Red Terror after attempting to assassinate Soviet Russia's new leader, Vladimir Lenin.

From Noiser and Airship, this is History Daily.

Hosted, edited, and executive produced by me, Lindsay Graham.

Audio editing by Mohammed Shahzeb.

Sound design by Misha Stanton.

Music by Lindsay Graham.

This episode is written and researched by Scott Reeves.

Executive producers are Alexander Curry Buckner for Airship, and Pascale Hughes for Noiser.