Original subtitles

(film reel spinning)

(fire crackling)

- 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."

(slow electronic music)

- 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 (pausing) "Icarus",

Bryan Fogel and Dan Cogan. (audience applauding)

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

our incredible partners at Netflix.

- And the Oscar goes to--

- [Both] "Roma"!

(audience applauding)

- 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.

("Money" by Adi Levi)

♪ 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 ♪

(quirky synthesizer music)

- [Narrator] 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?

- [Reporter] 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.

(soft electronic music)

- [Narrator] 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.

(bright fanfare music)

- [Narrator] 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.

- [Announcer] 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!

- [Narrator] Is popping up all over the country.

There's one near you.

♪ Blockbuster Video ♪

♪ Wow, what a difference ♪

(pensive music)

- 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?

(static crackling)

- 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.

- [Announcer] 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 someplace.

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".

- [Ace] Everybody's gotta watch everybody else.

And the eye in the sky is watching us all.

- [Corey] 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.

- (laughing) 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 (laughing) 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.

- [Announcer] 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!

(shrieking)

- [Announcer] 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!

- [Announcer] 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?!"

- (laughing) 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.

- [Announcer] 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.

- [Reporter] It's described

as nothing short of breathtaking,

a points drop never before seen on the US markets.

(bell ringing)

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.

(somber Western music)

(wrecking ball crashing)

- 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.

- [Reporter] 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.

- [Reporter] 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.

- [Man] 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.

- [Man] 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.

- [Reporter] Guilty verdicts in the biggest case

of corporate fraud in history.

38 counts of fraud and conspiracy.

- [Reporter] 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. (laughing)

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."

(laughing)

You know what the best part is?

(laughing)

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."

(soft pensive music)

- 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.

- [Tracy] 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 (pausing) 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.

Go to Netflix.com.

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.

- [Announcer] 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.

- [Crowd] No more late fees!

No more late fees!

No more late fees!

No more late fees!

No more (pausing) 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 ♪

(cheering)

♪ It's over ♪

♪ It's over ♪

- [Announcer] 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 ♪

- [Announcer] 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." (laughing)

- 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.

- [Reporter] 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.

- [Marc] 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.

- [Ben] 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.

- [Marc] 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--

(screaming) What is this?!

What's happening?!

(screaming)

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.

- [Man] This is it!

This is a sign!

(pulsating electronic music)

- This is your wake-up call, pal.

- [Shane] 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.

- [Announcer] 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.

(soft pensive music)

- 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."

- [Lesley] 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.

(film reel spinning)

(audience applauding)

- 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."

- [Announcer] 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!

- [Announcer] You can also return movies at the store

and exchange them for new ones at no extra charge.

- So, you get new movies faster.

- [All] 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.

- [Man] 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.

(audience applauding) - Thank you, Steve.

- [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 (pausing) Turner & Hooch.

Where is Turner & Hooch?

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

(incorporeal sighing)

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, (laughing) we know what we're doing.

(audience laughing)

- [Steve] 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?"

- [Man] 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.

- [Mike] From who?

(building dramatic music)

- 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.

- [David] 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.

(soft piano music)

- 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; (audience laughing)

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!

(audience cheering)

- 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. (laughing)

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

Unfortunately, it didn't help it enough.

- [Reporter] 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.

(somber piano music)

(explosion booming)

(uneasy music)

- [Man] 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.

- [Michael] 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.

("Feel Alive" by Rex Banner)

- 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? (laughing)

"Why? (laughing)

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

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

- Well done, Ed. (laughing)

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

thanking me for the kitchen sink.