That Will Never Work Book Summary
I was pleasantly surprised by this book. It was recommended by my wife, who enjoys non-fiction as well. This book takes you inside the company – and the mind – of starting and growing one of the most successful startups of our generation. Below are the lessons I’ve gleaned from the book.
I would recommend reading it, as it ready similar to a Ben Mezrich book because it keeps the momentum and the subject is always overcoming an obstacle. It’s like a business thriller (in business terms) with priceless business insights.
Surprisingly, I learned that the idea came up during car rides between Marc and Reed (Hoffman). This is different from the typical story you hear when Reed went to return a forgotten movie to Blockbuster and received a $40 late fee.
- DVDs were a middle ground between analog VHS and streaming video. Marc realized this when meeting with Alexandre Balkanski, who was well versed in the DVD and streaming industries. Alexandre expected DVDs to become obsolete in less than 5-years. Alexandre was right about the trend, but his timeline was incorrect.
Take Aways: You can profit from trends, and then reorient your company towards the long-term ends.
It’s somewhat similar to how Peter Thiel talks about starting with a niche and then expanding out once you’re successful with that nice; except in this case, the original niche will eventually go away.
Large scale changes take time. While it may be obvious that a trend is coming, the adoption can be very slow.
This reminds me of when Bill Gates says “People overestimate what can be done in 10 years, and underestimate what can be done in more than 10 years.”
- “Sales is theater : every pitch, every call, every interaction in which you, the businessperson, are trying to convince someone else – the customer, the client, the potential investor, you name it- is a little performance, in which each side plays a role.”
- The Anxiety Cure-All. What did Marc do to relieve his anxiety about Netflix’s possibilities of success? He worked more. He didn’t worry about the problems when he was actively working on solving them. He used this same mentality when working on fixing up his home.
- Marc’s problems to solve early on:
- Setting up an office
- Building a Team
- Building the Basics (Culture, Benefits, Pay, etc.)
- Building an Inventory – Marc’s goal was to be able to say Netflix had the most complete collection of DVDs in the world. It was great marketing, but didn’t totally make sense to carry DVDs that may never get rented. There were few enough DVDs that it was a reasonable goal and they ended up doing it.
- Building a Mailer – You must think through the customer experience and how they use everything they would touch.
- Building a Website – There was no WordPress back then so you had to build your site from scratch and set up your own servers. Both industries are huge now, so what industries today are the “sites and servers” of 1997? AWS and Azure have done very well.
- Marc’s theory about leadership is that you let the team figure out which way they should go. He gives an example of hiking with a group: the scouts travel light and take the high road to see the landscape, the pack mules take the slower safe route to avoid any falls/loss of equipment, and the team with rafts should float across the river to conserve energy. As a leader, you tell the team where to go and then trust their judgement to get their job done.
Marc also mentioned that a surprising learning of his is that people want to be treated like adults; and you can get them to join your dream and be happy doing it because of that. He references a time at his previous company when he overheard developers talking about how they did not enjoy working at their company, which provided all the perks, snacks, and even a hot tub that the developers were conversing in.
- Six months prior to launch, Marc takes stock of the four things going for them:
- $2 million in the bank from investors
- Having every DVD in stock. Marc didn’t think it was expensive to have all those DVDs, he thought of it as inexpensive advertising.
- The DVD market was continuing to grow (trending in the right direction).
- Their inventory was resellable if the company went belly-up.
- With 12 employees, and over 1,000 DVDs to catalog in their database they had a problem: they needed to upload that information to customers could find it online. With a small team, they didn’t have much time to spare, but they had enough money. Because of that, they decided to buy the database rather than build it. Marc says this was a mistake, although he doesn’t touch on why during the course of the book.
- I didn’t realize that during the mid to late nineties, there was a shared anxiety in companies who provided print products and how they would adjust to the internet. His example is Michael Erlewine’s company that documented every movie ever made. They were very uneasy about the transition to digital. The point here is to try to embrace change yourself, and to identify where other “traditional” companies are uneasy about expanding to another market.
- Company Naming. The Netflix name is well-known, but the company was almost called CinemaCenter. Marc’s tips for naming your company are:
- The name has to be catchy, easy to remember, and roll off the tongue
- One or two syllable words are best, with the emphasis on the first syllable
- Have the right amount of letters; too few and people will forget it, too many and people will misspell it.
- Check domain availability! This is the first thing I recommend startups to check when figuring out their company name.
- A crucial piece of advice Marc gives is to be prepared for problems. When starting a company, you may feel like you’re only responding to each problem. As Ben Franklin says, “Run thy business or it will run thee.” You need to be proactive. As Marc says, “You spend a lot of time thinking about what might happen. And preparing for it… most of the time you just think through how you will respond” because when things go wrong you will be prepared. He says that can be the difference between being successful or not.
- Marc used his local paper as the first outlet for announcing his launch. Instead of going to a big publication he went local because: he felt more comfortable starting with a “softball”, they would give him more prominent coverage (larger picture, front page, etc.), and they would be more positive in the article.
- On the day of their launch when Netflix is fulfilling orders Marc hits on the market opportunity. This is a good example of the type of points to hit on when talking to the press: “Several months ago we recognized an opportunity to create a major commerce brand in a billion dallas market, as well as to be a critical catalyst in the growth of one of the fastest-growing consumer electronics categories. This morning, NetFlix opened the world’s first Internet DVD rental store: NetFlix.com. The NetFlix store carries every DVD movie – all of which are fully available for rental.”
- Some of the most valuable lessons of this book come from Marc’s partnership deals with Toshiba and Sony. Why would a large corporation want to work with a startup like NetFlix? Marc loved finding Win-Win scenarios and found out that both companies were trying to get customers to adopt DVD technology by purchasing DVD players. They were moving slowly because people did not yet own DVDs. Here comes Marc to show them a way. He went to the Consumer Electronics Show to connect with those companies. He offered to put a coupon into all their new DVD players giving customers three free Netflix rentals.
Later in the book, you learn more about how the coupon idea was not fully-fleshed out: they lost money on one customer getting access to multiple coupons, and he leverages one partnership to get a larger partnership.
- At the time DVD was a nascent technology. What are nascent technologies today? This is where there is plenty of opportunity, and it’s no secret what technologies are on the cutting edge. These trends can be big and highly visible.
- Marc lands the deal with Toshiba. Why Toshiba when the big fish was Sony? Sony was fat and happy, and Toshiba was a smaller company looking to take risks against the competition. Toshiba had the willingness because they were chasing the bigger fish. They settled on a deal to include three-free Netflix rental coupons in each DVD player sold. Later you find out the customer only needs to type their serial numer into Netflix’s website to redeem it. The issue here is the serial numbers for DVDs are on the outside of the boxes, so anyone can find a DVD box, write down the serial number, and then go home and redeem the coupon without purchasing the DVD player.
Another point about landing this deal is that it helped to validate the idea. To Marc, it felt like most people didn’t believe in the idea. But now, having a large company on board helped validate the vision for what he was building.
- Something Netflix is known for is their company culture. Mark talks about how he built it, by incorporating a lot of fun to the company. Your employees are giving up their life, time with family, and likely better job prospects to join your team. To create a place where people want to work, Marc created fun games like putting small amounts of money in the urinal to see how long it took for somebody to pick it out, bringing in food to the office that tasted bad enough to last all day but also good enough so that it would be gone by the end of the day. They also had every new employee dress up as their favorite movie character on their first day. As they grew some of these traditions had to change or evolve, but it created a fun atmosphere.
- It was hard to recruit engineers in Silicon Valley. Marc says engineers ask themselves two questions when deciding where they want to work: 1) Do I respect the people I’m working for?, and 2) Will I be given interesting problems to solve?
For most engineers, it’s not about the money. Being able to answer those questions will result in being able to bring on quality engineers.
- Going back to the Toshiba coupon deal, Marc now has interest from Sony. Sony was not interested last time but the deal with Toshiba has been working. Sony has seen that and is now looking to do a similar deal. This is common in business, sports, and life. If a smaller, riskier company tries something that works, the industry leaders adopt and follow suit.
During the deal, Marc references that Sony had tried their own promotion. They put James Taylor in Concert DVDs into all their new DVD players. I like James Taylor, but I would not expect the group of first-adopters (tech-people) to be excited about it in 1997.
In his deal with Toshiba, Marc had promised exclusivity. He decided to go against that because Sony has the industry leader. Because they were the leader, they could ask whatever they wanted, which was 10-free DVD rentals plus 5-free DVDs. That came out to $100 per customer acquisition cost.
- An interesting part of the book is when Marc meets with Jeff Bezos. He describes the office as in a bad area of Seattle. The Amazon offices were outfitted in the cheapest way possible – they were only focused on the customer. It sends a message to everyone working there on what to focus on. Bezos is notoriously frugal. Marc mentions Jeff’s “regret minimization framework.” This is the same idea that Steve Covey talks about where you project yourself to the future and see what you want to have happened (Covey uses it to help you identify what you want to have people say about you at your 80th birthday.) Another interesting point is that Amazon was almost named Cadabra.
The purpose of the meeting was to discuss the possibility of Amazon purchasing Netflix. Amazon wanted to enter the DVD market, and Amazon was already a larger company than Netflix. Amazon didn’t want to do rentals though, they wanted to sell DVDs. With Netflix having every DVD and a database of all DVDs it would be a good acquisition. The offer would have likely been around $14-$16 million. The offer was too low for Reed so they decided to continue building Netflix, but pivoted into rentals only.
This was important because at the time, DVD sales was the biggest revenue generator for Netflix. Knowing that Amazon would be moving in forced the decision to focus on rentals. Marc wanted to make that switch sooner, but the rental business was simply not profitable enough. Now their pivot is being forced upon them.
After this meeting, Marc and Reed agreed that is was better to focus on one thing. Focus is extremely important. Rentals was Netflix’s big differentiator and having both sales and rentals is confusing for customers. Netflix had limited time to get rentals working because Amazon would crush them when they entered it.
Marc says that “focus is imperative. Even when the thing you’re focusing on seems impossible. Especially then.” During a dinner party with Bill Gates and Warren Buffet, they were asked what they think the single most important thing is to success. Both of them answered Focus. (You can read more about focusing and getting things done from Cal Newport’s book Deep Work)
- Example of culture and team building: Te would ask each new hire what his or her favorite film was. Then, the day before our monthly company-wide meeting, she’d instruct the person to come to work the next day dresssed as their favorite character before being introduced to the entire team.
- Example of Netflix early viral marketing. They took advantage of the Clinton testimony since which was recorded for the mass public. Since so many people would want to see the testimony, Netflix took advantage by making sure they had a copyright after the testimony was taken. They would then quickly turn multiple disks so they could ship out the next morning. Customers would also want the ability to quickly jump from topic to topic, which DVD allowed and VHS did not.
Instead of allowing customers to purchase at $9.95 and rent the DVD at $4, they let customers have the DVD for $.02 plus shipping and handling. Their headline was “Netflix Lets Consumers Put in Their Two Cents Regarding Clinton Testimony.”
What a brilliant marketing tactic! There were hiccups during and afterwards, but keeping your eyes open to opportunities allows for ideas like this. It’s a mix of team input and opportunity that allowed this to happen.
It can be daunting to try and find opportunities like this that fit so well into what you do, but the key is to be open. You have to look at situations as potential opportunities. You’ll start to realize you have more ideas and opportunities coming to your doorstep.
- You have to be diligent about understanding what the person across you has in their best interest along with their driving factors. Are they trying to keep their job by not taking risks or trying new products? p.181
- Reed came in and was the “dramatic and confident and inuitive leadership.” There are two types of confidence: external and internal.. P. 185
- Shit Sandwich. It’s simple in its form: you give good news, bad news, and then good news again. It’s used a few times in the book to explain situations, such as when Reed tells Marc he should step down as CEO and promote Reed. Marc was the first CEO and founder, who initially was frustrated at Reed’s proposal. By that evening Marc had thought about the decision and then
There is also another “revelation” tactic that Reed uses with Marc. He gives him bad news during the day, and then at night he drops another bad news bomb on him. He sends him an email saying Marc should give him his shares. Ultimately Marc gave up some of his shares to Reed because Marc was convinced Reed would be the leader to take the company to the next level. It would make sense for Reed to be compensated as a CEO. The lesson here is that once Marc mentally accepted the first proposal from Reed, the reasoning was intact in his mind. Then Reed built on that same reasoning to give Marc another request. Once the door for the reasons Reed should be CEO, it allowed Reed to capitalize on that by requesting a higher split of stock shares. P.188
- When a team is small, trust and efficiency go hand in hand. If you have the right people… you simply need to be clear about what you want them to do.” p.193 Doing this and giving them room, will help them take more of an ownership role in their jobs and will result in them fixing problems you don’t even need to know about.
Marc talks a lot about Freedom and Responsibility and Radical Honesty. We’ve touched on Freedom and Responsibility, but Radical Honesty resulted in arguments in front of employees and blunt statements. It also allowed everyone to cut through the BS and get their point across without wasting time.
An example of both of those culture pillars at work at the same time was when an engineer asked if he could leave work early on Friday to see his girlfriend in San Diego, work from there on Monday, and then come back to the office on Tuesday morning. Marc said he had no problem with when or from where the engineer worked. But he became radically honest and said “if what you’re really asking me is whether I’m willing to lower my expectations for you and your group so that you can spend time with your girlfriend? Well, that’s an easy answer too. No.”
Marc both respected the freedom and responsibility of the engineer, but as was also radically honest with him.
- Turning Your Biggest Weakness into Your Strength. Netflix knew that people who rented movies usually decided on what they wanted to watch right before they rented it. They also had the issue of sitting inventory; tens of thousands of discs sitting in their warehouse, not being watched. The issue was, with Netflix, you had to plan out days in advance to receive the movie in the mail by the time you wanted to watch it. And by then, you are probably in the mood for a different movie.
To solve both of these problems, Marc and Reed thought, what if the customers stored the DVDs for them? This would solve both issues. The benefit is no longer with Blockbuster, now it’s with Netflix. If you wanted to watch a movie, it would be instantaneous. Here is what they did:
- Home Rental Library – They threw out late fees, and instead let customers rent up to 4 DVDs at a time for $15.99/mo.
- Serialized Delivery – Instead of customers coming back to the site to select the next DVD, they let customers set up their queue. So when they returned one of their DVDs the next DVD on their list was sent out to them. This is a prime example of creating an ongoing system that a customer has to interact with infrequently.
- Subscription – There were a lot of unknowns about switching to a subscription service; what if somebody never returned the DVDs, and do you pay a rental fee each time you swap? The subscription model made it even easier for customers to stay paying for the service without needing an interaction.
- Subscription – One of the keys of Netflix being able to successfully charge a subscription fee is that they were selling the potential. Marc says it best: “By saying that they would be paying the same amount, no matter how many movies they watched, we were, in effect, daring them to use our services as much as possible.” And since they eliminated the late fees, they became the best alternative for heavy renters, thus undercutting Blockbusters best customers. This is a key example of finding a win-win between customer and company. You are creating more value than any other options AND customers can save money.
- Trust Your Gut… But Test It – Marc and the team knew next day delivery was important, but they didn’t have data to back it up and they didn’t know how valuable it was. They tested it out by driving the DVD orders up to the Sacramento post office every day for a month. What they expected was that the customer cancellation rates would go down and they would improve their customer retention.
In fact, not much changed there but they had a lot more sign ups. It dawned on them that customers were telling their friends about Netflix and next-day delivery which caused a lot of sign ups in Sacramento. They know they had hit on something viral. This was a huge learning, and created another problem for the team to solve before downloading and streaming became viable options.
- $0 for Your Thoughts? – One of the challenges faced by the team was figuring out other movies to recommend. The team had collaborative filtering (if I rented the same movies as you, the algorithm recommends the same movies to each of us). The problem with that is what if we rented the same movies but I liked them and you didn’t? To solve for that they needed to create a rating system. The beauty of the rating system is that customers love to share their opinions. Netflix asked customers to rate movies early and often, even if they had not rented the movie on their platform. They found that everyone loves to share their opinion which helped them build a huge collaborative filtering function with reviews. With that data, they could finally recommend or predict which movies you want to watch next.
- Empathic listening tips – Antioco with Blockbuster is listening to the Netflix team pitch themselves. Marc notes that Antioco is a great listener and uses some tricks to get people comfortable: Lean in, make eye contact, nod slowly when the speaker turns in your direction, and frame questions in a way that makes it clear you’re listening.
- Logistics – Next-Day, Nationwide – This is what allowed Netflix viral growth to go nationwide. Netflix set up shipping hubs around the country that would accept and send out DVDs every night. Since customers in the same region rented the same DVD that another customer watched the previous night, it allowed for very fast turnaround times. Here is an overview of the process:
Customer returns DVD via mail > Netflix Hub Employees (NHE) pick up mail at 9am > NHE’s open the mailers and scan the DVDs into a Netflix inventory program > NHE’s transmit data to Netflix Headquarters > Netflix servers at HQ would match up all the DVDs that had come in with new DVD requests > NHE’s would scan all the discs again and the system would produce a mailing label for the customer who wanted the DVD next.
Having fast delivery times was important enough for Neflix to set up shipping hubs around the country and for Amazon to set up huge warehouses around the country. Logistics is something that also allowed Walmart to expand and become such a global force for low prices.
- Persistence. When it comes to making your dream a reality, one of the most powerful weapons at your disposal is dogged bullheaded insistence. It pays to be the person who won’t take no for an answer, since in business, no doesn’t always mean no.” This is the same guidance that Sam Wyly has said about the #1 characteristic of an entrepreneur.
- VC: When Marc was stepping down from the role of President, Reed also asked that he give up his board seat to one of the VCs. Marc said no, and convinced Reed of this. Marc hits the nail on the head when he says “VCs will always say that they’re aligned with your mission, that they want what’s best for the company. But what they really want is what’s best for their investment in the company. Which isn’t always the same thing.”
As you can see, this book is a series of obstacles and solutions. It walks you through the process as the challenges change and become more impactful. If you want to understand how to navigate the terrain of building your startup company, this book is a great story to internalize.