The untold story of the birth of Netflix: How one man’s simple idea about renting movies via the internet changed home entertainment forever

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Silicon Valley loves a good origin story. There’s one about Netflix, now one of the largest media companies in the world, that says the idea came to co-founder Reed Hastings after he’d incurred a late fee on renting a video of Apollo 13 at Blockbuster.

He thought, ‘What if there were no late fees?’ And BOOM! The idea for Netflix was born. That story is beautiful. It is, as we say in marketing, emotionally true. But it’s not the whole account.

Santa Cruz, 1997. I was 39 and married with three kids. Reed’s software company had recently acquired a start-up I’d helped found and he kept me on. He was working on a merger that would put us both out of a job and I was planning to start my own company.

Miley Cyrus in Black Mirror. Netflix has come a very long way since Marc Randolph first tested the idea of DVDs by mail with a second-hand Patsy Cline CD and a 32 cent stamp

Connie Britton and Eric Bana in Dirty John. In just two decades Netflix has revolutionised the entertainment business

Angela Bassett, Kathy Bates and Jessica Lange in American Horror Story. In 2010, Netflix began streaming content, delivering direct to TVs, computers and tablets

Our Planet. There are 10.3 million Netflix subscribers in this country alone, and young people now watch it more than the BBC

I’d pitch ideas to Reed to try to convince him to come on board as an investor. I’d tried dog food that is individually formulated for your pet, customised baseball bats and personalised shampoo.

One morning during our journey to work, I was trying to think of a new idea. I was tired because my three-year-old had woken up in the middle of the night from a bad dream. The only thing that coaxed her back to sleep was a well-worn copy of the video of Aladdin.

‘Videotapes?’ I said.

Reed looked at me. ‘Don’t remind me,’ he said. ‘I just got fined 40 bucks by Blockbuster for returning a movie late. But… maybe.’

Tapes were expensive to mail and to buy – around $75 [£61] then.

But what about DVDs, the first of which were just becoming available? A DVD was probably small and light enough to fit into a standard business envelope.

I said to Reed: ‘Let’s try it. Mail a CD to your place. If it breaks, it breaks, and we know that this idea could never work.’

We went to a used-record store and I bought a Patsy Cline greatest hits compilation. Then I bought a greeting card in a pink envelope. We put the CD minus its cover into the envelope, addressed it to Reed and posted it.

It arrived undamaged the next day. It cost only 32 cents to mail a DVD, and we could buy them for 20 bucks [£16] apiece – we knew we had a shot.

Reed, already a successful entrepreneur, put up $1.9 million [£1.5m] of the $2m needed to get the company off the ground. When I went to bank the cheque I thought: this will make the teller’s day. She’ll discreetly signal to the manager and he’ll usher me into a back office and pour me champagne while an underling handles all the details.

I handed it over – nothing. No hint of surprise on the teller’s face. Business as usual. ‘You want any cash back?’ she asked.

The rest of the money we raised from friends and relatives. As a student I’d done work with a charity that took inner-city kids from disadvantaged areas and introduced them to hiking and climbing in the wilderness.

Part of the training for instructors was to be dropped off in a city centre with no money or wallet and told you’d be picked up in three days. When you’ve scavenged uneaten food from tables at fast-food joints and begged for spare change on the streets, asking an investor for $25,000 [£20,000] is nothing.

We rented an office in a nondescript office park and spent less than $1,000 [£820] furnishing it. There were no ping-pong tables or refrigerators full of mineral water. There were six or seven cheap folding tables and a mismatched set of dining room chairs I’d salvaged from my storage unit. Several employees dragged beach chairs in, the legs still covered in sand.

We did spend money on technology. We bought dozens of Dell computers and our own servers – in 1997 there was no shared cloud – and miles of cable. Extension cords and ethernet cables twisted through the office like orange and black snakes. Wires hung from the ceiling like vines. It resembled a cross between a computer geek’s basement and a politician’s campaign war centre.

I kept a jar of silver dollars on my desk and at every weekly meeting I’d hand one out as a ‘bonus’ to the employee who’d made the largest contribution to the company’s success that week. ‘Don’t spend it all in one place,’ I’d say.

We brought in Corey Bridges to work on something we jokingly called ‘Black Ops’. He was a brilliant writer with a gift for creating characters. He’d realised that the only way to find DVD-owners in those early days was in the fringe communities of the internet: user groups, bulletin boards, web forums.

Corey infiltrated these communities. He developed 17 different personas, each engineered for a different site. Posing as a cinephile, he would join the conversation, befriend the major players and slowly, over time, alert the most respected commenters, moderators and website owners to this great new site called Netflix.

Before we launched, the company’s working name was ‘Kibble’, what Americans call dog food. I still own the domain name. Type kibble.com into a web browser and you’ll end up on my personal website.

When it came to picking the company’s actual name, we came up with a list. No one liked Netflix. ‘It just makes me think of porn,’ one of the team said. ‘Skin flicks.’

Yet the next day we all agreed: we were Netflix.com. It wasn’t perfect. It sounded a little porn-y. But it was the best we could do.

Dead To Me. Netflix co-founder Marc Randolph is an executive coach and is still involved with start-ups

Jack Whitehall. Marc Randolph remains interested in the fortunes of the company he co-founded

Conversations With A killer. 'Two months after the launch we were on target to hit one of those magic start-up numbers: a million dollars of annual revenue,' writes Marc Randolph

On the day of the launch, April 14, 1998, we had no idea how many orders we were going to get. Five? Twenty? A hundred? At this time, there were only 800 DVDs available and we had copies of each of them.

Corey had been working overtime on the message boards, pumping us up. But I wasn’t holding my breath for big numbers.

At 8.45am, everyone in the office – all 15 of us – nervously gathered in front of a computer. At 9am on the dot, Eric, our technology officer, leaned over, punched a few keys, and we were live. We held our breath.

Eric had hooked up a bell to his computer so that it would ring each time an order came in. I filled out the day’s first order as a test, requesting a copy of Casino. I hit ‘Enter’ and moments later the bell rang.

Almost immediately we had three other orders in the queue, each sounding the bell as credit cards were authorised. Within minutes the bell sounded like a machine gun.

Kevin Spacey, Kate Mara and Robin Wright in House Of Cards. Netflix's first big hit was House Of Cards, swiftly followed by Orange Is The New Black

It lasted for 15 minutes before the servers crashed. We had to make a trip to a store to buy more computers. Twice. The site crashed all day. Later, with the servers down yet again and the entire content team typing individual confirmation emails for orders (turns out an automated email should have been higher on the to-do list), I asked Corey, ‘Think you can hold off the nerds for a little while?’ He laughed. ‘I’ll try. But they’re really into it.’

By the end of the day we’d had 137 orders.

Two months after the launch we were on target to hit one of those magic start-up numbers: a million dollars [£820,000] of annual revenue.

And in our first 12 months we did so much to determine the company’s direction and ethos. Netflix today wouldn’t exist without that – or if it did, it would look a hell of a lot different. We forged a special culture.

Here’s an example. Each new employee was asked what their favourite film was. Then they would be instructed to come to their first company meeting dressed as a character from that film – Batman or Cruella de Vil or Rick Blaine from Casablanca.

Was this silly? Yes. Pointless? Not at all.

Small, semi-improvised rituals like this kept things light. And nothing forces people to bond like shared embarrassment.

Our employees from India seemed totally bewildered by the practice. The whole thing had ‘possible HR violation’ written all over it. But that’s how small we were: we didn’t even have HR guidelines to violate yet.

Better Call Saul. 'In our first 12 months we did so much to determine the company’s direction and ethos. Netflix today wouldn’t exist without that,' says Randolph 

Glow. Randolph writes: 'I can’t help but note that the little DVD-by-mail company that Blockbuster could have purchased for $50m [£41m] is now worth $150bn [£123bn]'

The Crown. 'By September 2000, after another round of fundraising, the total amount of money invested in Netflix was more than $100m [£82m]. Since I owned a load of shares, I was now worth an absolutely obscene amount of money... at least on paper,' recalls Randolph 

Narcos. Marc Randolph's favourite Netflix show? It’s about a powerful, disruptive, wealthy organisation finding new ways to distribute a product that millions crave...

It wasn’t long after launch that we got a call from Amazon. Would we be interested in coming up to Seattle to meet founder Jeff Bezos? We would. Amazon was only a few years old but they already had more than 600 employees and were doing more than $150m [£123m] in revenue. Bezos had made clear it was going to be an everything store – and that he was soon going to start selling DVDs.

Reed and I found Amazon in a part of town that looked like a movie set of Skid Row. It wasn’t far from a building with a sign in the window reading ‘Needle Exchange Program’. As we were led into the warren of cubicles that made up the offices, it was hard for me to believe that this was the company reinventing e-commerce. The carpeting was stained; the partitions used to separate the cubicles were dirty and torn. Dogs roamed the hallways. There were multiple people per cubicle, desks under the stairs, desks pushed to the edges of hallways. Almost every horizontal surface was covered: by books, papers, printouts, coffee cups, plates and pizza boxes. It made the green carpeting and beach chairs of the Netflix offices seem like the executive suite at IBM.

Bezos’s desk, and every desk in the office, was made of doors that had been mounted atop wooden legs.

He was wearing pressed khaki pants and a crisp, blue Oxford shirt. Behind him, hanging from an exposed pipe in the ceiling, were four or five identical pressed blue shirts. ‘OK, Jeff,’ I said. ‘What’s with all the doors?’

‘It’s a deliberate message,’ he explained. ‘It’s a way of saying that we spend money on things that affect our customers, not on things that don’t.’

Bezos was notoriously frugal – even cheap. He was famous for his ‘two-pizza meetings’ – the idea being that if it took more than two pizzas to feed a group of people working on a problem, then you had hired too many people. People worked long hours for him, and they didn’t get paid a lot.

He showed Reed his watch, bragging that it updated itself 36 times a day by picking up the radio signal from the national atomic clock.

A Star Trek fan, Bezos had spent his childhood acting out scenes from the show with his friend. His pals would play Kirk or Spock. Jeff was always the Enterprise’s computer.

Reed ran Jeff and Joy Covey, Amazon’s chief financial officer, through the Netflix numbers, and then Bezos headed back to his office. ‘I’m very impressed with what you’ve accomplished,’ Joy started, ‘and I think there is lots of potential for a strong partnership to jump-start our entry into video. But…’

I’m not a ‘but’ man. Nothing good ever comes of that word.

‘But,’ Joy continued, ‘if we elect to continue down this path, we’re probably going to land somewhere in the low eight figures.’

That meant $14m to $16m [£13m]. A pretty good outcome for me, but on the way home, we decided that we weren’t ready to sell.

I spent the autumn of 1998 dealing with a porn scandal. The US had been gripped by the investigation into President Bill Clinton’s affair with Monica Lewinsky. For the first time, a sitting president had been compelled to testify in front of a grand jury.

Although his testimony was secret, the session had been videotaped, and now it was announced that in the interest of public transparency, the video would be released to all the major broadcast networks.

We saw an opportunity to use new technology to turn the broadcast into a DVD and sell it for two cents as a publicity stunt: ‘Netflix lets consumers put in their two cents regarding Clinton testimony.’ We got nearly 5,000 new customers and press exposure in The New York Times, The Wall Street Journal and The Washington Post.

However, the following Monday, I was just walking into the office when Corey grabbed me. ‘There’s some funny comments running across the board this weekend. They’re saying we sent them some kind of porno?’

Immediately I had a sinking feeling.

When they said that their DVDs were pornographic, they didn’t mean that Clinton’s testimony was occasionally X-rated. They were saying that we had sent them real, honest-to-God pornography.

We eventually worked out that as a result of a mix-up at the site where the DVDs had been made, we’d been given a batch of hard-core porn discs, as well as our Clinton ones.

Like Bill, we came clean. We sent out a letter to every one of the nearly 5,000 people who had put in their two cents. We explained what had happened, and we apologised for any possible offence. And if they had received the porn version, we asked that they return it to us, at our expense, after which we would send them the proper DVD. Funny thing. Not a single person did.

By September 2000, after another round of fundraising, the total amount of money invested in Netflix was more than $100m [£82m]. Since I owned a load of shares, I was now worth an absolutely obscene amount of money... at least on paper. We had more than 350 employees and were approaching 200,000 paying subscribers. However, the faster new subscribers poured in, the faster money poured out. This was because everyone who wanted to try Netflix got their first month free. That was expensive.

It was time to seek ‘strategic alternatives’.

When a company decides to seek strategic alternatives, what they’re saying is, ‘We’ve got to sell this sucker. And fast.’

The obvious strategic alternative was our biggest bricks-and-mortar competitor, Blockbuster. We had been reaching out to them but had heard nothing.

That month, we went for our first corporate retreat, three days at a Californian ranch in the middle of nowhere. We had a banquet on the second night. There was alcohol. I was wearing lederhosen (don’t ask). I climbed onto a table and, to the tune of God Rest Ye Merry, Gentlemen began singing a skit song, the chorus of which was: ‘And we soon will be rolling in dough... Rolling in dough, and we soooon will be rolling in dough.’

As I reached the end, a commotion started at the far end of the hall. It was Reed, wearing a vintage red gingham dress. He’d swapped clothes with our product manager Kate Arnold. Reed doesn’t really drink but when he does, he makes it count. He stood on one of the benches, flouncing the ruffles of his dress and curtseying.

That was the point at which Blockbuster chose to call. They wanted to see us. Tomorrow morning. In Dallas.

We flew by private jet to the meeting. The Blockbuster office was on the 23rd floor of the tallest building in Dallas. Their conference room was almost like ours – if ours had been 50 times bigger – and with a 30ft conference table made from an endangered hardwood with hidden power outlets and audiovisual plugs, rather than an eight-foot folding table with an extension cord.

Reed ran through his pitch about how we could run the online part of the combined business and Blockbuster could use us to accelerate its entry into DVD.

Finally, Ed Stead, the Blockbuster lawyer, asked: ‘If we were to buy you, what are you thinking? I mean, a number.’

‘Fifty million,’ Reed said.

I looked at the Blockbuster chief executive, John Antioco. He was struggling not to laugh.

The meeting went downhill pretty quickly after that. ‘Blockbuster doesn’t want us,’ I said on the plane on the way back. ‘So it’s obvious what we have to do now. It looks like we’re going to have to kick their ass.’

We tightened our belt, refined our systems, and in late 2001 we hit our target of one million subscribers. And we continued to grow.

Netflix went public in May 2002, about five years after I first lobbed the idea of DVDs by mail across the car to Reed. We’d turned an envelope and a Patsy Cline CD into a publicly traded company.

I can’t help but note that the little DVD-by-mail company that Blockbuster could have purchased for $50m [£41m] is now worth $150bn [£123bn].

And guess where Blockbuster is?

They’re down to one last store.

I keep thinking I’ll make a trip to pay my respects, but I haven’t found the time.  

'That Will Never Work: The Birth Of Netflix And The Amazing Life Of An Idea’ by Marc Randolph is published by Endeavour on September 17, priced £20.  Offer price £16 (20 per cent discount) until September 30. To pre-order call 01603 648155 or go to mailshop.co.uk 

Pre-order a copy of That Will Never Work for a chance to win an exclusive online mentoring session with Marc Randolph. For full details, click here