Founding Story Time: Netflix

Perhaps you’re familiar with the founding story of Netflix: the story goes that Reed Hastings came up with the idea for Netflix when he was hit with a $40 late fee on the movie Apollo 13

Business Insider article elaborates: “ He was embarrassed about the fee, and thought there had to be a better way to do movie rentals [Hastings says]:

‘I started to investigate the idea of how to create a movie-rental business by mail. I didn’t know about DVDs, and then a friend of mine told me they were coming. I ran out to Tower Records in Santa Cruz, Calif., and mailed CDs to myself, just a disc in an envelope. It was a long 24 hours until the mail arrived back at my house, and I ripped them open and they were all in great shape. That was the big excitement point.’”

But, like all stories, there are always two sides. There’s no reason to believe that Hastings didn’t incur a video rental late fee, however, there are two problems with this story. 

First, it doesn’t mention Hastings’ co-founder, Marc Randolph, who has been largely written out of the company’s history.

Second, Randolph told Gina Keating, the author of Netflixed, that the story his co-founder Reed Hastings tells about the company’s founding isn’t exactly true. Randolph said that Reed began circulating the story early on in the company’s history.  

Reed has said that this story is just a way to explain how the company worked. Initially the tale was a kind of marketing tool, which strategically is a very effective move. The anecdotal story explains how Netflix operates, why it’s relevant, and why the company is more desirable and functional than its early competitor (Blockbuster) . 

And as company founding stories go, the detailed truth is often arduous and complicated, and not very sexy. It’s not uncommon for companies to craft their founding history into a more concise and creative non-fiction version. 

However, the problem with this particular story is that it not only excludes co-founder and original CEO Marc Randolph, but all of the other founding executives as well. There is no recognition of Mitch Lowe, Netflix’s first Vice President of Business Development & Strategic Alliances, who also present from the very inception of the startup. Nor any acknowledgment of Patty McCord, original Chief People Officer who helped create the Netflix Culture Deck which Sheryl Sandberg has said, “may be one of the most important documents ever to come out of Silicone Valley.” 

Reed Hastings’s Netflix founding story centers around himself and credits the birth of the company to Hastings alone. It creates the idea that, “this company is me; I thought it up” and if you tell a story enough times, sometimes you start to believe it.  

So what’s the other side of the story? The nitty, gritty, unpolished version? Randolph reveals that he first met Hastings at Pure Atria where they both worked. In an interview with BizJournals Marc said, “I became head of marketing for Pure Atria, so I got the chance to work very closely with Reed. I got to meet him professionally but I think the way the whole friendship really was cemented was that both Reed and I lived in Santa Cruz and there was a little commuting group…Patty McCord was part of that group as well.” 

Marc describes a mutually beneficial partnership with his co-worker and carpool buddy: “We both work very well together. We’re both deeply analytical…Reed, of course, is a mathematician, so I was able to introduce him to a lot of the power that the Internet was going to bring the e-commerce.” 

It was during these commutes that Marc and Reed brainstormed ideas for their next company. He said they had the idea of taking VHS video rentals and making an e-commerce video rental site, but they rejected the idea because of the difficulty of mailing VHS tapes.

Randolph reveals, “it was only three or four months later…when all of the sudden we read that DVD, this new video format, was being test-marketed in a number of cities. At that point, we had the insight that perhaps we could dust off this old idea – that DVD might be the trigger to make this work, whereas VHS would not let it work.”

One facet, though, of the Netflix founding myth stories that is actually very true. Randolph confirms,“Reed and I did go down to Logo’s in Santa Cruz and bought a used CD, and then went to one of the little gift shop stores on Pacific Avenue. We bought ourselves one of those little blue envelopes that you put the greeting cards in and we mailed a CD to Reed’s house. We go up the steps to the Santa Cruz Post Office and dropped it in with a single first class stamp and by the next day when he came to pick me up he had the envelope in his hand. It had gotten to his house with the un-broken CD in it. That was the moment where the two of us looked at each other and said, “This idea just might work.” 

Not too long after that, Reed and Marc met Mitch Lowe at a Video Software Development Association trade show. Mitch was a natural fit, at the time he was on the board of directors at the VSDA and had prior experience in the VHS video rental business. 

And as they say, the rest is history. The startup now known as Netflix began to take shape slowly into the mega-giant video streaming site we all know today. 

Randolph’s final reflections on the mythology of the Reed Hastings founding story: “The first thing, myth versus truth is kind of a harsh way to put it. These founding stories are just that–they’re stories. They’re constructs that we come up with to take what’s a very messy process with input from many, many people, and condense it into a story which you can get across in a sentence or two. Quite frankly, with apologies, most press, that’s all they want. That’s the very quick bit. We morph into a story that resonates. And it’s a good story, and Netflix is a story, so I’m okay with that.”

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