Disrupt yourself: Netflix co-founder Marc Randolph on why the fledgling startup walked away from 99% of its revenue

Startups have to be willing to disrupt themselves if they’re to have the best chance at long-term success, according to Netflix co-founder Marc Randolph. And he should know.

Speaking at The Uncut Story of Netflix, an event hosted by StartCon at Melbourne Town Hall last week, Randolph talked about Netflix’s infamous meeting with Blockbuster in 2000, which “profoundly changed my life as an entrepreneur”.

At that time, Netflix was two-and-a-half years old with 100 employees and was turning over $US2.5 million in revenue.

“We were also on track to lose $US50 million”, Randolph said.

Blockbuster, on the other hand, had 60,000 employees and was turning over $US6 billion.

“We were nothing to them,” Randolph said.

The Netflix team pitched the startup and were famously laughed out of the room. But ten years later, the video rental giant was bankrupt.

“In some ways, if you’re an entrepreneur, it’s a really inspiring story, because if just a handful of people with no experience in the video took down a $6 billion market leading organisation,” Randolph told the crowd in Melbourne.

“But, it has a very different moral if you’re working for the $6 billion market-leading organisation,” he added.

“You never know who’s coming after you. They may well look nothing like you … and they’re going to come after you not by doing the things you do well, but by doing the things you don’t do, or can’t do, or are scared to do.”

Whether a company is big or small, it has to be able to disrupt itself, Randolph said.

“If you can’t figure out how to disrupt yourself, you’re leaving it wide open for someone else to disrupt your business for you.”

This is not just talk from Randolph. Netflix started life in 1998 as a DVD rental-by-post service that also sold DVDs on the side.

By the end of its first year in business, however, 99% of its revenue was coming from sales.

“That was bad news, because selling DVDs was a commodity business,” Randolph said.

It was just a matter of time before other people started selling DVDs, he added.

“Pretty soon the margins would be driven down to zero, and out of business we’d go.”

It was the rental market that was promising, with the potential of much higher margins, but that wasn’t what customers wanted. On the other hand, the DVD sales business, although popular at that time, had a shelf life.

“It would have taken years. It would have been this apparent success, but we knew we could not compete to that distance,” Randolph said.

“If we were going to do one thing right we had to pick one thing and focus on it.

“In one day, we pulled the plug on selling DVDs and walked away from 99% of our revenue,” he added.

It was one of the most difficult decisions the founders ever made, Randolph said, but, of course, it turned out to be the right one.

“It was more important to us to take a long shot at a potentially huge business than to ride a sure thing into the ground”.

Netflix started testing ideas of how to make the rental business work, and eventually stumbled onto the subscription model.

They tested a model with no due dates or late fees for rental returns, and a monthly fee for as many movies as the customer wanted.

“It was magic. When we tested all three of those crazy ideas at once, it worked, and all of a sudden things took off,” Randolph said.

The company went from struggling to find a sustainable business model to struggling to maintain the growth.

But there came a point when the founders were faced with a similar predicament once again. Netflix was trying to get its online streaming business off the ground while also running the DVD subscription business.

This time, they didn’t abandon the DVD business altogether, but “we were never going to compromise”, Randolph says, and the business switched its focus entirely to streaming.

For Netflix, being able to change its model ultimately led to huge growth, Randolph said. And while he admitted “there’s a big element of survival bias”, he maintains that determining one thing to focus on — and being brave enough to change that thing — is key.

“I could never, ever have envisioned that Netflix could become what it’s become,” Randolph said.

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