When Netflix first exposed its intriguing blueprint to the Hollywood studios some years ago, techno-nerds predicted the majors would likely embrace its bold ideas. They were wrong. Hollywood displayed the same chill toward Netflix as it had toward HBO years earlier. Warner Bros declined to invest, for example, but offered to agree to revenue sharing provided it was issued stock warrants for Netflix common stock. Even Amazon, itself a relative newcomer at the time, secretly offered $15 million for a controlling stake, but Netflix would have to play second fiddle to the books and music it was then pushing.
Netflix’s birth pains and its secret Amazon negotiations were revisited this week in a new book by its co-founder Marc Randolph, who, with his principal stockholder Reed Hastings, felt Hollywood really didn’t “get” their message. The book was thus titled That Will Never Work.
(Full disclosure: I didn’t “get” it either, and I had been given a close-up look, as I will explain later.)
The Netflix-Amazon dalliance seems especially relevant at this moment, when the studios and indies customarily take center stage with their festival product. This season, however, the water-cooler conversation, as it was once called, focuses more on Netflix’s sprawling, three-hour-plus movie The Irishman, or on its Sacha Baron Cohen series The Spy, than on Hollywood features.
So why didn’t the majors get it? Or at least, why didn’t they try to annex Netflix before the company climbed on its roller coaster? “They all looked at us and decided we weren’t making enough money,” concluded Randolph, the first CEO.
Randolph and Hastings sensed that a great money tree existed out there, but no one wanted to gamble on their big dream.
“Warner Bros, like the other majors, admired the bountiful jigsaw puzzle the Netflix guys envisioned but we couldn’t figure out how to put together the pieces,” observed Warren Lieberfarb, then president of Warner Bros Home Video. One of the few visionaries at the majors, Lieberfarb was figuring out the answers but parted company with his bosses before he could implement them.
Now, at a moment when Netflix is exponentially expanding as a content provider as well as a streaming platform, Hollywood’s tactical mistakes seem all the more painful. An early example: At a time when brick-and-mortar thinking already was on the fade, Viacom’s Sumner Redstone invested billions in Blockbuster’s vain initiative to control the DVD-rental business. The Netflix concept, of course, was to skip the stores and rent DVDs by subscription, then sending them out by mail and eliminating late charges.
The studios, meanwhile, were obsessing about Blu-ray technology, hoping their next-generation disc would rule the marketplace. The Justice Department even made special allowances to assist their “teamwork” in approving the multi-studio Internet movie service Movielink. At the same time, however, the majors found themselves oddly competing with themselves: Through a series of complex deals and inadvertencies, Disney and Sony content (contemporary and classic) became available digitally on Netflix, fighting for eyeballs against the majors’ own basic cable networks. In part, these conflicts stemmed from the corporate pressure on the majors to meet quarterly earnings.
Against this background, Netflix was embarking on new initiatives involving the creation of its own product. Ted Sarandos, who, like Hastings, had started out renting DVDs, now emerged as a major force in creating new content, greenlighting (with Scott Stuber) an initial program of some 55 feature films as well as a blizzard of Netflix series.
Had that been part of Netflix original blueprint? The part that he and Hastings had decided not to disclose?
I asked that question since I had been invited to speak at an early Netflix off-site a decade ago. In inviting me, Hastings was vague about the meeting’s objectives. “We just want to sort out some new ideas,” he told me. Since I had been an executive at three of the majors, and had been involved in Paramount’s historic ’70s turnaround, Netflix seemed to want insight into managing creative energies.
Addressing the group of some 30 young Netflix staff members, I confessed I had no magic answers to their questions. The key to a turnaround, I reminded them, was to set forth clear objectives, then build a continuum, avoiding Hollywood infighting and intrigue.
There were lots of questions and ideas exchanged at the session. I concluded these were very bright people. I also realized that I had no idea what their true objectives might be. Netflix either didn’t know where it was headed or didn’t want to show its hand.
Well, now we know. Even Marc Randolph knows, and he had put in 12 months of work; had Amazon closed the deal at $15 million, he would have come away with a cool 30% — Hastings owned the other 70% and had invested $2 million of his own money. That’s a pretty good return on a venture best described in a book with the title of That Will Never Work.