$150 billion Netflix blunder

Netflix co-founder Marc Randolph said Blockbuster chased them out of their offices in 2000 when they wanted to sell their business during the depth of the dot com crash. It was a costly mistake.

In 2000, Blockbuster was the movie rental king in the United States, with 9,000 stores and 60,000 employees.

Reed Hastings and Randolph, on the other hand, were just two Silicon Valley geeks with a DVD-rental-by-mail idea.

“We’d been struggling since 1998 to find a way to make it work, and by the summer of 2000, we were finally seeing the light at the end of the tunnel,” Randolph said.

“Our no-due-dates, no-late-fees subscription model was a hit. Customers were pouring in, and the company was growing like crazy.”

However, running a subscription business takes a lot of cash since you pay acquisition costs upfront while the revenue comes in over time.

“But it was the height of the internet boom. Cash was plentiful,” the Netflix co-founder said.

Disaster struck when the Internet bubble popped, and venture capital dried up over a few short months.

Randolph said that the .com at the end of their name had previously been a badge of honour. It turned into three scarlet letters.

“With customers flooding in, cash was flying out. We’d spent more than $50 million getting to this point, and now it looked like our success would bankrupt us,” he said.

“Luckily, there is a Silicon Valley playbook for this. It’s called ‘pursue strategic alternatives’- code for ‘sell, and sell fast’.”

The obvious strategic alternative for Netflix was to sell the rapidly growing business to Blockbuster.

“A few weeks later, you’d have found me, Reed, and our CFO Barry McCarthy sitting at a giant conference table on the 37th floor of the Blockbuster headquarters in Dallas, getting ready to pitch,” he said.

The pitch was simple. Netflix would join forces with Blockbuster and run the online business. Blockbuster would run the stores.

“We would jointly develop a blended model. And everyone would live happily ever after,” Randolph said.

“And it was going great. They were leaning in. They asked good questions. Until they asked the most important question of all: How much?”

The Netflix team had rehearsed this question. “We figured we were $50 million in the hole, so let’s go with that,” Randolph said.

Reed leaned forward confidently and told the Blockbuster team: “Fifty Million Dollars.”

“There was perfect silence. Their words were, ‘We’ll consider it’ but we could tell they were fighting to suppress laughter. After that, the meeting went downhill fast.”

“Well, what doesn’t kill you makes you stronger. Or, as my father used to tell me, ‘Sometimes, the only way out is through’.”

The Netflix team knew there was no easy way out. They struggled for years but eventually did make it through. “We had our IPO. We passed Blockbuster in revenue,” he said.

Today, the company that Blockbuster could have purchased in 2000 for $50 million has a market cap exceeding $150 billion.

Blockbuster, the video and entertainment rental powerhouse with 9,000 stores, only has one left.

Randolph said the most important lesson is, “If you are unwilling to disrupt your business, there will always be someone willing to do it for you”.