By now, most techies know the celebrated story of howto kill off the late fee, , and .
But "Netflixed," a book coming out next week, aims to set the record straight about how the company seized supreme power in online video rentals and who was responsible for that success, as well as offer clues to where the company may be headed.
Gina Keating, the book's author and a former reporter for Reuters, spent two years researching the project, which offers an insider's view of the strategy, chaos, and hand-wringing that went on behind the scenes at Netflix and Blockbuster during their Internet-based dogfight. "Netflixed" touches on last year's price increase and Qwikster debacles but doesn't go too much into detail. She said that Penguin Books bought her proposal about Netflix v. Blockbuster and was more interested in that.
Keating spoke with CNET this week to discuss the findings in her upcoming book.
Q: You started on the book in 2010, right? What was the most surprising thing you found out about Netflix?
Keating: Right. I started it in March 2010. The most surprising thing to me was that there was this era at Netflix from 1997 to when it went public in 2002 that was totally undiscovered territory. It's not on the company's Web site and nobody really talks about it there. To me, it set the defining characteristics for Netflix. The DNA was created during that period when (Netflix co-founder) Marc Randolph was there. All those people (the founding group), left and this engineering mindset kind of took over, which was very beneficial for them in the battle with Blockbuster because they needed that optimization. But the consumer facing, sort of quirky characteristic that people really loved about Netflix, was created by Randolph. I was most surprised to find out about him. He was an incredibly important character and he's just nowhere in the company lore.
I always thought that Reed Hastings was an essential figure in every part of Netflix's development. That isn't true, according to your book. Why do you think that's buried or not included when the company discusses its history?
Keating: I interviewed Reed many, many times. I knew him as well as a reporter is ever going to know a CEO. He didn't cooperate with the book and I have to draw my own conclusions. So, like a lot of CEOs, he became very enmeshed with Netflix. I just think that he felt that it reflected him, and more and more it did. Netflix now is extremely different from Netflix when Marc Randolph was there. But the platform the founding team created and the attitude that they had about what they were doing -- that they were supposed to benefit customers first -- that was all Marc Randolph.
Read CNET's story: "Netflix's lost year: The inside story of the price hike train wreck."
Many people told me that Reed just doesn't have that human...they called it an emotional IQ of zero. Several people told me that. No one has disputed that in the research that I did. He just doesn't have any kind of empathy toward people in terms of consumers. I think with a lot of great CEOs, there's a little bit of a blind spot there. That was interesting to discover because knowing him for so long I never knew he had that. I just felt that he was one of the smartest CEOs I'd ever met and this little vanity thing was really interesting to me. I think maybe he just didn't value it very much. He didn't understand how important it was until Qwikster happened and it became very obvious to him.
Why do you think Hastings and Netflix didn't participate in the book? Though you touch on some of Hastings' quirks and shortcomings, most of the book is about how smart and skilled he and his management team were in defeating Blockbuster.
Keating: I actually have spoken to some of the people who are still there. I understand that they are very aware of the book, they've passed it around and that there are people within the company who really want Reed to take note of the conclusion that I reach, which is that he's not good at the consumer-facing aspect of the business and he needs help with that. I know outwardly they say that they are not super enthusiastic, but I know from just a couple of sources inside that they don't think it's such a bad thing. I think Reed is upset about his portrayal, especially about what we just talked about, that he's not particularly warm or empathetic. But I agree with you, I think he comes out looking great.
You have that wonderful poem from Marc Randolph about how the story Hastings tells so often about the way Netflix was founded is "crap." Hastings has said that Blockbuster hit him with a late fee for "Apollo 13" and that's where the idea for Netflix came from. That's not true is it?
Keating: Randolph told me that Reed began circulating that story when he was still with the company and Reed explained that this was just a way to explain how the company worked -- like the Pez dispensers at eBay. It didn't really happen, but the founding story is long and complicated and is not a lightning strike. Initially the tale was sort of a marketing tool. It tells you everything about how Netflix works.
But what would grate on the founding team is that Reed would go out and just tell that story all the time. It never happened and there is something very indicative about the fact that Hastings would continue to do that. We go back to the hubris of the whole thing. It's sort of, "this company is me; I thought it up," and maybe it just becomes true after a while.
Yeah, because that story also has the effect of wiping Randolph's contributions completely out of the picture.
Keating: When I started doing interviews with the founding team, they were very reluctant to talk about Randolph getting pushed out very slowly. As I got to know them and did more interviews with them they began to open up more about their resentment about being completely erased from Netflix history.
You write a lot about what took place behind the scenes at Blockbuster. So, are you convinced Blockbuster could have defeated Netflix had former Blockbuster CEO John Antioco not resigned?
Keating: I think they could have and Reed has admitted that before. I had an interview with him in 2009 where he explicitly stated that "If it hadn't been for their debt, they could have killed us." And they could have. Netflix's metrics were all showing that if Blockbuster continued on this suicide mission to grow Total Access (the Blockbuster program that enabled customers to rent in store or online for one monthly price) then Netflix was done. Netflix's stock would have collapsed. Although it would have been, I think, very Pyrrhic had it happened because Blockbuster was so much in debt and this new debt they were taking on was going to capsize them if anything went wrong.
That Blockbuster team really didn't know what they were doing. They were trying everything. You have to give them a lot of credit because they didn't have the technology background at all and they were just flying by the seat of their pants. The thing that they did figure out was that if they had a better economic proposition than Netflix, they would win. I'm not totally convinced that Blockbuster would have walked into the position that Netflix is in now, but I think they could have damaged Netflix. And Blockbuster's idea was that if we can just get Netflix's stock price low enough maybe we can take them over.
Antioco has received a bad rap, according to your book. Contrary to what's been written, he recognized that the era of video stores was finished and digital was the way to go, right?
Keating: Oh God yeah. Sure, they were pretty slow on the uptake. Their first problem was getting Viacom to let them explore online rental. At the same time, they didn't understand why people would wait for a DVD to come in the mail when they could go to the local video store and pick one up. That was a serious blind spot that they had to overcome. But what I admired about the Blockbuster guys was that as soon as they recognized the magnitude of their mistake, they took every action to ameliorate it. They wanted to win this battle and they thought that they could. And what I loved about them and what was a nice foil for the Netflix guys was that they were extremely creative and weren't afraid to try a lot of different stuff.
Netflix was extremely disciplined and very data driven. They have this platform that spits out data on all their consumers. After 15 years they are really able to plot behavior very well. Blockbuster didn't have that, so they had to go by the gut instincts of John Antioco. He's sort of a consummate marketing guy in the old style. So you really have this cybergeek guy in Reed Hastings going up against this old-school marketing guy in John Antioco. I thought this was tremendously interesting to see the different moves they would make. Blockbuster drove (then-Netflix CFO) Barry McCarthy crazy because he couldn't understand why Antioco would do these very risky and counter intuitive things just to try to beat them. It was very hard to counter program against Blockbuster because Antioco could not be predicted.
What about Jim Keyes, the guy who in 2007 replaced Antioco as Blockbuster's CEO? From your book, he appears in every way to be the man who ran the company into the ground. Was it his idea to go back to focusing on stores rather than digital or did Carl Icahn influence his decision? (Icahn is the famed billionaire and former corporate raider who became one of Blockbuster's largest shareholders.)
Keating: I wasn't able to ascertain to what extent Carl was driving the train on this one. Carl told me that Keyes got the job by bringing in a plan for digital delivery. He came in saying, "yes we need digital," but then he went back to what he knew. A lot of people within Blockbuster told me one of the driving motivations behind sticking to the stores so much was that was how Keyes made his reputation at 7-11, but also Keyes and Antioco didn't like each other at all. There was a long animosity (from when both worked together at 7-11). And there was a feeling inside Blockbuster that Jim Keyes was very motivated to tear down everything that Antioco had done. He had a lot of support within the board because of that, because Carl and Antioco didn't like each other.
So there was a feeling at Blockbuster that even though they had made a lot of progress with Total Access and they were on the right track, they just wanted to wipe the slate clean after (Antioco got into a dispute with the Blockbuster board over his compensation and left the company as a result). That's one of the things that I really wanted to talk about in this book: how much the big personalities in companies shape the decisions that are made. They just let this guy [Keyes] go. It was crazy. I remember covering it as a reporter when he came in and he was talking about making the stores great again. I thought it was ridiculous and when I asked the Netflix people about it, they thought it was the greatest thing in the world. They said this is fantastic. If they want to focus on the stores, more power to them because they're going to fail.
Remember, who was on the board of Blockbuster. You had a lot of older guys and women who didn't understand digital delivery and didn't know what was going on with digital media. That was a real failing.