Netflix is one of my all‐time favorite products and companies. But back in 1999, a then very young Netflix—based in Los Gatos, with fewer than 20 employees—was on the edge of going bust. They had a couple of experienced co‐founders, including the now legendary Reed Hastings, but the problem was that they were stuck at about 300,000 customers.
They were essentially providing the same general pay‐per‐rental experience that Blockbuster provided, just an online version. There were, as always, some early adopters, and some people lived in places that didn't have a video store, but in truth there wasn't much of a reason to rent DVDs via the U.S. Postal Service when you could just stop by the local Blockbuster store on the way home from work. People would rent once from Netflix and then quickly forget about the service. They didn't seem very willing to change. The team knew that the service wasn't better enough to get people to change.
Those were the technology‐powered innovations that enabled the new, much more desirable business model.
Even worse, DVD sales were starting to lag, and a Hollywood backlash further muddied the situation. Then there were challenges with fulfillment logistics, difficulty maintaining DVD quality, and trying to figure out how to do all this in a way that covered costs and generated some cash.
Kate Arnold was the product manager for this small team, and the team knew they needed to do something different.
One of many tests they tried was to move to a subscription service. The idea was to get people to sign up for a month, and offer them unlimited movies. Would that be perceived as better enough to get them to change their media consumption behavior?
The good news was that, yes, this approach really did appeal to people. A flat monthly fee and all the videos they could consume sounded pretty great.
The bad news is that the team created some real problems for themselves. No surprise that Netflix customers wanted to rent mostly newly released feature films; yet, these were much more expensive for Netflix to stock, and they would need to stock so many copies of these that they'd very likely run out of money fast.
So, the product challenge became how they were going to make sure Netflix customers could watch a set of movies they would love, yet wouldn't bankrupt the company.
They knew they needed to somehow get customers to want and ask for a blend of expensive and less expensive titles. Necessity being the mother of invention, this is where Netflix's queue, ratings system, and recommendation engine all came from. Those were the technology‐powered innovations that enabled the new, much more desirable business model.
So, the team got to work. In three months' time, the team redesigned the site—introducing the queue, the rating system, and the recommendations engine all in support of Netflix as a subscription service.
They also rewrote the billing system to handle the monthly subscription model (a funny little side story is that they launched without this, as they had the 30‐day free trial month, which bought them the extra time they needed).
With so many moving pieces and interconnected efforts, the daily standups included just about every person in the company.
Between working with the co‐founders on the strategy, validating concepts with the users, assessing the analytics, driving features and functionality with the team—and working with finance on the new business model, marketing on acquisition, and the warehouse on fulfillment—you can imagine the workload Kate faced on a daily basis. Yet, the team got the new service up and running and used this to power and grow their business for another seven years, until they disrupted themselves again by moving aggressively to the streaming model.
Kate would be the first to credit a pretty amazing team, including some exceptional engineers, and the vision and courage of the founders. But I would argue that without Kate driving for the technology‐based solutions that could power this business, there's a good chance Netflix as we know it never would have happened.
One more interesting little aside about early Netflix—when they were struggling for cash early on, they offered to sell themselves to Blockbuster for $50 million, and Blockbuster turned them down. Today, Blockbuster is in the dead pool, and Netflix is worth more than $40 billion.
Kate is now a product leader in New York City.