Reading Marc Randolph’s “That will never work”

“The truth is that no business plan survives a collision with a real customer. So the trick is to take your idea and set it on a collision course with reality as soon as possible”

Marc Randolph, That Will Never Work

 

Marc Randolph published last year his account of the foundation of Netflix. It’s a really good book I strongly recommend. By walking the reader through the different steps associated to building Netflix from the ground up, Randolph illustrates how some key guiding principles helped the founders make the right strategic choices (and leverage as much as possible some crucial contextual circumstances). This story can also be a source of inspiration for anyone in mobile games trying to build something successful. The prose makes the narrative engaging, and more importantly the book highlights some core key values that were necessary for Netflix to succeed early on (the book is on the first few years – it doesn’t discuss the pivot to streaming).

 

The book

The book is full of great nuggets. For example Randolph discusses the kind of people you need to build a team for a startup – and how that’s not the same kind of people you need for later growth stages. There are plenty interesting anecdotes concerning dealing with investors. When discussing the need to get a movie database for the website on lunch, Randolph argues that if you can buy it or build it, then you should build it. There are some interesting insights around the culture of experimentation and testing at Netflix. Specifically concerning the culture of constant testing required to quickly identify high impact ideas. The below quote will probably resonate strongly with anyone who has worked with AB tests in the past:

“We’d learned, before launch, how to test efficiently. It didn’t matter, in the end, how great a test looked – there could be broken links, missing pictures, misspelled words, you name it. What mattered was the idea. If it was a bad idea, even more attention to detail in our test wasn’t going to make it a good one. And if it was a good idea, people would immediately fight to take advantage of it, despite obstacles or sloppiness on our end.”

 

The main takeaway (and main value of the book) for me is that there were 3 key factors in the success and growth of Netflix:

  1. Technological circumstances
  2. Focus
  3. Business model

 

Technological circumstances

What drove the founding of Netflix is not so much one idea in particular. It’s the desire to build a company, and the vague idea of selling something over the Internet. When Randolph and Hastings started working on their idea, not only was video rental still a thing. Movies were watched on a VHS. And because of that technological landscape, the idea of sending movies by mail was simply not viable. VHS were very expensive to acquire. Also, VHS tapes were very large – that made it both costly to store, and more importantly prohibitively expensive to ship by mail.

What made it possible to simply consider the idea behind Netlfix – the necessary starting point – was the advent of the DVD. Randolph points out something that – twenty years later – is not always discussed as much as development processes and product ideas. The change in technological environment (and not just the Internet) is what made Netflix possible.

Here we think about an expanded definition of technology. It’s not just about DVDs, DVD players and Internet connections. It’s also about the way people use that technology on a larger scale. You need DVDs to exist to be able to store them and ship them cheaply. But you also need the widespread adoption of the technology to have a potential customer base. You need the technology that will make the business case viable – plus the adoption of the technology among the potential user base.

Netlfix was built on the bet that DVDs would become mainstream (even if only for a short amount of time). In order to be succesful, Netflix needed to be the first mover and get ahead of the curve. It took a chance on a technology before its adoption had been proven. That was the risk that needed to be taken in order to be a first mover in that space. In a way, success stories always have a sense of “Darwinian retro-activeness”. The successful endeavors are the ones that took a chance that ended up working in their favor (you don’t hear about companies that took a bet that didn’t pay off quite as much).

Stated differently, the foundation – and success – of Netflix depended in large part on the evolution of entertainment media and the emergence of a new business model (more on that below). With Netflix, you had Internet meets DVD meets viewing patterns.

Focus

One of the most inspiring parts of the narrative for me concerns the company’s radical commitment to focus. Early on, the large bulk of revenue at Netflix was coming from selling DVDs. But that wasn’t the main vision – and the inevitable entry of Amazon in the DVD selling space meant selling DVDs could only be a short-term thing. So, Hastings and Randolph decided to cut that part of the business to focus exclusively on rentals. At the time that decision was made, selling DVDs accounted for over 95% of the company’s revenue. You don’t always hear such examples of focus.
At Netflix this dedication to focus apparently came to be known as the “Canada principle”. For the longest time, Netflix decided not to expand its operations to Canada – despite an almost guaranteed jump in revenue of 10% – because dedicating resources to this part of the business meant diverting resources to something that could have a greater impact. Netflix’s radical refusal to dilute its focus appears as an undeniable source of success in its early years.

Business model

There were 3 main innovations at the heart of what ultimately became Netflix’s business model. First, the idea of a “home rental library”. In other words, no late fees. Second, the idea of “serialized delivery”. Customers could set up a queue of movies they wanted to watch. And when customers sent a movie back, Netflix automatically sent the next DVD in the queue to the customer. Last – but obviously not least – the subscription model.
The subscription model meant dropping the “a la carte” rental model (here, another illustration of focus). It also meant 2 important things. With a subscription model, you are “divorcing value from unit”. Customers pay the same amount, regardless of how much content they consume. With the subscription model, customers pay for potential.
Also, with a subscription model the default payment mode for customers is to be charged continuously. Customers need to be actively ending their subscription to stop paying and using the service. This is the opposite of a “transaction model” where customers are actively making a purchase on a punctual basis. A subscription model is the continuous payment by default. Interestingly, in this case divorcing value from unit actually becomes beneficial for the billing company (you do wonder however about the value this brings to the customers).

What this can mean for people in mobile (and/or free-to-play) gaming

The notion of focus is perhaps the one that can resonate the most with people in mobile gaming. It can be tempting to dedicate resources to the “sure thing” in your game. And to be fair, there are some circumstances where going for the sure thing – even if it brings a marginal improvement – can be the right call. This commitment to the greatest impact possible – and the refusal to settle for moderate gains simply because they are very certain – is something that every team should strive for. What is clear from the story of Netflix is that you can only achieve great things of you’re willing to take a chance and focus all your resources on your best bet (the culture of experimentation can ensure you don’t dedicate too much resources for too long before noticing confirming you’re on the right track or not).

The discussion about subscription is also very interesting. It’s very in line with current debates in the field. More specifically, the idea of “pay for potential” is probably the way we need to think about a successful subscription-based monetization format in mobile games (we – as an industry – probably need to focus more on that and less on the “default billing” part of the subscription model).

Aside from those two points, I’m walking away from this book with a more acute sense that we are content creators. Probably because one thing that was crucial for Netflix – namely the technological circumstances – are not a big consideration in the day-to-day of the mobile gaming environment at the moment. AR/VR do exist, but it can hardly be considered something mainstream. More importantly here, nobody can start making a game before the new medium on which it will run has been created. As content creators, we depend on the previous existence of a technology or functionality.

In mobile games, I feel like we too often turn to other tech companies for examples to emulate. I suspect – it’s only a suspicion, I have no data to back this up – that’s because culturally speaking there is a large part of people on the content creation side that have a STEM background (maybe more than in the movie or music industries). Reading the book made me think we should probably turn more to other content creating industries for inspiration. Netflix (or Google, Facebook, Amazon, Spotify, Airbnb, or any other tech company usually considered an example in the tech industry) is not a content company (at least at first). Netflix was founded on the idea it would provide people with a new way to deliver and consume movies at home. The tech companies that color the myths of tech entrepreneurship are in the business of “functional innovation”. They are building functionalities that didn’t exist before and allow people to do things they weren’t able to do before that technology or service was developed. Netflix was built as a service company. It was a content provider, not a content producer. It provided a new way to provide content for a new medium (in this case DVDs). It’s much easier to see if you are successful in producing a service that works than entertainment content that is appealing. Building an app that doesn’t crash is not the hard part of the process in mobile free-to-play games. It’s finding the right content that resonates with the audience.

Interestingly enough, Randolph gives a very compelling example that helped inspire his own endeavors (he dedicated the entire chapter 14 to that: “Nobody Knows Anything”). His example is not from a tech company, but from the movie industry. In the movie industry, nobody really knows how well a movie is going to do – until after it’s out. There is a fundamental uncertainty at the heart of content creation. Even if it’s functional, you can’t tell if it’s going to work. On the other hand, when you are working on a new functionality, it’s much easier to see if you are achieving your goal (of course, the uncertainty around market relevance is always present).

Because of that uncertainty, you have to trust yourself and go with the ideas you believe in. Even more when you are in the business of content creation. That means try to reassure yourself less with data and follow the consistency of your vision (here the experimental process can ensure you “test the mettle” of your ideas and minimize the amount of resources you dedicate to an idea before you know it’s good). Tech companies are good trying to develop processes to minimize uncertainty and achieve a desired result. It’s easier to see if the desired result is achieved when you are developing a specific functionality. It’s not quite as black and white when you are producing an entertainment content. The story of Netflix can help us see that developing content – regardless of the medium – is very different from building an innovative functional technology. And probably we could benefit from turning to examples that come from more traditional content industries.

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