The Wall Street Journal - 07.09.2019 - 08.09.2019

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TECHNOLOGY

over 600 employees and was doing more than $150 million in revenue. But as Jeff and I chatted about our launch days, I could see in his face that in many ways he missed those simpler, more exciting times. Reed, on the other hand, has never been someone who dwells on the past. He was impatiently jog- ging his leg up and down. He wanted, I knew, to direct the con- versation to how Netflix could fit with what Amazon was doing. I was just about to brief Jeff and Joy on key members of our team, when Reed decided he’d had enough. “We don’t need to go through all this,” he said, exasperated. “What does this have to do with Netflix and Amazon and possible ways we can work together?” Everyone stopped. It was quiet. I was relieved when Joy jumped in to help. “Reed,” she said, “can you help me understand a bit better how you’re thinking about your unit economics?” With obvious relief that we were finally on topic, Reed began running Joy through the numbers. An hour later, after Bezos had headed back to his office, Joy lin-

gered behind to wrap things up. “I’m very impressed with what you’ve accomplished,” she started, “and I think there is lots of potential for a strong partnership to jump-start our entry into video. But...” I’m not a “but” man. Nothing good ever comes of that word. This time was no exception. “But,” Joy continued, “if we elect to continue down this path, we’re probably going to land somewhere in the low eight figures.” When someone uses “low eight figures,” that means barely eight figures, probably something be- tween $14 million and $16 million. That would have been a pretty good outcome for me, since at the time, I owned about 30% of the company. Thirty percent of $15 million is a pretty nice return for 12 months of work—particularly when your wife is hinting it might be time to pull the kids out of private school and move to Montana. But for Reed, it wasn’t enough. He owned the other 70% of the company, but he’d also invested $2 million in it. And he was fresh off the sale of Pure Atria, the company

formed out of his first software venture. He was already an “eight- figure guy.” On the plane ride home, we dis- cussed the pros and cons. The pros? We’d find a solution for our biggest problems: We weren’t making any money. We didn’t have a repeatable, scalable or profitable business model. It was expensive to buy DVDs, to ship them and to give away thousands of them in promo- tions, hoping that we’d convert one- time users into return customers. And of course there was the bigger problem: If we didn’t sell to Amazon, we would soon be compet- ing with it. So long, DVD sales. So long, Netflix. Selling now would solve all those problems—or at least it would hand them off to a larger company with deeper pockets. But... We were also on the brink of something. We had a working web- site. We had a smart team. We had deals in place with a handful of DVD manufacturers. We had figured out how to source virtually every DVD currently available. We were unquestionably the best source on the internet for DVDs. It didn’t seem like the right moment to give up. “Listen, Marc,” Reed said as we watched Mount Rainier scroll by outside the window. “This business has real potential. I think we could make more on this than on the Pure Atria deal.” I nodded in agreement. Then I chose that moment to tell Reed we should abandon the only profitable part of our business. “We just have to figure out some way to get out of selling DVDs,” I said. “Doing rental and sales is con- fusing for our customers and un- necessarily complex for ops. And if we don’t sell, Amazon will destroy us when they enter the field. I think we get out now. Focus on rental.” Reed arched his eyebrows. “Kinda puts all our eggs in one basket,” he said. “That’s the only way to make sure you don’t break any,” I replied. One of the key lessons I learned at Netflix was the necessity of focus. At a startup, it’s hard enough to get a single thing right, much less a whole bunch of things. Espe- cially if the things you are trying to do are not only dissimilar but ac- tively impede each other. Reed agreed with me. “You’re right,” he said. “If we get funding this summer, that’ll buy us some time.” He frowned, but I could tell he was pleased to have something new to chew on. “What percentage of revenue comes from rental right now?” “Roughly 3%,” I said, signaling to the flight attendant for a gin and tonic. “That’s horrible,” Reed said. “But sales are a Band-Aid. If we rip it off...” “Then we have to focus on the wound,” I said. We went back and forth like this for the rest of the plane ride, and it was only when we landed that I realized we hadn’t actually formally decided not to take Bezos’s offer. Without deciding, we’d decided: We weren’t ready to sell. We agreed that Reed would let Amazon down lightly—and politely. In the future, we’d be better off having Amazon as a friend, not an enemy. In the meantime, we needed to figure out a way to get people rent- ing from us.

It was the summer of 1998. DVDs had been in the U.S. market for a little over a year, and Netflix , the e- commerce company Reed Hastings and I had co-founded to sell and rent them through the mail, had been live for just over two months. I was the company’s CEO, Reed its largest investor. Netflix was still pretty small, but we had big dreams: We saw our- selves as an alternative to Block- buster and Hollywood Video. The bad news was that we weren’t making much money. And what little money we were making was coming almost entirely from DVD sales, not rentals. I feared that once others started selling DVDs, our margins would shrink to nothing. So when Joy Covey, Amazon’s chief financial officer, called Reed to see if we would be interested in coming up to Seattle to meet with her and Jeff Bezos, Amazon’s founder and CEO, I felt a mixture of both fear and hope. Amazon was only a few years old, but Bezos had already decided his site wouldn’t just be a book- store. It was going to be an every- thing store. And we knew that mu- sic and video were going to be his next two targets. We’d also heard that Bezos planned to use a good chunk of the $54 million raised dur- ing his company’s 1997 IPO to fi- nance an aggressive acquisition of smaller companies. It didn’t take us long to figure out why Jeff and Joy wanted to meet. Netflix was in play. That feeling—although thrilling— was also a little bittersweet. I wasn’t quite ready to hand over the keys. But when Amazon calls, you pick up the phone. Even if it’s 1998, and Amazon is nowhere near the powerhouse it is today. The building Reed and I entered certainly didn’t look like it belonged to a powerhouse. The reception area was cluttered and dusty. On the desk was a telephone with a printed directory of numbers. Reed leaned over, squinted and dialed. Within seconds, Joy swept into the lobby. She was younger than ei- ther of us. But she was already a re- spected businesswoman, a dynamo who had taken Amazon public just 12 months earlier, convincing skep- tical investment bankers that a company that wasn’t remotely profitable was worth $20 billion. As Covey led us back into the war- ren of cubicles that made up the Am- azon offices, it was hard for me to believe that this was the company in- venting e-commerce. The carpeting was stained. There were multiple people per cubicle, desks under the stairs, desks pushed to the edges of hallways. Almost every horizontal surface was covered: by books, gap- ing Amazon boxes, printouts, coffee

Continued from page B1

When Netflix

Flirted With

Amazon

Cristiano Amon cultivated a make-your-own-luck spirit when he worked to turn around a re- cently bankrupt Brazilian mobile operator in the early 2000s. That same spirit later helped Mr. Amon rise up Qualcomm’s executive ladder. Mr. Amon has helped Qualcomm become a leading chip supplier and a key American technology player at a time when the company has also fought a handful of big, ex- istential battles—including a hostile takeover bid in 2017 and a world-spanning legal challenge to its business model from Ap- ple Inc. Qualcomm settled its differences with Apple this year. Here are four people he turns to for advice. —Asa Fitch

Age: 49 Education: BSEE, Universidade Es- tadual de Campinas (UNICAMP), São Paulo, Brazil Pet project: Restoring a 1970s-era Chevrolet Opala, a muscle car made by General Motors for the Brazilian market

President, Qualcomm Inc.

Cristiano

Amon

Roberto Padovani Former Qualcomm CTO

When Mr. Amon needs sage advice from an experi- enced hand, Mr. Padovani is often the one he turns to first. Especially after he returned to Qualcomm in 2004, when Mr. Padovani was CTO, Mr. Amon sought his counsel on business deci- sions and how to navigate within Qualcomm. “I’d use him as a sounding board,” Mr. Amon says. “He was always available.”

Satya Nadella CEO of Microsoft Corp.

Since taking the reins at Microsoft in 2014, Mr. Na- della engineered a dramatic turn- around that in- vestors have re- warded by making it the world’s most valuable company. Mr. Amon sees Mr. Nadella’s abil- ity to make that pivot—something Qualcomm and other tech companies also may have to do one day—as an inspi- ration.

Roberto Setubal Co-chairman of Brazil’s Itaú Unibanco Holding SA

While their rela- tionship is still young—the men met roughly two years ago—Mr. Amon says Mr. Setubal is a growing influence. He admires the Brazilian banker’s willingness to adapt when cir- cumstances call for it. “He can always bring a per- spective different from the perspec- tive I’m used to,” Mr. Amon says.

Nick Kauser Former AT&T Wire- less Services CTO

As Mr. Amon shifted from tech- nical roles to more business-focused ones, Mr. Kauser’s broad-mindedness and practicality have been an im- portant guide. Mr. Kauser hired Mr. Amon to work at the venture firm that had a stake in the Brazilian mobile company. “He always talks about what is the real problem the technology is solv- ing, versus the technology itself,” Mr. Amon says.

PERSONALBOARD OF DIRECTORS The trusted advisers of top business leaders

From top, Netflix co-founders Reed Hastings, left, and Marc Randolph celebrate on a plane after Netflix’s IPO on May 23, 2002; some of the company’s employees outside their offices on IPO day; Netflix worker Hector Comancho moves boxes of ready-to-be-shipped DVDs in January 2002 in San Jose, Calif.

cups, plates and pizza boxes. It made the Netflix offices seem like the executive suite at IBM. We could hear Jeff Bezos before we saw him. He-huh-huh-huh-huh. Jeff has a...distinctive laugh. If you’ve seen any video of him speaking, you’ll have heard a ver- sion of it—but not the true, un- tamed thing. Now it’s polite, a little giggly. But back then, it was explo- sive, loud, hiccupping. He laughed the way that Barney Rubble laughs on “The Flintstones.” He was just hanging up the phone when we walked in. His desk and the desks of the two other people he shared the office with were made of doors mounted atop wooden legs, braced with triangular metal pieces. I suddenly realized that every desk I’d seen in that office was the same. Bezos was wearing pressed khaki pants and a crisp blue oxford shirt. Behind him, hanging from an ex- posed pipe in the ceiling, four or five identical pressed blue oxford shirts fluttered in the breeze from an oscillating fan. After introductions, we filed into a corner with a bigger table. This table, too, was made from recycled doors. I could clearly see where the holes that used to hold the door- knobs had been patched. “OK, Jeff,” I said, grinning. “What’s with all the doors?” “It’s a deliberate message,” he explained. “It’s a way of saying that we spend money on things that af- fect our customers, not on things that don’t.”

Netflix was the same way, I told him. We didn’t even provide chairs. Bezos was notoriously frugal. He was famous for his “two-pizza meetings”—the idea being that if it took more than two pizzas to feed a group of people working on a problem, you had hired too many people. People worked long hours for him, and they didn’t get paid a lot. But Bezos inspired loyalty. He’s one of those geniuses—like Steve Jobs, or like Reed—whose peculiari- ties only add to his legend. In Jeff’s case, his legendary intelligence and notorious nerdiness mix into a kind of contagious enthusiasm. He peppered me with questions about Netflix. How could I know that I had every DVD? What did I expect the ratio of sales to rentals to be? But he was most excited about the stories about launch day—particularly, the story of the bell we had rigged up to mark each new order. “We had the exact same thing!” he exclaimed. “A bell that rang every time an order came in. I had to stop everyone from rushing over to the computer screens to see if they knew the customers.” We traded beta names: he laughed at Kibble, the name we had used before Netflix’s launch, and told me that Amazon had originally called itself Cadabra. “The problem is that Cadabra sounds a little too much like cadaver,” Bezos said, barking out a laugh. Although Amazon was still rela- tively small in 1998, it already had

Netflix’s market cap today: more than $120 billion. Its first CEO once briefly considered selling it for $15 million.

FROM TOP: MARC RANDOLPH; BILL KUNZ; JUSTIN SULLIVAN/GETTY IMAGES

JOHN FRANCIS PETERS FOR THE WALL STREET JOURNAL

The Wall Street Journal - 07.09.2019 - 08.09.2019

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