Today in Tedium: Last fall, controversial satirist Andy Borowitz wrote a piece that tied together two stories that were getting a lot of attention in the news around that time: Former president Barack Obama’s move into film production, and current president Donald Trump’s impeachment. Because Borowitz publishes in The New Yorker and his satire is on the wrong side of subtle, featured in a publication that publishes actual journalism, the headline “Obama to Produce Netflix Series About Trump’s Impeachment” led to enough confusion that the Associated Press had to publish a fact-check about the false story. But if Netflix was involved in such an endeavor, it wouldn’t be the first time. Oddly enough, see, Netflix actually made its name on the prior impeachment in a surprisingly clever way. Today’s Tedium talks about Netflix’s brilliant 1998 growth hacking strategy. — Ernie @ Tedium
Thanks again to David Friedman, who has the best username on Twitter, for flagging this for me.
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How the launch of the DVD gave Netflix’s founders the perfect starting point
Today, Netflix produces (not just distributes) so much content that you’d never be able to watch it all. But to build to that point, Netflix had to do a lot of things right over a long period of time. And it’s had to evolve its strategies numerous times over its two-decade lifespan.
But the company had to start somewhere, and that place was in 1998, as a company that had built itself around a technology that was relatively untested in the market, the DVD player.
In 1996, the first DVD players showed up in Japan, and by the middle of 1997, the U.S. had a growing DVD market of its own. Despite the tall tale that Reed Hastings told investors—that he built Netflix out of frustration with late fees from an Apollo 13 rental from Blockbuster—the reality was that the company came out of discussions between Hastings and his cofounder, Marc Randolph, around the time that their former companies merged.
The DVD had a lot of things going for it as an idea for distributing content. Built around a standard, it was clear that momentum could build around it becoming a mainstream way to record and distribute content, replacing both the VHS recording and the LaserDisc. But at the time Randolph and Hastings found it, it was still an extremely expensive and fairly rare technology, with early units selling for as high as $750 ($1,194 today).
But signs were promising. According to Sound & Vision, about a million DVDs sold in that first year, despite only around 530 titles being on the market. Hastings and Randolph, discussing the idea during commutes together, knew that its biggest advantage might be its size—which meant that it could be mailed very cheaply.
The Apollo 13 story, while still held up in Netflix legend today, just provided a perfect ribbon around the bow that is Netflix’s value proposition to investors.
It was a neat idea—one that launched publicly in April of 1998—but the DVD was still very young, and their flat-fee casual rental strategy still hadn’t been uncovered. They needed something to sell the concept of DVDs-by-mail to the public.
Oddly enough, such an opportunity surfaced in the news cycle.
“Congress released this material with the intent that it be made available to the widest possible audience. By offering the complete Clinton testimony on DVD for only $.02, we believe we are making it possible for virtually every DVD owner to easily review this material and form their own opinion.”
— Marc Randolph, the first CEO of Netflix, discussing the company’s plan to sell Bill Clinton’s grand jury testimony to the public for two cents in a September 1998 press release. The company was able to pull together the DVD release of the testimony, which it sold as a loss leader, in a single weekend. The company initially planned to give it away for free, minus the cost of shipping, except the system had no way to give away something for free—an ironic note given the company’s later business model.
An edited version of Bill Clinton’s grand jury testimony, in case you want to skip to the important parts. (note: explicit subject matter)
How Netflix leveraged the sudden release of key impeachment testimony to earn itself national press
As entertainment goes, President Bill Clinton’s August 17, 1998 grand jury testimony—which can be viewed, in full, on C-SPAN—does not exactly carry the fireworks of the film Bird Box or the sixth season of BoJack Horseman.
It’s literally Clinton, speaking before the Office of Independent Counsel Ken Starr about allegations of lying under oath during a sexual harassment lawsuit (involving Arkansas state employee Paula Jones) about an affair (with White House intern Monica Lewinsky). It’s around four hours long, and Clinton is responding to questions the entire time, sometimes in graphic terms. As a piece of history, it’s unparalleled—no other president, including the current one, has ever subjected himself to this type of grand jury testimony. The things he said during this recording directly led to his impeachment, though not his removal from office. (As in 2020, the votes simply weren’t there.)
This clip, unique in American history, begs for editing and curation, but despite this, there was a strong interest in the full video, thanks to its limited initial distribution. (The full text of the testimony, as published in 1998, still resides on the Washington Post’s website.)
It had been kept under wraps for roughly a month after it had been recorded, but this was about to change—on September 18, 1998, the House Judiciary Committee decided to release the whole thing to the public, creating something so compelling that cable news networks aired the whole thing in full.
And through a unique mixture of Silicon Valley connections and good timing, Netflix had found an opportunity to exploit this video to its advantage.
In his recent book, That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea, Netflix cofounder Marc Randolph laid out the plan, which was formulated with the help of two early figures in Netflix’s history—Mitch Lowe, the vice president of business development and strategic alliances, and Arthur Mrozowski, the CEO of Media Galleries, a post-production firm that specialized in DVDs.
Mrozowski, a friend of Lowe’s, knew of a firm called Mindset that claimed to have the ability to encode analog tapes to DVDs in real time. Which meant that they had the ability to convert a piece of film, press it to DVD almost immediately, and mail it to whomever wanted it.
Lowe was interested in testing this capability out, but identifying the perfect test case wasn’t easy—until the plan to release the grand jury testimony was announced. Lowe, who had made his name on a RedBox-style video rental machine called Video Droid, was well-connected and quickly found a source for the raw video.
While there was a bit of debate over whether it was the right move, per Randolph, the very-young company was well-positioned to put its chutzpah to good use. Some of the key decisions made in the process of producing the DVD (including the price) came about because of a low-key, non-corporate approach that helped to encourage creative thinking.
“We’d built a company where freewheeling discussions sometimes turned heated—and it was okay,” Randolph wrote in his book. “Where ideas were more important than chain of command. Where it didn’t matter who solved a problem—only that it got solved. Where dedication and creativity mattered a lot more than dress codes or meeting times.”
Lowe was the point person on the whole affair, getting the master from Mindset and copying the discs at Media Galleries. And while it was not easy—Randolph describes Lowe returning to the office after a stressful 72-hour period in which he did not sleep—his efforts were successful. They didn’t even buy or design labels for the discs. They just shipped them out, bare.
For one thing, they didn’t need to. Netflix was the only company in the world selling a hot title on DVD. However, the title proved a little hotter than they expected.
The estimated number of copies of the DVD that were produced. The company stated in its press release that the first 2,000 copies were sold at 9.95 with a $4 rental price, but that it was cutting the price to two cents plus shipping to “encourage public education.” Per Randolph, the gambit earned the company 5,000 new customers at a cost of less than $5,000—a major shot in the arm for the then-new company.
So, it turns out that not everyone got Clinton’s grand jury testimony on their DVD
Netflix’s wild bet on political scandal succeeded in almost every single way a story like this possibly could. (Emphasis on almost.) It earned the company press in some of the biggest publications in the country, including Variety, The New York Times, The Wall Street Journal, and The Washington Post.
The story, in many cases, was played with a bit of a sneer by the press, an accepting wink that a new startup had successfully played the PR fiddle perfectly.
“If you are one of the dozens of Americans who cannot get enough of the Clinton-Lewinsky saga, a California company called Netflix has just the thing for you,” Peter H. Lewis wrote in The New York Times.
Lewis wrote, seemingly sarcastically, that the DVD was rated NC-17. (The discussion was at times explicit, but a film of this nature likely wouldn’t have been rated, especially with that turnaround.) It turns out that, at least for some of the company’s customers, that rating might have actually been a bit on the mild side.
See, in Lowe’s haste to get a DVD made, he and others made a mistake, grabbing the wrong spindle of DVDs—which, reminder, didn’t have labels. And it turns out that Media Galleries had some fairly explicit DVDs in the fabrication line that day, and Netflix ended up mailing a number of them to its customers.
At least one mixed-up copy of the fateful DVD ended up in the hands of someone who actually served in the Clinton White House. According to The Washington Post’s “In the Loop” column, Jonathan Kopp, who served for Clinton during his first term, paid the two cents plus shipping for the DVD, only to find the questionable film, titled The Lonely Widow, instead.
“Now I understand what Ken Starr was watching when he did his report,” Kopp quipped to columnist Al Kamen.
Per Randolph, the company apologized, and offered to replace the botched DVD for a real one, on the company’s dime. Lowe, who regaled the tale years later, noted that the situation had a particularly amusing silver lining.
“We told our customers to send them back—no one did,” Lowe said in 2018 at a Sundance event.
Netflix is an established company at this point, with less room to play around in quite this way today. It’s basically an arm of Hollywood at this point.
But at least one key figure in the early days of Netflix is still taking pretty crazy risks in his career along these lines.
Mitch Lowe, the man responsible for coming up with the impeachment marketing tactic, spent the last few years pumping air from his lungs into the troubled Helios and Matheson Analytics, the parent company of the infamous startup MoviePass. He was MoviePass’ CEO.
If you watched the saga of MoviePass, the startup that promised you could go to the theater and watch a movie whenever you wanted for a single subscription price, and thought that was the work of a crazy marketer, you might not be surprised to find out that the same guy was responsible for the leap of faith that gave Netflix an important jumpstart.
The difference between Netflix and MoviePass was that Helios and Matheson couldn’t convert on its attention-grabbing strategy. But when you can convert, it makes all the difference.
In 1998, there wasn’t really a term for what Netflix did, but in 2010, a guy named Sean Ellis came up with a term for it: growth hacking.
“The right growth hacker will have a burning desire to connect your target market with your must have solution,” Ellis wrote. “They must have the creativity to figure out unique ways of driving growth in addition to testing/evolving the techniques proven by other companies.”
Sometimes, a good growth hack might involve a distribution strategy that stays consistent over a number of years, like how Dropbox gives away free space if you get referrals to sign up using your code. Other times, it’s a matter of taking something happening right now and exploiting it, cleverly.
The latter is what Netflix did back in 1998. It might’ve been just the jump in attention they needed to remain a dominant force in our lives 22 years later.
Good thing at least some of the DVDs offered what was advertised.
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