Netflix tried to sell itself for $50M in a year it lost $57.36M. At first it even charged the late fees it was supposedly born to hate

There is a well-known story about how Netflix began. Reed Hastings forgot to return a videotape of “Apollo 13,” got hit with a $40 late fee, felt annoyed, and came up with rentals that had no late fees.

Co-founder Marc Randolph accepted only half of that story in his 2019 book. There really was an overdue copy of “Apollo 13.” But the idea for Netflix, he wrote, had nothing to do with late fees, and in fact the company charged them at the start. The story is emotionally true, he said, but not the whole story.

A company born of anger at late fees charged late fees at first. Several gaps of that kind lie between the story and the documents. Open the 2002 IPO filing and the first of those gaps sits right in the pricing section. Listed companies fall outside this site’s criteria for cases, so the five years up to the listing are followed here, as a column.

From founding in August 1997 to 456,000 subscribers at the end of 2001

Only the Blockbuster row comes from the co-founder’s book. The rest is in the IPO filing.

The late-fee story and the record in the price list

According to the IPO filing, per-title rentals were the main source of revenue from February to October 1999. The subscription began in September 1999, at first $15.95 a month for up to four titles, with each title beyond that at $3.98. Unlimited titles arrived in February 2000 at $19.95 a month, with up to four out at a time.

For about a year and a half, from the website’s launch in April 1998 to the subscription, Netflix was a store renting one title at a time. The late fees Randolph mentions belong to that period. The flat fee without late charges shows up in the documents not as the founding idea but as the conclusion after a year and a half of testing pricing.

What the desk wants to state plainly here is the story’s role. The $40 late-fee story explains the advantage of a flat fee in a single sentence, and it does that job well. Randolph himself grants that it is emotionally true. But placing it at the moment of founding erased from the story the year and a half spent trying out pricing.

In the year it tried to sell for $50M, the loss was $57.36M

In 2000, Hastings and Randolph offered to sell the company to Blockbuster for $50M. According to Randolph’s book, CEO John Antioco was struggling not to laugh. The episode is often told beside Blockbuster’s later decline, as a tale of a big company without vision.

Place the IPO filing’s numbers next to it and the picture shifts. Netflix’s net loss in 2000 was $57.36M, on revenue of $35.89M. The price offered was smaller than a single year’s loss. Subscribers numbered 292,000 at year-end, and there was a single fulfillment center, in San Jose.

What follows is inference: the documents hold nothing that would let anyone call Blockbuster’s refusal in 2000 a mistake outright. Buying for $50M a company that had lost $57M in a year might well have looked expensive to someone who did not know what came next. In that arrangement of numbers, the size of the loss catches the eye before the price does.

The loss shrank the year after the flat plan became standard

In 2001 revenue grew to $75.91M and the net loss narrowed to $38.26M, with 456,000 subscribers. The flat plan with three titles at a time became standard in October 2000, and the following year revenue doubled while the loss fell by more than 30%.

From per-title rentals to a subscription, from up to four titles to unlimited, then to a flat plan with three at a time. What the IPO filing lays out is a record of changing the shape of pricing three times. The change the late-fee story tells as a single flash of an idea survives on paper as three rounds of price revisions.

Small subscription businesses also record reshaping their pricing

Reworking the shape of a subscription again and again appears in the records of much smaller businesses. Trends.vc changed where it drew its paywall and went from $15 in total revenue to $24,000 a month within a year. How churn sets a ceiling on revenue is counted in the column lining up ten cases that disclosed churn.

The list setting Netflix beside other legendary companies is in the column tracing 22 founding legends to their sources.

What could be confirmed

The limits need stating. The truth of the late-fee story was checked only against the co-founder’s book and a programme that discussed it. No rebuttal on this point from the other party, Hastings, turned up in what was read. The $50M Blockbuster story also comes from an article introducing Randolph’s book, not from documents of the time. Whether the subscriber counts in the IPO filing include only paying members could not be determined from what was read.

The story tells of one idea, the documents record three revisions

Read through its story, Netflix’s founding leads to a single flash of anger at late fees. Read through its documents, it leads to a record of starting with per-title rentals, trying a subscription a year and a half later, and changing the shape every six months.

Trying to sell for $50M in a year with a $57.36M loss is told in the story as a big company’s blunder, and stays in the documents as the judgment of a company that valued itself below one year’s loss. The desk thinks the latter describes this company’s founding years far more accurately.