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Why Netflix co-founders turned down Jeff Bezos' offer to buy the company

Jeff Bezos, founder and Ceo of Amazon
Paul Souders | Getty Images

It was the summer of 1998 and it was just two months after Netflix had officially launched (back then it was a movies-by-mail subscription service); the start-up's co-founders — Reed Hastings and Marc Randolph — got a call from Amazon.

"Jeff [Bezos] wanted to meet us," Randolph tells CNBC Make It.

Randolph, who at the time, was the company's CEO, remembers he and Hastings, who served as co-founder and was an investor, were excited to meet the Amazon founder, who was then just starting to expand his e-commerce site beyond books.

Back then, Amazon was also relatively young — it was only four years old and a year earlier (in 1997), it had debuted on the stock market, raising $54 million. Bezos, under pressure from investors, was eager to make aggressive acquisitions to expand the company's footprint.

He wanted to be an "everything store," Randolph writes in his new memoir, "That Will Never Work."

"At that point, [Amazon] had almost $100 million in revenue in selling books," Randolph says, with about 600 employees, according to his book.

Randolph and Hastings knew they had to take the meeting and flew to Seattle to meet with Bezos and his team.

But they were surprised by what they found at Amazon: "We went into that office and it was a pigsty," Randolph says.

"People were squeezed in there. The desks were all doors — like old wooden doors ... on wooden posts," Randolph says. "And Jeff was in an office with four other people."

Randolph says it didn't take long for him and Hastings to figure out that Bezos wanted to buy Netflix to jump-start Amazon's entry into the video market.

And after the meeting wrapped, Bezos' team offered Netflix "somewhere in the low eight figures" to acquire the company.

"When someone uses 'low eight figures,' that means barely eight-figures. That means probably something between $14 million and $16 million," Randolph writes in his memoir.

But considering Netflix was only two months old, that was a pretty significant number for a short amount of work. Randolph owned 30% of the company, while Reed owned 70%. Both of them would have walked away with several million dollars.

On the plane ride home, Randolph says that they discussed the pros and cons of selling.

The biggest pros were that the company wasn't yet making any money; it didn't have a repeatable, scalable or profitable business model; and while they were doing plenty of business (most of it through DVD sales), their costs were high.

Plus, they both knew that if they didn't sell to Amazon, they would soon be competing with it.

"So long, DVD sales. So long, Netflix," Randolph writes.

But in spite of that, both Randolph and Hastings also knew they were "on the brink of something." Netflix had a working website, a smart team and deals in place with a handful of DVD manufacturers. They had also figured out how to source virtually every DVD on the market and Netflix was "unquestionably the best source on the internet for DVDs."

Netflix.com Chief Executive Officer Reed Hastings sits in a cart full of ready-to-be-shipped DVDs January 29, 2002 in San Jose, CA. The online DVD rental site has 500,000 subscribers who can rent, receive and return unlimited discs per month by mail.
Credit: Justin Sullivan / Stringer

Randolph and Hastings decided on the plane ride that it didn't seem like the right moment to give up and turned down the deal "politely" as soon as they landed.

The meeting also sparked them to think about new ways to get out of selling DVDs and have people rent them instead, because they knew Amazon would be big competition.

Their decision paid off. Today, Netflix is the world's sixth-largest internet company by revenue, which exceeded $15.7 billion in 2018 (a 35% increase from 2017). Amazon is the second-largest internet company behind Alphabet Inc., which owns Google.

Netflix has also grown from a movie rental company into a streaming and production company producing award-winning original content, with more than 151 million subscribers worldwide.

Marc Randolph and Reed Hastings on a jet after Netflix debuted on the Nasdaq on May 29, 2002.
Credit: Marc Randolph

Randolph, who left the company in 2003, says the decision taught him that when an opportunity comes, you don't necessarily have to open your door, but you owe it to yourself to at least look through the keyhole.

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