The Brain Behind Netflix

Lesley Stahl Profiles Company Founder Reed Hastings

CBS All Access
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The way Americans watch movies has changed dramatically in the last few years because of the man who thought up, and started up a company called Netflix. Now more and more of us rent movies by mail.

As correspondent Lesley Stahl reports, Netflix today rakes in about $50 million a month and other companies, like Blockbuster, are trying to get in on the action. Netflix was started by a math teacher-turned-software tycoon. He asks his subscribers to pay a flat monthly fee – most people take the $18-package – and then order the DVDs they want over the Internet. It's an idea that makes a lot of people say: "Why didn't I think of that?"

And when you hear how the CEO Reed Hastings thought it up, you'll really shoot yourself, because you've probably been in the same boat he was in.

Asked how he came up with the idea for his company, Hastings says, "I was hoping you wouldn't ask that, because it's a little embarrassing! I'd rented a VHS and I had misplaced it and it was six weeks late. So it was a $40 late fee. I remember 'cause I didn't want to tell my wife. Because you know I knew what she would say."

What would she say?

"Just like, you know, an eye roll. An eye roll that could kill! And I thought, 'Oh, great! Now I'm thinking about lying to my wife about a late fee and the sanctity of my marriage for this thing!' I mean it was just crazy. And I was on the way to the gym and I realized – 'Whoa! Video stores could operate like a gym, with a flat membership fee.' And it was like 'I wonder why no one's done that before!'" Hastings explains.

For Hastings, it was the eureka moment.

Most movies were still on VHS nine years ago, and VHS tapes were too bulky and too expensive for the mail. Then a friend told him about a new technology called the DVD and he wondered if those might be a viable option.

"I ran down to Tower and bought a bunch and mailed them to myself and then I waited," Hastings recalls.

He wanted to see if they would get destroyed in the mail. "And I opened them up. And they were fine. And I thought, 'Oh my God. This is gonna work! This is gonna work!' Hastings explains.

And so far, it has: more than five million Americans are getting their movies in skinny red envelopes, by snail mail, and keeping them as long as they want, with no late fees.

Hastings took Stahl to their main warehouse, which is in Silicon Valley. It houses a staggering 26 million DVDs, row after row of big ticket blockbusters, box office bombs, TV shows and thousands of other videos you've never heard of; the company does not carry pornography in its inventory.

There are more than 65,000 different titles. If it's ever been put on DVD, chances are it's in the warehouse.

"There's 40 of these warehouses around the country, so that nearly every customer gets next-day delivery," Hastings explains.

Here's how it works: the warehouse opens at 4 a.m. When the post office delivers the DVDs, Netflix renters send them back after watching them.

"We get 100,000 returns and we open them one by one," Hastings says.

Every DVD is examined for scratches before the ones on order are repacked and shipped out again by late afternoon. Nationally, Netflix moves more than 1.5 million DVDs a day, making Reed Hastings one of the post office's top ten customers for first-class mail.

While 60 Minutes was at the warehouse, one of the employees was stuffing envelopes, at a rate of 1,000 per hour. And so she and all the other workers - associates they call them – break every 90 minutes for mandatory exercises to ward off carpel tunnel syndrome.

Netflix uses the same sorting machines as the post office, which run through 17,000 envelopes an hour, grouping them by zip code; this pre-sorting gets them a postal discount.

Special Netflix software keeps the DVDs in almost constant circulation. Most returns are sent right out again, without going back to the shelves.