Hey, everybody.
Welcome, Spencer Neumann. We're so excited to have Netflix here, finally.
Finally! Good to be here.
It's very, very exciting. We're actually in New York for the first time, which is—i t is what it is. But, there's so—
It is what it is. New York is one of the greatest cities on the planet.
This is the thirtieth year of the conference and the first time we're in New York.
Okay.
But in any event, there's a lot to talk about with Netflix. There's a lot going on with you guys. So, let's start with the password-sharing crackdown. Can you talk about the rollout of paid sharing and what changes Netflix implemented between the first quarter and second quarter rollout that seems to have had a big impact?
Yeah, sure, sure. Jumping right into it. All right. So, yeah, we, you know, I guess, again, as you kind of step back, when we, before we rolled out paid sharing, we had, over 100 million borrowers out there that weren't paying for Netflix. So it was great to have all that watching, but we had to—b ut it was free watching, and we had to address it, because if we wanna drive that kind of sustained kind of flywheel of, healthy revenue growth and reinvestment back into the business, better service for our members, we had to address all that free viewing. So, so we were working at it for a long time, and we were working hard to come up with a solution that was good, good for consumers, good for members, and, and good for the business.
And so that's why we kind of approached it with a lens of what's value we can bring to the equation. When you think about some of those consumer-facing benefits or value propositions, it was things like the ability to transfer your profile more easily and transfer my list or to manage your devices more easily, or even because there was a broad range of borrowers, things like the extra member, where folks could effectively subsidize an account for their grandmother, their cousin, et cetera. So we tried to be pretty thoughtful there and balance it. And what we saw, going from, you know, early, we were prepared to roll this out broadly to, you know, more than 100 countries, more than 80% of our revenue base. And we saw some opportunities.
The opportunity that we delayed it by a quarter basically was pretty tactical at that point. So the solution was largely in place, but we saw some opportunities, primarily to make it more intuitive, that experience for members, and a little cleaner on the messaging. So those sort of small tweaks can be pretty impactful, and that's sort of what we did. And when you see it in the rollout, what happened was, you saw it in our results in Q2, you know, we're pleased with how this is rolling out. It's the cancel reaction, which is the big kind of upfront risk as we kind of start to enforce and intervene on members, how are folks going to react? And we didn't see those big spikes.
So it was much more muted cancel reaction, better retention of our existing member base. And it's been kind of healthy characteristics now going forward in terms of bringing on new paid membership, both in terms of individual accounts as well as extra members. So, but that, that was really the main thing. It's not super sexy, frankly, it was some tweaks in the background, but it made it more intuitive and easier for our members.
Can you say anything about the sign-ups and what tiers they're going to?
Yeah. So I'd say generally, in terms of just the nature of kind of how this is rolling out, in general, as I said, it's been healthy on the retention front. In terms of sign-ups, first, it's been also a pretty healthy mix between spin-offs onto individual accounts and those extra member set accounts. It's a little bit in favor of those individual accounts, which is good, but we wanna provide value to both. But we, you know, fundamentally, we think having your own Netflix account is probably a better experience. If households wanna have an extra member, that's great, too, and that's why we provide that.
Then, in terms of those spin-off accounts, it tends to be, in general, a pretty healthy mix across our member profile. It's a little—y ou know, we've got the ad tier and the non-ads tier. The ad tier is a healthy mix in general across our plans, but it's the minority because we have multiple plans. It skews a little bit more towards ad-free in these spin-offs, so still a healthy, healthy kind of proportion going into the ad tier, but a little bit higher mix into the ad-free relative to organic sign-up. Which makes sense, because a lot of these folks have been enjoying Netflix for a long time ad-free, so it's slightly skewed in that direction.
And how far through this rollout do you think you are? Even in the U.S., like, a lot of people still feel like they, they've been untouched so far.
Looking for hands in the room of whether you've intervened. Yeah, well, well, we talked about in the last call, is this is something that's going to roll out over multiple quarters. And so, so we're in the midst of that. It's a bit, you know, paid sharing, it's a bit front-loaded, right? So, you see kind of the impact roll, it rolls out over at least a few quarters. And that's just the nature of while we are, while we've rolled it out broadly, when you think about kind of behind the scenes, the nature of our interventions and who we're intervening on or enforcing on more aggressively than others, that's part of the impact.
The other is just the nature of the folks that are converting tend to be, at least initially, those that are more engaged with Netflix to begin with. And then sometimes, it's not totally in our control, because even as we're enforcing, well, if someone isn't really interested in Netflix at that particular time. We have to have that right title. So it's not until, you know, if it's Virgin River or Rebel Moon, you pick your title, that all of a sudden sparks their interest to come join Netflix. So that's why I would say it's gonna roll out over multiple quarters in terms of, well, you see it more in the member growth, the paid member growth initially, and then it builds into revenue growth. And then it's just something ultimately that doesn't ever fully go away, right?
Because then we just have a better net, if you will, in order to capture paid memberships and a bigger paid membership base to grow on going forward.
So, I mean, can you give us some color in, like, terms of the financial impact, 2024 versus 2023? It sounds like it's a, it's a build.
It's a build, but as you say, there's this front-loaded impact in general, but then we have the benefit of kind of full year impact in 2024 versus partial year impact in 2023. So you have those two dynamics at play. So revenue is building through 2024, but it's kind of that partial year, so you, you see the, the member impact front loaded, and then you get into 2024, and you're kind of through that kind of bigger front loading of MHU, but you get a full year impact. So I'm not gonna give you specific numbers, but the benefit carries through in 2024.
So in terms of specific numbers, you've never specifically said, how many more than 100 million households there are. Do you wanna give us any color?
How many more than 100?
Than 100 million.
Is it not 100 million?
100 million plus.
It's 100 million plus. No, I'm not gonna give you a number. It's interesting dynamics with that because folks are coming in and out of the system all the time, so it's always a bit of an estimate as to who's in the system, because there's always circulation of folks who are watching Netflix or not. But a hundred million is already a pretty big number. If you kind of think about, you know, with our kind of growth opportunity, generally, you know, we have about, at the end of last quarter, about 240 million paid members. We had about 100 million or more that are kind of watching and not paying. And then, you know, there's a total universe of smart TV plus households or connected TV households of about 500 million.
So there's another, you know, so that's two, four, there's another 150 million-ish there. So think of it as 240 million-ish paid members, and at least that many that we still have the ability to kind of bring into, into Netflix, either through converting kind of free watching to paid or capturing others. And then, that connected TV universe is gonna continue to grow over time.
So a long runway on that slide. Then moving on to advertising, which is a much longer growth runway. There were press reports that said that Netflix, you know, that, that you were happy with your upfront performance or it was in line with your company expectations. Can you give us any details on, like, what actually you did in the upfronts?
Yeah, no, So we were pleased with the upfronts. This is, you know, we, this is probably, technically our kind of first upfront that we really went through, because we did sort of a quasi in our first year, but we missed the upfront. So this was really our first upfront, as our inaugural. And as you say, we met our expectations, so we closed deals with all the major holding companies, with a bunch of independent agencies. We closed the deals at the top, sort of the high, top, CPM of the kind of streaming market. So we kind of preserved and reinforced the premium environment of our ads environment.
And we also started to kind of prove out that, like, you know, obviously, we have something that is, we believe, attractive to advertisers, and we're seeing that in terms of the quality of the kind of amazing content that folks, brands, and advertisements are sitting side by side with or integrated with, in terms of the engagement of the audience and some of the capabilities we're starting to bring in. So it's really still kind of really infancy in terms of that innovation, but things like the ability to do sponsorships for our top 10 titles. So that was really early innovation, but something that's a bit more innovative than kind of the old legacy, linear model of trying to kind of guess which titles to buy into there.
You can kind of buy into the biggest of Netflix—
Got it.
Dynamic basis, and we basically sold that out. So, so all those things were good. But it's, but it's still like I just want to kind of reinforce, it's, we're still in the crawl of the crawl, walk, run stage. So, it is not easy to build an ad business from scratch. We've got a lot of work to do. This was a good first step, but, again, as you've seen in our guidance, what we've done so far is not material to the overall revenue of the business. It's something we're building into, and we have to get better, across the board.
Right. And as you just said, you, you have had a very unique approach. I have to say, being in upfront for decades, like, it was the most innovative, fast-paced, really to the point, and you asked for the sale. It was, it was a great presentation. And you talked about the capabilities, the top 10, and following viewers from show to show. You know, like, it was, it was just very interesting and very different. But, you know, we all know you have quality premier video. It's uncluttered environment, that's 4-5 minutes an hour. You've reached all the demographic. I mean, you have a lot going on for you. So those are the attributes, but so can you maybe give us the other side? Like, what are the gating factors in obtaining larger shares, a share of ad budgets?
Yeah. So, yeah, as you say, we think we have a good number of things working in our favor. And just stepping back, I'm super bullish and confident in the long-term opportunity of ads as a big—a dvertising is big incremental revenue and profit contributor to the business, but we do have to build it over time. And there are those secular things. So it starts with just, you know, there's the natural shift of engagement from linear to streaming, and then the dollars follow. We've seen that with subscription. We think advertising is gonna follow a similar pace. It's also kind of addressing a consumer proposition of a great kind of set of entertainment across film and TV and ultimately games titles at an accessible price point for consumers.
So that's also great as well. But then the key for us is, with that, how are we going to build it into a really big business? So we have, sort of stepping back, two big priorities. One, we have to scale the reach of our ads tier. So we need a, you know, advertisers want a scaled solution, so that is number one priority. And then number two is to better monetize that reach. So we have the kind of benefit of scarcity today, but we want to create less scarcity by driving a lot more reach than, you know, we know we can deliver engagement, but we have to deliver reach here. And then, obviously, better monetize through the combination of kind of capabilities and go- to- market resources.
So how we do those two things and address those two priorities become very much—i t's very much tactics, and it's a lot of tactics that we layer on over time. Start to see it, you know, if we use reach as an example, it started with just improving the feature set, right? So we started with what was basically a feature set that looked like our basic ad-free tier, and then we improved video quality, we added streams, we've achieved content parity. So that's kind of a piece of the puzzle. But over time, and then we, as part of rolling out paid sharing, that was another reach driver, because some of those folks that spin off into advertising accounts. And there's a bunch of other tactics that we'll continue.
Assume that that is a big priority for us, is to just kind of drive that, reach and scale, and then, of course, we'll continue to kind of build out our monetization capabilities.
Right. So Microsoft obviously helped you get off the ground, like, incredibly quickly, like, fastest, probably anyone's ever kind of taken an ad platform, or you know, to market. But what, what capabilities do you still need to build out internally to drive your own internal advertising capabilities?
Yeah, well, sure. Yes, it is something that we kind of think about, both ourselves and Microsoft. I mean, this is a partnership. As you know, as in all partnerships, we're always pushing ourselves to be better and do more, and collectively, we're trying to build a really big and successful ads business. And part of that is, as you say, things. First of all, we both have to do a lot more, but then there's a share of things that we have to do in terms of our own internal capabilities. It's. And it's things like better targeting and relevance capabilities on our end, measurement capabilities. And a big part of it is just the go-to-market, so sales force and sales support and really kind of supplementing Microsoft's capabilities in market.
Right. So despite having two powerful, I'm going to use your word, ARM, not ARPU, but you have two powerful ARM drivers in password- sharing crackdown and your advertising build out. And even though you have like, you know, password- sharing and advertising, your guidance for Q3 was flat to down year-over-year ARM. Can you just walk us through the drivers impacting the third quarter ARM and how that will change, you know, coming into the fourth quarter and beyond?
Yeah, sure. So, when we think about, yes, ARM, Average Revenue per Member, sorry for those who love ARPU, but it's on our ARM or Average Revenue per Member, we guided to kind of, on an FX neutral basis, flat to slightly down in Q3, similar to Q2. And the dynamics you see there, if you kind of break it apart, that we've got some things that work in our favor and some that don't, in terms. So starting with the don't or the headwinds, it's things like when you think about the member growth that's coming for our service, 90%+ of that growth is outside of the U.S., and the U.S. is our highest ARM market. So there's a kind of a country or region mix that's going to be a slight drag on ARM.
And as an example, APAC has been our largest growth region and our lowest ARM region. So that's, that's one natural thing that's, that will continue to happen as we continue to grow. There'll, that'll always be a little bit of a drag on ARM. The second thing is, while our plan mix is generally quite stable across tiers, whether it's premium, standard, et cetera, while we're going through this kind of early rollout of paid sharing, if you think about the nature of it, folks are spinning off into their own accounts, some of those folks were, for affordability and other reasons, on the premium tier. So the, there's a little bit of a move out of premium and, and others. It's, this is slight, but relative to historical. So that's a little bit of a drag.
And then we also, we do have some ancillary revenues that run through our business that are small today, like consumer products, sometimes we have events and other things. And there were some, there were some dynamics from Q2 of last year to Q2 of this year, and now same with Q3 and Q3. I think last year, we had, like, Netflix Is a Joke or something in Q3 of last year that we don't have this year. These are small things. This is all, like, noise in the system, typically, and offsetting that, we have the benefit on ARM of extra member, so that's starting to build, but it's not that significant yet in terms of our overall member base, right?
As we said, if you just do the math, we had 5.9 million paid net adds in Q2, and of that, you know, we also said we have a pretty good mix between kind of spin-off accounts and extra member, but a little bit in favor of spin-off accounts. So not all of our net adds were because of paid sharing to begin with, and then if you think about a subset of that, of, on extra member, it's just not a huge amount of extra members to drive ARM yet. And we said ads, which is also a driver of ARM, it's just not that material yet. So those things kind of cancel each other out, but they're just, they're generally noise in the system that you wouldn't see.
The real story is that we haven't been increasing pricing since early 2022, and we've lapped price increases. So that's kind of what you're seeing in the ARM trends in both Q2 last quarter and what we guided to for Q3, because the main action we're taking to accelerate revenue growth this year is the rollout of paid sharing, and the way paid sharing shows up initially is bringing in more paid members— you know, which is not an ARM driver, it's a paid member driver, which shows up in revenue acceleration. Over time, we, you know, as we guided to in Q4, we expect to have kind of a revenue continue to accelerate, but it's not, I just don't wanna manage expectations, it's still not a major ARM story this year, in 2023. It's not gonna be in Q4 either.
Not giving you specific guidance, but we really have to get back to what is more balanced kind of revenue growth in 2024 and beyond, through a combination of continuing to grow our membership. Our pricing philosophy has not changed, so you're gonna assume over time, that's action we'll continue to take as we deliver more value to our members. Ads will, you know, if we do our job well, we will continue to grow in materiality, and that will contribute to ARM, too. So again, our primary, our North Star is growing revenue, but ARM will be a piece of the puzzle, going forward in 2024 and beyond.
So with the near-term impact of password- sharing, and I'd say maybe the medium-term impact of ads, how are you thinking about the longer-term growth opportunity for Netflix?
So, long-term growth opportunity for us, I'm super, super bullish on our long-term growth opportunity. You know, I think, you know, for us, the opportunity to grow the business is, you know, it's, you know— I would start with the fact that we think we're starting in a really good position. So we're starting in a leadership position in terms of, revenue, profit, and engagement. Just to put that in perspective, you see the revenue and profit relative to kind of industry profitability, at least, and streaming profitability and engagement. Just, you know, fun facts, I guess.
So what, in the first 28 weeks of this year, we had the number one streaming TV series, 27 of those 28 weeks, with Nielsen reported in the US, and the number one film, 24 of those 28 weeks. So we are by far a leader in engagement as well. I think when Nielsen reported their, you know, for their top 10 that they reported in 2022, we had 5x the engagement of our nearest competitor in terms of view hours in that top 10, and 3x of all of our competitors combined. So what—so engagement is a, is a key barometer of kind of health and future growth of our business, because from engagement, it's, that is really a proxy for member satisfaction and joy, and then also it kinda drives key metrics like, retention.
So with that starting point, then the question is like, okay, it's a good starting point, but how do we grow from there, and what are our opportunities to grow? And, like, on every measure, and you've heard this from me, Jessica, it sounds a little boring, but, like, on every measure, we see opportunity to grow. So whether it is, like, the shift from linear to streaming, when you think about view share, we're less than 10% view share in every market in which we operate, and streaming is still sub 40% of the overall TV viewing in all those markets. In many markets, it's still in the 10%-15%. In the U.S., it's almost at 40%. So there's still that secular shift to streaming and our ability to grow our view share.
If we look at kind of consumer spend or industry spend in the markets in which we operate, it's over $600 billion globally, would add a little over $30 billion of revenue last year, or about 5% of that addressable revenue market. So we're small there, as well. And then in terms of kind of household penetration or TV penetration, we talked about it before, there's about 500, we estimate, smart TV or connected TV households around the world. We're only in about kinda 240 million on a paid basis, so we've got another kind of doubling of that by addressing paid sharing and then folks that aren't enjoying Netflix today, and that market's gonna continue to grow and get penetrated.
So to do all that stuff, what we're focused on is to grow into those big, big markets. We have to improve every aspect of our service. So that's why we're so focused on improving content, improving the product, improving marketing, and better monetizing all of that engagement. And it starts with content, right? Because that's what our, our members care about most. So we think we've built up a, a pretty durable, and growing competitive strength in that. It's, it's really kinda tough to do those things well, because it means being great at commissioning and developing content in all these countries around the world with different languages, cultures, tastes, affinities, wrapping technology around it, user interface and discovery, payment systems, collecting payments in all these places around the world, driving the zeitgeist and co-conversation.
Most companies are pretty good at one or two of these things, or really good at one or two of these things. We think we're pretty good at all of them, and we just need to keep getting better. If we do that and stay focused on it, we think we can continue to drive more and more of that entertainment value and build a really big business.
Mm-hmm. So most, or some, but maybe most of your competitors or streaming services have recently announced price increases. Do you view the, like, price increases by competitors, like, does that give you confidence to raise price? Or conversely, is it an opportunity to be an even bigger share gainer?
Well, I think it's good for the industry generally that folks are, I would say, pricing a bit more appropriately to the value that they're delivering, right? As opposed to just subsidizing and giving away the product. But we really don't price to our competitors. Our pricing philosophy is unchanged. We start with delivering amazing entertainment, amazing TV, amazing film, and increasingly, hopefully, amazing games to our members at scale, delivering more and more value and then pricing into it. And for us, it's about being more sophisticated in how we monetize that entertainment value, that engagement, and ultimately building that kind of widespread in price options to both address, at one end, really accessible access, great accessibility into Netflix with a great feature set.
You've seen us do more of that in the past 12 months. We've lowered prices in many countries around the world, where initially, when we went global, it was sort of a skimming strategy. It wasn't super sophisticated, and we were overpriced in a lot of these smaller countries. Small percentage of revenue, less than 5% of our revenue, but it was over 100 countries where we dropped prices. We also launched the ad tier now in, you know, these 12 markets. So these are ways to kind of create more accessibility for Netflix and ultimately grow and optimize revenue. And on the other end of the spectrum, we want more and more ways to kind of monetize and price into fandom.
So I think you'll see us continue to get more sophisticated and kind of widen our pricing opportunities, while also maintaining a level of simplicity, so it's not confusing in terms of the ways to enter and enjoy Netflix.
Right. But password- sharing and advertising are extremely high margin, you know, revenue sources. Can you help us think through the incremental margin associated with these revenue streams?
Well, yes, they are high margin businesses. They're not 100% margin businesses, but, but, but yes, they, we believe they're high incremental margin. Paid sharing is a little bit more like pricing and member growth in terms of less, fewer direct costs associated with it. Obviously, there's people costs and things behind the scenes. Advertising has some more direct costs in terms of building out sales force. There's revenue share, there's tech stack to build out, there's capabilities there. But both, we want—we wouldn't be getting into these if we didn't think they were big, both revenue and, and, and, and profit contributors to the business. But we don't really parse it individually like that.
To be frank, we, we manage to kind of a global P&L and overall margin, so to me, that's, that's what we should best have an eye towards, and what we're trying to do is, build these businesses in a way that, yes, they will be meaningful margin contributors and help us as we, accelerate revenue, which both, which both paid sharing and advertising are intended to help us accelerate and sustain healthy revenue growth, and then with that, to start ticking up our operating margins again, our kind of, our, our reported operating margins, which, you know, peaked at 21%. We've been managing in the 18%-20% range, roughly, but this year is already starting to tick up from last year. We ended at 17.8%.
We're guided to 18-20, so the midpoint of that range is up from last year, and we'll start to tick up again going forward.
Could you help us think through, like, how you, how margin expansion over the next few years?
Yeah, you know, it's the way we think about building operating margin, and every company has the right to their own philosophy, but ours has always been that it's best to kind of grow our operating margins while we're growing revenue, right? So it's just easier to build that profit muscle as we're growing revenue. So if we really step back, when we went global, fully global, back in 2016, we ran the business almost to break even as we built out that global launch. But then we started ticking up margin. We said roughly three percentage points each year. So we went from 4% operating margin, and we ticked it up all the way to 21% in 2021.
If we kind of look forward now, as I said, our priority is to get, is to accelerate revenue growth, and as we do that, then to start ticking up margins again. As I said, we're starting to do that this year, and we would expect to do that going forward in 2024 and beyond, but we wanna balance it with being able to invest in all that big growth opportunity, that big prize that we were just talking about in terms of those big addressable markets. So we wanna have a balance. So I don't think, given our scale, now that we're at roughly 20% operating margins, I don't think it's really prudent for us to keep growing at three percentage points of margin per year.
I think that would probably constrain the business too much on the growth opportunity, so we'll grow margins more gradually. At some point, there's probably some peak margin where it's a good balance between peak margin and growth potential of the business. I just don't think we're anywhere near that yet. So we're gonna gradually go into it. We've got a bunch of benchmarks, you know them as well as I do, of networks at scale that are well above 20% operating margins. So we think we've got a lot of headroom. We just wanna grow into it and help it well.
Can you help us think through, what do you think the natural peak margin in the business is?
I don't have a specific number for you other than it's well above where it is today. I mean, you know, you've seen, you've seen businesses that are kind of— I mean, you know these numbers. There's, there's all these, these, these networks in the legacy network, historically, that were, you know, fully distributed 100 million households. And so we think we have some inherent advantages in terms of the business we're in today because our distribution scale is so much larger than that. We're already at 240 million, so we have a truly global network that's going to grow from where it is today, with content that is designed to have big local impact, but be able to then travel and success regionally or globally. So it's a good, scalable content model.
So you know, we hope to kind of grow at levels that, you know, networks have been at before, but I'm not gonna give you a specific number.
Networks meaning, like, cable networks?
I'm not gonna give you a specific number, Jessica.
Okay. Does margin of more than 50%?
I'm not— I know you want a number. I'm not giving you a number.
It's okay. We have a lot to cover, so let's keep going. You know, it's almost unavoidable, but, you know, we have to just at least touch on the strikes. What, what, what is the impact on Netflix on the dual strikes in terms of both content and if we include content strategy in that, and also your financials?
Yeah, gosh, you know, we talked about the financial impact or estimated financial impact on the last earnings call. I think, really kind of cutting through it, the main thing, and you know, we try to stay focused on the main thing at Netflix, and the main thing is that there's a lot of folks out of work, and the business isn't moving forward, and so it's terrible for all those folks that are out of work, and it's not good for the business. So that's what we're most focused on. I mean, at the end of the day, to move the business forward and to have great storytelling and fresh stories for our members, it really is about the partnership with those writers, with those producers, with those directors, with those actors.
And so we need that partnership to be healthy. We need to get back to work. That's what we're focused on. And so, suffice to say, we are very committed to get back as quickly as possible. In the meantime, we're managing through.
Okay, so moving on. You mentioned gaming a few times, and even though you've been in the gaming area for, I don't know, several years now, it still feels like a developing business. Can you talk about your plans and long-term aspirations in gaming, and how much investment is needed?
Yeah, sure. So yeah, it is— I mean, it's definitely a developing business. We're almost two years into it. All right, I don't know when, I don't remember exactly when our 2-year anniversary is, but we're right around it. And when we launched games, we said, "Hey, this is a long-term growth opportunity for us in success. It's a giant adjacency." You know, half the world is some form of game, playing games or a gamer. So it's a giant market, both in terms of users, in terms of, you know, pick your kinda revenue number. So in success, we think it's a big growth opportunity for us.
But we started out, you know, in terms of our commitment, we started out first on mobile, because it's a way for us to get into it faster in terms of development cycles. So, you know, fast-forward to now two years in, we've had about 70 games on our service. It's a range of games from licensed games to games that are now just starting to come out from, and we have six studios. We had to both, we grew studios organically, but we also acquired a few along the way to get us started.
So now you're seeing games on service that are a range of both those licenses as well as internally developed, a range of IP from, some bigger third-party IP to, you know, a new IP, like Oxenfree 2, which just came out, you know, came out recently, but also things like, Too Hot to Handle and Queen's Gambit and things around our intellectual property, of an increasing mix of live services and not just, kind of, play-through games. But it's still early for us. So ultimately, our vision is to have games that are playable across multiple services, not just mobile. You see us starting to do that a little bit with some early forays into being able to play on the TV as well as mobile.
But really, right now, we're just kind of building our learnings in this business in terms of what works. You see us kind of building out more games with Netflix IP as an intellectual property, as an example. And we're spending in a way that is, like, material, but not material to the business yet. So this is not a dip our toe in the water and like, you know, we're gonna get out. Like, we're in games for the long term. It's a relatively small percentage of our overall content budget today, but it's still, on an absolute basis, a pretty meaningful set of dollars in order to really go after this adjacency for us and this big new content category. And then, like we've done with other content categories, as we build confidence in the—
You know, we've already seen, at smaller scale, the ability for this to be a benefit to the business in terms of driving things like retention and kinda core metrics. We need to prove it out at bigger scale, and then what we've done in the past with other content categories is then we kind of ramp up our investment, and we can do that pretty quickly. But this is, you know, think of it as we said early days when we launched, like, this is not a material driver to the business in the next, you know, when we launch, we said in 3-4 years. This is something that's a 5-10-year kinda growth impact-
Okay.
for the business, and we're still on that trajectory.
Sports, obviously, you guys get this question all the time. What, what is your longer term goal? Is it, is it sports-focused entertainment and documentaries, or is it something else?
Well, we love sports. We love sports, and it's a big viewing category, right? So we're just what you've seen us to date is, like, how can we participate in sports in a way that is also good for the business in terms of impact on both member satisfaction, but also return on investment? And so we've been doing that in areas that are much more kinda sports lifestyle programming to date. I think we've done a nice job, from Drive to Survive to more and more of that with Quarterback and Living with the Furys and gosh, Full Swing and a bunch of others I'm forgetting right now.
But so we're, I think, becoming a great destination for those sorts of stories around sports and compelling lifestyle stories that are really adjacencies and kinda sports adjacent. It's good for the leagues. It's good for our business. Whether or not we get into kinda direct licensing of sports, it's not like we're anti-doing that. It's just, it's hard for us to see that as the best return on what really would be billions of dollars of incremental content investment. And so we see a long runway in the areas that we're playing in right now, and it's really hard to do the things we're doing today across film and TV and games all around the world, right? So that focus is one of our advantages.
It's good, frankly, that there's some pretty big streaming competitors that are going more and more into sports, 'cause it builds that secular trend of the transition from linear to streaming. It's an accelerator to that, which is a good thing for our business. But with a lot of things, we say, never say never, but it's not something that, you know, we found a way to have kind of a big revenue and profit pool from being a licensor.
And another area, sorry for interrupting. Another area that you guys have gotten into, you know, recently is live content. Can you talk about, like, what have you learned? What's interesting to you? Does the advertising capability, you know, have an impact on what kind of content you're looking for in live?
It's not driven by ad capability. It's really about, can we further—can we do things that further amp up and making it even better, TV or title experience, if you will? So is there a way to create more of an event around some of our programming? And that's what you've seen a little bit with whether it's reunion shows or other types of events that we have done or are looking at. So I would look at it as, hey, it's a proven form of entertainment. It's not like live is really a new thing. It's new for us, but can we do it in a way that's additive to our entertainment experience?
Okay. Last question, because we have a couple of minutes, but your balance sheet is incredibly strong and very liquid, and you're generating, I mean, I would say, explosive free cash flow from where you were. There are several distressed media assets that are likely to be for sale, maybe, maybe not publicly announced, but should be for sale. Can you talk about what your appetite is to be a potential consolidator of IP or studio assets? And, you know, I guess the last part of that question would be, any thoughts on capital returns?
Sure. So, I mean, we've been historically more of a builder than a buyer. We have done - we did about $2 billion of M&A over the last couple of years, but that was in areas that we believe could accelerate our business, whether it was in game studios, as we talked about, or IP driven, like the Roald Dahl Story Company. That we, you know, to, as you say, you mentioned distressed assets. Yes, we have a strong balance sheet, but then it's about how do we best drive the growth in our business in a healthy way. We think that kind of focus and simplicity has been a good thing for us. If we purchase those distressed— I mean, one, it's a high bar for M&A in general for us. We said we're more kind of builders versus buyers.
And a distressed asset probably has an even higher bar in a way because of the, you know, the risk of distraction. I mean, and most of those are legacy entertainment assets that, as we see every day, there's very difficult and challenging transitions that go along with that. So, yeah, we look at everything. We keep an open mind, but I would just say it would be a very high bar for that to be something that we entertain. And in the meantime, we think we've got a really long runway of organic growth that we stay focused, which then gets to our balance sheet. And we, you know, our, our capital allocation policy is unchanged, which has been pretty consistent the last few years, which is great.
We first invest in all the core areas of growth of the business. We invest as much as we can into funding that growth and things like ads, games, et cetera, and our iconic, core content and service offering. We then opportunistically look at M&A, and then we return excess cash to shareholders. That excess cash is, we hold about two months of revenue, which is roughly $6 billion. So we've been a little bit high on that lately. So we said we wrap up our share repurchase in the back half of the year. And we probably continue with that kind of a share repurchase program for returning excess cash as opposed to, you know, things like dividends. We like the flexibility of share repurchase.
Great. Thank you so much for coming.
All right. Thanks, Jessica. All right. Thanks, everybody. Peace.