Welcome to the Netflix Q3 2014 earnings call. Welcome to David Wells, CFO. Joining me today on the company's side is Reed Hastings, our CEO and Ted Sarandos, our Chief Content Officer. Interviewing us on our results today will be Michael Nathanson from MoffettNathanson and for his last time, Doug Anmuth from JPMorgan. Doug will be handing the baton over to Mark Mahaney from RBC next quarter.
I think Michael you have our first question, so I'll turn it over to Michael.
That's right. Thanks David. First question would be to read. I think the obvious question to ask is, given the mix in subscribers this quarter in the U. S.
And the slightly slow growth next quarter in the U. S, what gives you confidence that you're still on the middle part of the growth curve on the S curve, especially given the fact that you have a grandfather price increase couple of years down the road? So anything on that?
Sure, Michael. We added 3,000,000 net subscribers in Q3, so about 1,000,000 a month. And then in Q4, we're forecasting 4,000,000. If you look just at the domestic side, however, that's about 1,000,000 and about 2,000,000 in Q4. And we're hoping for big numbers.
We're always working hard on that. But when you ask what's the confidence that we're on the middle part, we really have to feel our way along quarter by quarter as we improve the content. And if you think about the general society all moving to Internet TV, like HBO's announcement today, There's a lot of feeling of just everyone is going there, not exactly sure the rate of transfer, but Internet TV is going to be everything in a couple of years.
And Reed, just to follow-up on that. Why is $60,000,000 to $90,000,000 still the right number in the U. S. Given what we saw here in 3Q and what you're looking at for the Q4?
Well, everything that we're seeing is completely consistent with the whole society, not only the U. S, but around the world is moving to Internet video and Internet television. And so I think it's completely consistent with what we're seeing. We're seeing we saw Starz a week ago announced that they're doing an Internet video service. We saw HBO.
Perhaps there'll be other providers over the coming weeks. And so think of all the big networks are moving to Internet video and it's just becoming a very large opportunity.
David, given that revenues came in line, subscribers came in lighter in the U. S, was there a mix shift amongst your pricing tiers in the Q3?
Not really. Before I jump into the question, I realize that I didn't provide the Safe Harbor statement. So we will be making forward looking statements during this interview and actual results may vary. And there's your proof that this is not a scripted interview. So Michael, back to your question, in terms of really the revenue number, we sort of missed on the total subscriber line.
And there is a bit of a delay between the folks getting a 30 day free trial and the revenue coming in. So that would explain most of it. There's a little bit of a mix shift in terms of ASP being slightly higher than we forecasted, but most of it was just because of the revenue having a little bit of a lag.
Reid, can you talk about the strength of subscribers in the new Western European markets in 3Q? How they performed early on versus your expectations? And then also, how much do you know here about conversion rates as they're just coming off of their 1 month free trials? And how is that impacting your guidance for 4Q?
Well, we had a very successful launch. We've done numerous launches now starting in Canada 4 years ago. So we're getting better and better at it. We've got some of the fastest integration with MVPD set tops that we've ever seen in the world. In the U.
S, we still don't really have anything material. In the U. K, it took us a year and a half to get Virgin, and we were able to announce Orange and Deutsche Telekom, and these are all going live shortly or just turned live or going live over the next couple of months. So really a great successful launch that portends well for us and that's built into the guidance. So we're feeling, I mean, just incredible about international.
When you think that from starting 4 years ago in Canada to through to the Netherlands, so almost 40 countries as a whole are now profitable, just an average of 2 or 3 years after starting. It's a great success and that's why we're continuing to invest so rapidly in international.
Okay. I have a 2 parter for Reed and Tanner, HBO GO. Today, the big news at the Time Warner Investor Day was the announcement of an over the top service to be launched next year in the U. S. Two questions would be for Reed.
What do you think the impact on competition will be as they start really pushing that product? And TED, the takeaway was they might start sourcing some of Time Warner's putting Time Warner's content into HBO on kids and maybe on movies and TV shows. So talk about those two things.
Sure, absolutely. On the consumer side, it's one more channel. So already consumers subscribe to us and Hulu and Amazon and they do pay per view and they do DVD and they do cable. So there's so many great sources of entertainment and consumers subscribe to many of these. So it's not much of a change in the direct competitive landscape.
We and HBO have completely different content. So I don't think it will be a significant impact at the consumer level. As we bid for content, that's more significant and
I'll turn that over to Ted. Yes. I'd say similarly that HBO is another buyer in the market if they do choose to start licensing from even from their sister companies. And different companies have different views of how they look to vertically integrate. But in this case, I think they've already they have an established revenue model for that content with buyers like Netflix and others that they will have to competitively bid in the market for.
Reed, just following up on HBO GO and the competitive dynamic there. Do you have a view on how it could be priced and distributed when it ultimately comes out?
In Nordics, they've competed with us since launch 2 years now with HBO Nordics. And there they chose to price on top of our pricing. Now that pricing is higher because of VAT and cost of living. So it's not definitely indicative. But they've been quite aggressive in the Nordics and we've stayed well ahead.
It looks like this quarter, I'll start to David, that the guidance you provided on free subs in international markets missed our expectations and your expectations. What is going on there? How could free trial subs miss expectations?
Well, there's a number of ways. We just didn't grow as much as we thought we were going to in terms of bringing folks in. So across a number of markets, we were lighter versus our forecast than we expected. And you collect all of those markets together and you get to a point where you missed on the total number, but you made it on the paid number.
And when David talks about missing, remember that what we're providing is our internal forecast and we expect to miss pretty frequently. That's the midpoint essentially. And so we'll be a little above that, a little below that every quarter.
And David, you called out in the letter basically that the increase in pricing may have had some impact in 3Q and perhaps a greater impact than you saw in the Q2, perhaps because Orange is the New Black offset that. Was beside pricing, is there anything else that you can point to in the U. S. In particular?
Well, in any given quarter, there's a number of swing factors involved. We said that was our leading indicator or leading factor in the quarter. The Home Depot breach certainly brought down some of our put a number of people on payment hold. But we felt like if we provided 3 or 4 more swing factors, it felt a little bit like an excuse, so we didn't do that. But there were certainly other factors at play.
We had a strong comp last year with releasing Orange in July versus in Q2 of this year. We talked a little bit about that. We certainly saw some effects from the Home Depot breach. And then there's 2 or 3 more of those we could talk about, but they're minor compared to what we think is the major one.
Reid, we got a lot of questions about France versus Germany as markets. Can you I know it's early days. Can you share some information as what you're seeing on initial take up rates or excitement around in France and Germany for Netflix?
Yes, absolutely. I mean, France and Germany are unique markets and so is Brazil a unique market and so is Norway. And now we're over 45 of these unique markets. In every market, we've been able to figure out over time what's the right mix of content. And think of basic consumer behavior is they want control and they want Internet video because they get to watch on any screen, they get to watch any time they want, they get to binge watch.
Those are very universal values. And so we're gaining increasing confidence that Netflix is highly relevant around the world. And that's why we're just looking forward to continue to expand next year.
And just following up, Reed and perhaps Ted here, as we talk about the international business, what percentage of content in new international markets is local? How do you know what the right level is here? And do you feel like you have enough currently in France and Germany?
So Doug, I'll jump in there. It's similarly placed as the other markets have been around 15% to 20% local, with another with the 80%, 85% being either Hollywood or other international content. One of our first indicators that we are getting the mix right is how many hours of viewing people are participating in. In France and Germany, the viewing hours are quite healthy relative to all of our other launches. So we're the consumers are finding the things they want.
The tricky thing is figuring out is the local content something that people want in the long term, because when we first get to a new market, I think people are mostly excited about those things that they didn't have access to before. So Orange is the New Black was by far the most watched show in both France and Germany, and in fact, all of the markets that we launched. So it tells you that with all the differences in taste that they both they all rallied around that show. I do think too that we're offering those markets unprecedented choice, not just in programming, but also in choice of language, where you can watch the show either in native language with subtitles or dubbed in local language, which is something that's not been available to consumers in those markets before.
David, in the press release today or the letter to shareholders, you mentioned that Canada is now at the same margin as the U. S. After 4 years. How different are the penetration rates between those markets? I know you don't get into the actual rates, but how different are acceptance rates there?
And is that the threshold for profitability in terms of U. S. Level profitability around the world? Well, you're right.
We don't get into specifics. But the penetration, the rate of growth in any given market can be different. So the rate of growth between Canada, between Europe, between Latin America can be very different. But just reiterating in terms of the financial performance and the return on investment, in 2012, we spent nearly $400,000,000 in terms of contribution loss on international. And what we were telling you today is that is now a positive number.
So in little less than 2 years, we've made great progress. So we think the international is a very good investment. So some markets are going to take longer than others. The content may be priced lower in those markets. So the economics are very different market to market.
David, you mentioned in the letter a little bit about the changes in the VAT in Europe that go into effect in 2015. Can you talk here about how those new rules will impact neptelix in Europe and how much profit is at risk here? Can you just perhaps quantify things beyond just talking qualitatively about it?
Sure. So Luxembourg had an arrangement with the EU where if you were headquartered there you could charge a 15% Luxembourg VAT rate. And VAT rates they vary from Switzerland at 8% on the low end to the Nordic countries at 25% on the high end. So for us, we're talking about an internal cost change to Netflix because we're not going to pass that along to the consumer of about 5% on average of European revenue. So some of those rates are going from 15% to 25%, some of them are going from 15% to 19% and so forth, but a weighted average that you can sort of ballpark is about 5% of European revenue.
David or Rich, can you give us an update on 2015 international expansion plans? You've called out that you're going to keep opening up new markets. How should investors think about the speed of those openings and investments in 2015?
We're still sorting that out, Michael. I'm trying to figure out which markets are most attractive, and we'll have some announcements to make over the next year. If you look at our long term strategy, we've been extremely consistent over the past 3 years saying that we're going to take all of our profits and put them into international expansion because we see it as such a big opportunity. So think of that as the base case. If we can move quickly enough, then we can deploy all of those profits in highly productive ways.
And I would say to give you some sense of the magnitude, we peaked out of international loss at $105,000,000 We've guided in Q4 to a number that's slightly lower than that. But in terms of the potential down the road, we certainly could see that level of investment.
Okay. Thank you. So following up on that, Reed and perhaps David as well. Reed, you were quoted about a month ago as saying that it would take 3 to 5 years for a single country to get to breakeven and then also that it could take Europe 5 to 10 years overall to be breakeven and then also that you want to be fully global, including China. Can you help us sort these out?
And in particular, do you still believe that international contribution margins can be comparable to U. S. Margins in a more mature state?
Yes. We're making great progress on international. We gave you the proof point on Canada having gotten there. We're continuing to make progress in all those markets towards having a similar contribution to contribution profit to the U. S.
And contribution margin. So feeling great about that. 3 to 5 years is what we've seen in our experience. We'll see if future markets are slower or faster. There's some variation.
And then the overall Europe picture is because we keep adding new markets. So that's why that's a longer time frame because it's a cascade from the very beginning.
And just to clarify on that, you still think that that's the right kind of time frame for Europe overall cascading from the beginning?
Yes, there's nothing that's changed. Okay.
Chad, as you start buying rights like Gotham worldwide, you start seeing some markets like Australia acknowledge that you have the rights to Gotham in those markets. How do you balance the need to basically buy global rights with a desire to be more measured as you expand internationally?
The one thing that's been really encouraging, Michael, is that the content a lot of our content choices have proven to be extremely global, starting with all of our original series that Orange is the New Black and House of Cards have been huge successes in not just in Australia, but in China, I mean all over the world. So these buys bode well I think for future expansion in all territories. And right now I believe we've hit in kind of a financial tipping point where we can move forward on buying up more territories than we're currently operating in versus playing catch up, which we had been doing, licensing the territory or creating original series and then several years later having to go back and either renegotiate for that series or not have it like we don't have House of Cards in some of our current expansion territories.
David, just on international expansion, what do you think the best way is for The Street to think about and model your future international markets? So meaning, if we don't know the exact markets in any given year, what is a reasonable expectation for the number new broadband households that you'd like to address over the next few years? Obviously, there's big implications here for both subs and, of course, for the bottom line. And do you expect these international launches to continue to be more heavy in 3Q and 4Q or more evenly spread out through the year?
Well, I've given you some indication of sort of at least the financial magnitude. I don't think we have an addressable broadband household target in mind when we think about the next wave of international expansion. There's a number of just execution elements that come into play, how many we think we can do successfully well at the same time or consecutively. And certainly, we're getting closer and closer, as Ted talked about, to a global right. So in terms of the incremental cost associated with an international launch, we certainly are reflective in some of our produced content today of having a global right or close to a global right.
So I would say it's our intent to continue to roll out international. You've got some indication of magnitude on the pursue it because it's been a great investment so far.
David, based on some of our analysis, I think other people feel the same way. It looks like you can add in new markets between 300 to 500 basis points of penetration in the 1st couple of years. Is that consistent with your own data, which you have and we've not been able to dig into?
We don't provide that level of detail and specificity.
The one thing, David, that we've said in as we do in the launch markets is that it took in the U. S. 7 years to get to about 1 third of broadband households. And that in the developed markets, so not as much LatAm, but for Western Europe that we're targeting those kind of numbers getting to a third of households over 7 years. So that would be consistent with the trajectory that you just outlined, Michael.
Sure.
Okay, thanks.
All right. Let's shift over a
little bit more toward content. So Ted, a couple of big announcements recently, certainly Crouching Tiger, Hidden Dragon and then also the Adam Sandler deal. I'll just hit on the latter. But can you talk more about how data influenced the decision to do the 4 movie deal with Adam Sandler? Can you talk about his global appeal as well?
And do you think there are other actors or actresses that could have similar appeal for Netflix going forward?
Sure, Doug. The Adam Sandler decision was driven by following market after market, seeing Adam's films from his deepest catalog to his newest releases, performing outperforming not only outperforming their box office, but performing wonderfully in every territory, defying conventional wisdom that American comedy doesn't travel. And more importantly, he really performs well in the box office in our key markets like Brazil, like Germany, like the UK. And his last movie was 60% international. So Adam is not only a proven 20 year star, meaning he has a movie that performs well in the box office every summer for 20 years.
He is a real global superstar. And we see that in the data. And the more international we get, the more access we have to those data points versus relying on conventional wisdom of generic thinking like that American comedians don't travel so well. So we're really proud of the deal and we think that our subscribers are going to love having access to those movies immediately and through this new deal.
Ted, you mentioned or the letter mentioned today that it's more efficient for you to buy movies this way than buying it in your pay one window. Can you talk more about that because it seems to me that if you are a successful film producer, you want to use the windows to monetize all your consumer touch points. So why is it more efficient to do it this way versus Payone?
Well, there's a couple of ways to think about it, Michael. The main one is access to content that people want to watch. And I think this long protracted window model was fine before on demand was possible, but consumers now expect to see content sooner and have access to content earlier windows in the formats that they want to watch. So in this case, we're talking about Netflix. And the current pay model doesn't deliver movies to us till about 10 months to a year after theatrical, and in some cases, 9 years after theatrical if it's sitting behind someone else's deal.
So if you look at a successful film and you roll up all the licensing fees in each territory, it is possible there's an economic trade off that you are paying less to produce the film than you are to license it. And this model, to your point about do you want to exploit those other windows, for us, this is programming cost, not an individual P and L in each film.
And the broad point here is, especially with Adam Sandler multi movie deal, it's establishing a sense in the subscribers of I'm thrilled with Netflix because I'm in Adam Sandler, I watch this and now the next movie and the next movie comes. So think of it with us playing with this idea of episodic and serialized, but now in the movie form and seeing what kind of great brand allegiances we can create for Adams fans. That's not everybody, but they're very identifiable. So I think it's a very creative approach that Ted's pioneered here.
And on that note with the Adams Sandler deals, Ted, can you just talk to us about how you'd actually measure the success of these kind of partnerships given that you don't have the traditional barometer of the box office to track here?
Yes. I would think about it the same way we look at the successes around original series or any of our license series. Relative to what you're paying, do you get this kind of 3 legs of success with the viewing, the brand halo and the net subscriber additions based on access to the content? I think that particularly in this one is, if we try to be as consumer friendly as we can, and I think the model here is telling us is that consumers want access to those films sooner and that we could build a model that's economically feasible to do it. But it's the measure you should think about measuring success the same way we do series.
And do people get excited about Netflix because of it? And I think as Reid pointed out, I'm as excited about this as I have been since we talked about House of Cards a couple of years ago about the potential impact on the brand and the subscriber enthusiasm around it.
Ted, in the U. K, we found some data that suggests that younger households are consuming a lot more Netflix than older households, penetration rates are higher. You mentioned in the letter that you had I think 75 series, kids series with over 2,000,000 views. Can you talk a little bit about what does that mean? Is that over a week?
Is that over what duration is that? And is that globally?
Those are active titles, titles that are currently being watched, and that's a domestic number. And we wanted to point that out because relative to other outlets for kids programming, that's a pretty big number for those particularly in that kind of volume. But those are domestic and you could think about the international and domestic split roughly similar to our subscriber base.
And within what time frame? Is it on a monthly basis? Is it cumed over time?
There are currently active titles and they're cumed for active titles.
Okay. Thanks. And Ted, on Crouching Tiger, Hidden Dragon, some of the major theater chains here have responded pretty negatively early on in terms of the day and date IMAX release and Netflix streaming plans. What happens to the economics of your film strategy if some of those major chains prevent IMAX from exhibiting the film?
Very little economically. I mean, I think the key to it is we would like to give the consumers the choice to see a big film on a big screen. And Crouching Tiger Hidden Dragon is not a direct to video, low budget sequel. It's a big film. And it'd be fantastic to have the opportunity to see it on the IMAX screens at the same time.
And IMAX has made arrangements with us for that to happen. I think it's as expected, the theater chains reacted negatively publicly. But I think the real story will unfold on August 28 when the film opens and we see if it's on those screens or not.
Reed, in the past quarter, it looks like in Canada, a local tribunal, the CRTC, was asking for some data regarding Netflix that you guys were not willing because of privacy to share. Are you worried that governments and regulators will start asking for even more disclosure and try to enforce more traditional regulatory pressures upon your business?
It's super important that Netflix maintain a reputation with consumers for protecting privacy against a wide range of players. So you'll see us be a really staunch ally of the consumer. Will there be conflict with certain government agencies that may over time? We're not seeking to have a fight. We're going to try to work well with everyone.
And certainly, as an example, in France, I think we really turned around what could have been a difficult situation and one that was quite positive. So we're getting better and better at those government relations skills, where we don't have to have a battle.
It's probably worth mentioning, Michael, in Canada, producing Netflix content, particularly in the animated space. We're one of the largest employers in Canada for animation executives. There's I think something on the magnitude of $140,000,000 a year being poured into the Canadian economy producing animation for Netflix. It's pretty impressive.
David, can you talk about just how the amortization of these newer movie deals are going to be recognized on the financial statements? And then just in particular, can you go into some more detail? I know you talk about it in the letter some, but just the dynamics around free cash flow and EPS as both a function of some of the heavier content investments and then also the international expansion as well?
Sure. So I'll take the amortization question. In terms of how the movies will be amortized, they will be accelerated like our large original series are. And until we have more data to challenge that, whether it should be faster or slower, we'll take that assumption that they'll be accelerated. And then your second question was on free cash flow relative to net income.
So we put the graph in there to illustrate the separation that happened in Q3. We've been saying this for quite some time in terms of the pressures on cash being the expansion of content, including produced content as well as the international expansion because it forces the loss lower. So I would say, it's still consistent when we talked about a 1.2 to 1.3 ratio of cash outlaid to content P and L expense is still consistent. And if we spend $3,000,000,000 globally on content and growing, even taking the 1.2% or the 20 percent ratio, that's $600,000,000 of cash laid out for content over and above the P and L expense. So we expect these trends to be persistent.
And I think that we have $1,700,000,000 in cash. I think we're okay for the next few quarters, but we continually look at this. And if we continue to expand both content and international as we expect to do, then you should continue to see some pressure on
the cash on the free cash flow. Ted, can you talk a bit about off network syndication? In the past quarter, you were able to license both Gotham and Blacklist a year after they aired on network television. Can talk a bit about what's changed in the model and what's the cost of those types of purchases versus maybe library content?
Yes. And there's other variants on the model like in January, you'll see Better Call Saul, the Breaking Bad prequel that we will be licensing in all of our other territory and a year after in the U. S. And Canada and then in the first run-in every other territory we operate in. So we're super excited about that one too.
And I look at it about as all these models are changing pretty rapidly, there's multiple buyers in the market. So I think at any one piece of content, the bidding can get pretty intense. But overall, the content costs are pretty consistent on all these new models. And I think operating in 50 different countries and being willing to operate in multiple windows gives us a real advantage in the market. So we're excited about that.
And Ted, there have been some comments in the press recently, and I think coming from agencies essentially, that really the foundation for the agencies in selling to its streaming service. Backends, of course, are typically their foundation, but selling to a streaming service with a potential deal, they wouldn't necessarily know where that back end would come from if there may not be a second sale. Does that create a problem for you in buying content rights across all markets? And do you see any pushback there?
No, Doug, just like every time you press into a new market and a new window and a new paradigm, you got to figure out how to make it work in the old world too. So I think in these problems were contemplated back when HBO started doing original series, before they had a DVD business, before they knew if they were going to syndicate. So I think those are all navigatable and have been navigated in the past, and we're navigating them as well.
Biren, a question on Internet net neutrality. One of the things we struggle with looking at broadband investment is if the interconnect fee is capped or protected or capped 0, how do investors in broadband plant recoup their investment if they can't charge interconnection? So how does the Comcast investor or the pipe investor think about returns on their investment if they can't charge for interconnection?
Well, the simple version is, they collect revenue on the Internet from their customers and that pays for the network and we don't ask them to pay for our content and we don't think they should ask us to pay for their network. So that's the basis of the no fee interconnect.
David, I think U. S. Marketing spend was down about 5% year over year, more than 200 basis points as a percentage of revenue. Why spend fewer dollars in 3Q if the growth was slowing down and you were coming in below forecast? Could this have hindered sub growth?
And how should we think about that marketing dollar trend going forward?
I think back 6, 8 years ago, there was a much more direct connection between our marketing spend and our net additions in terms of of bidding on bounties for people to sign up via a click through on an online ad. I don't think that's true anymore. So I don't think that whether our marketing spend is up 10% or down 10%, there's an immediate direct connection felt on our net addition growth. So when we look at our marketing spend, we look at a number of But I wouldn't say that, that was a large influence on the But I wouldn't say that, that was a large influence on sort of the year on year decline in growth that we saw in the U. S.
Reid, over the past weekend, our home, which uses Fios, had a trouble getting on to Netflix, which is a good problem to have. But I wonder what does your research tell you about satisfaction levels when there's a buffering or connectivity issue? And how does that get solved?
I'm surprised that you've got an issue. Verizon has done a lot of investment over the past 3 months to get the average speeds up and what's remarkable is how quickly they've been able to expand the interconnect, so that the average speeds for Verizon are now some of the highest in the United States, still not as high as many of the speeds in Europe, but some of the highest in the U. S. So it should be very rare and I'll have to follow-up with you and we can take a look at the logs for your home if you're comfortable with that and we'll see what was going on. Maybe one of the kids was doing some illegal downloading.
It's my problem.
Reid, just in thinking about the U. S. Versus international Do you see any elevated challenges in some of those new markets you might wish to go into in 2015 and beyond?
Outside the U. S, there's much more of a common regimen of settlement free interconnect. The whole charging for interconnect is really an artifact of size. So Comcast is the biggest, so they get to charge the most and then it goes down from there. So it's straight power dynamics as opposed to costs or anything like that.
So it's a much friendlier climate outside the U. S. For settlement free interconnect.
David, can you update us on foreign exchange? I know it's still early days and you guys are growing internationally, but is your cost base denominated for the most part in U. S. Dollars and is revenue base dominated internationals. How does currency affect you guys next year?
It's a mix, but it's actually very quite small. It's under $1,000,000 of P and L effect. On sort of valuing the balance sheet items, there's a little bit more of an effect, especially against the British pound. I would say there's a mixture across it. So there's some natural hedging that occurs, but right now it's actually quite small in terms of an overall influence on our EPS and on our P and L.
Reed or perhaps David, can you review the economics just around how the through the middle kind of set top box relationships work? And perhaps talk a little bit about how some of these newer dynamics or relationships in Western Europe may be relative to earlier deals and some of the smaller stuff, for example, that you've had in the U. S?
I think we'll both tell you the same thing that we can't tell you much about those deals that we're comfortable with the economics. We've done lots of deals in the U. S, first with Xbox, then with PlayStation, Apple TV, etcetera. So we've been doing these kinds of deals for a long time.
Reid, as HBO starts building out in the U. S, you've had experience in the Nordic region where they've competed with you. Can you share a bit what you've learned within the Nordics and what does it mean for overall television consumption in that market?
Yes. Each market is unique. So I think they've had some teething problems initially 2 years ago that they probably would not have in the U. S. I think they've been licensing broadly.
They just licensed a number of stars titles. So they're willing to license beyond their core platform. They've done pretty well and we've done very well. And what we've talked to when we talk to subscribers there is they're really if they're in the content, they subscribe to both services. So I really think we're going to see this just really fun couple of years where the 2 of us compete for the best content, the most really in the game with the Internet.
They're the leader in their field. Really in the game with the Internet. They're the leader in their field. They're well ahead of their peer group. They're ahead of the broadcast networks in this dimension.
So it's exciting to see.
David, you updated the U. S. Margin outlook to the 200 basis points of expansion per year and getting up to 40% over 5 years, of course, after you hit 30% early next year. How do you get comfortable that you can still invest what you need to in content in the U. S.
And also do that 40% longer term margin?
Well, I think Ted would
tell you that he'd take everything that we could give him. But I think that even with the shift to the 200, it still allows for some pretty significant expansions of both licensed and produced content. So we feel pretty comfortable about the room for continued growth of the quality of the content. And I think it provides a little bit of discipline in terms of making sure that we spend that marginal dollar well. So I'd say that we're pretty comfortable on both senses.
And any chance you want to share more on what sub number that 40% implies 5 years down the line?
It implies continued growth.
Michael and Doug, we should do one more question each and then we should wrap it up.
Okay. Thanks, Reena. I have one for Ted. I believe one of your content deals early on had a put option for a company to actually put shows to you. I wondered what do you think will happen to those types to that agreement longer term?
And should we expect some more of the show a big bundle of shows put to you the next 1 or 2 years?
All those deals, especially the early deals are very organic and they've all been in various stages of renegotiation and extension and redefining. So there's nothing looming that's troubling in that way, because remember they were mostly designed at the beginning to gain access to the content, not to try to avoid getting the content. So there's nothing out there that we're nervous about or concerned about in our existing deals about a put that could be just looming out there. Okay.
And Reed, a question that we frequently get still is on pricing. We obviously saw the small what we thought was a small pricing change in 2Q, but perhaps had a bigger impact in the Q3. Does that mean really as we look out over the next couple of years that you may not do anything in terms of pricing? Or do you think still think that you'd look to experiment and potentially do things around tiering?
Well, we'll definitely be listening closely to our members. And then as we add more and more great original content, then I think we're more valuable to consumers. So we're seeing an adjustment period that's this quarter. We're learning how to do that. But over the long time, consumers pay for value and it's up to us to front load that value.
And boy, the slate of content that TED has for next year, it's really exciting and kicks off with Marco Polo in early December. With that, let me thank everybody for joining us on this call and look forward to catching up with all of you over the quarter. And special thanks to Doug for his year of service. So we'll continue.
Thank you.
Thank you.