Welcome to the Netflix Q4 2015 earnings call. I'm David Wells, CFO. I'm joined on my right by Reed Hastings, our CEO, and Ted Sarandos, our Chief Content Officer. Interviewing us today will be Peter Kafka from Recode and Benjamin Swinburne from Morgan Stanley. Just a reminder, a cautionary statement that we will be making forward-looking statements and actual results may vary. Over to the first interview question.
I'll start out. Maybe for Reed and the team, can you reflect on the fourth quarter results for us that we're all going through right now? In particular, talk about the international strength. You mentioned you were pleased with the September/October launches. Can we infer that the outperformance versus your expectations maybe came from those areas? Any color you can give us on the international strength to start us off.
We've got over 50 countries in Q4. We have a lot of experience, Ben, at predicting these markets. We launched in Japan in early September, and Spain, Portugal, and Italy in mid-October. I'd say they've gone very well, as we said in the letter. In terms of the outperformance, it was pretty broad-based. Many different contributors around the world to that. What we're seeing basically is that this on-demand internet TV, watch wherever and whenever you want, it's very popular wherever you go in the world.
Just taking that question over to the U.S. for you or also maybe for David. A little bit lighter this quarter than your guidance or budget. Talk to us a little bit about the churn, connects dynamic, and anything you'd want to add around credit card chip sets or any other issues you want to bring up around Q4 performance in the U.S.
Q4, I would say, was pretty close to our projection. We were literally within hours of it. We did anticipate that net additions would be lighter year-on-year. I would say the credit card was a background issue in Q3, continues to be a background issue. The larger thing is that it's just the next 50 million are a little harder than the first 50 million in terms of growth, and we're doing everything on the content side, on the product side. We're continuing to improve that service. You're seeing that the law of large numbers, when you grow steady at 5, 6 million net additions a year on a larger number, then that percentage growth is smaller year-over-year, and that's what we predicted, and that's what you see in our guide for Q1 as well.
Hey, guys. Last quarter, you said credit card issues were a background issue. This quarter, you said they're a background issue. How long do you anticipate this is going to be a problem for you? Additionally, any sense of why you're the only major consumer company that's called this out as a problem?
Peter, this is David. I don't think that we're the only one. I think because we're a recurring merchant, anywhere from 5-10 basis points, 15 basis points is sensitive to us. We have optimized. We've spent a lot of time optimizing our recurring billing systems and our approach, so we're very sensitive to it. Again, it's a small thing. I think we want to focus on the larger things and not the small things. We anticipate that the EMV rollout will continue into 2016 into Q1 and Q2. We'll always have, even globally, these issues where there's mass reissues of things and disruptions in the recurring systems that we have.
This may fall under the small thing category, last quarter you added iOS sign-ups. Any impact surprising one way or another from that?
Customers have always been able to sign up on iOS. They had to do it in the mobile web Safari browser.
Right. Yeah.
Now they can do it in-app. It's a positive. It's not transformational, it's a really nice positive. In particular, in new markets, as we expand around the world, where we're less known and less trusted, the comfort for customers in terms of using the Apple payment mechanism versus entering their international credit card information is helpful. Think of it as one more in a long list of great payment options that we have.
Reed, I want to come back to the outlook and the Q1 guidance in particular, starting with international. You mentioned in the letter the 2016 markets, you're playing the long game here, the guidance is obviously impressive and well above expectations. Are the 2016 launches a big contributor to what you're expecting in Q1 and sort of for the year internationally, or is this continued momentum building on the existing markets? Any color you can share there?
It's a lot of both. Obviously, our global guides for over 6 million net additions will be a record for Netflix. We're super excited about that. What's amazing is we're seeing some of our new shows like "Making a Murderer" not only be huge here in the U.S., but it's emerging as a big hit around the world for us. You kind of expect "Jessica Jones" to carry internationally. What's been phenomenal about Ted's team's programming is that these more unusual content titles have also had great draw around the world.
Let me just ask you about the U.S., just to pick up on David's comment about the next 50 million. What are you doing as a management team? Maybe to Ted on the content side. What is your research telling you about the people who actually don't have Netflix today? Is there some genre that's not being addressed well enough? Is there a distribution decision you guys need to make to go after that? What are you doing to maybe go after that other opportunity in the U.S. market?
Well, David's a big thinker, so he's thinking about the next 50 million. I'll stick with the next 5 million. When we can clearly see the next 5 million, I've been hearing a lot about it, but nothing yet has compelled me to join. The big driver is getting people excited about whatever title we have and then making it easy for them to join. Whether it's integrating on the smart TV or integrated into the MVPD set-top
The Apple TV. Those are the things that make it easy to fulfill that desire. The underlying desire is for these new titles, which is why we're so excited about the year coming and the content that Ted's team's put together. Maybe you could talk about some of the big hallmarks we have in the next few months.
Upcoming in this quarter, you're going to see something that we were pleasantly surprised by how excited the world is over "Fuller House." This upcoming, you asked about different kinds of programming for the next 50 million or five million, depending on your level of aggression. You're getting more and more mainstream in some ways with the programming, but as a function of breadth, as a function of doing more for all tastes. Opening that up to include multi-camera sitcoms like "The Ranch," like "Fuller House." We have also a really great single-camera sitcom with Will Arnett called "Flaked," and the fourth season of "House of Cards." You've got all this kind of breadth just in a single quarter. We're releasing more programming than most networks will in their whole year.
Being pleasantly surprised that shows that are not necessarily all in English are being embraced by U.S. audiences.
Absolutely.
Which is one of those things that
Absolutely
has been rolling around in Hollywood for a long time, that U.S. folks don't watch subtitles or won't
The continuing success of "Narcos" in the U.S. where you have this primarily Spanish language show that's being watched in enormously mainstream numbers in the U.S.
You guys, I think it's for Reed and Ted. Since last quarter, several of your suppliers, most specifically Time Warner and Fox, have been even more explicit about their desire to pull back on the amount of content they sell to you. Has that caused you to accelerate your original programming, or are you already on that same trajectory?
We've been on the trajectory to accelerate original programming. I mentioned a couple of weeks ago, we're going to launch 600 hours of new original programming this year alone. It is a function of as our budget continues to grow, as our subscriber base grows, we are licensing programming and we're creating programming. As a percentage of our spend, the original spending is growing, but as an absolute, their licensing dollars are continuing to grow as well. Fox is an important vendor for us, just like they all are. We're also a very important source of revenue for them.
If that rhetoric was less intense, if they weren't out there saying, "Look, we're going to stop selling to SVOD," would you be pulling back on original spending?
No, I think the positives that have come from original spending have been tremendous in terms of our international growth, in terms of really distinguishing and differentiating Netflix from an explosion of SVOD services.
What do you think about the Marvel relationship? Do you see expanding that one, or is that going to stay steady where it is right now?
It's a pretty expansive relationship already. We have five different series going in. We just announced yesterday that we're going to a second season of "Jessica Jones." When you look at those five series with multiple seasons, plus the crossover season of "The Defenders," it's a huge commitment. All the way along the way, you're going to be introducing new characters who have the potential to spin off and grow that relationship even further. It's very important for Marvel, it's very important for Disney.
For us.
For us, absolutely.
Just, Ted, sticking with you on content, why the call out of family programming emphasis in the letter? Any comment around what you're doing maybe differently there? Now that you have a quarter behind you with some of your movies in the market, what'd you learn? How does that change your appetite around film?
Well, the reason we called it out is to acknowledge that there's a large volume specifically of kids programming coming out. When normally people think of Netflix original programming, they've been thinking about our sophisticated dramas and adult comedies more so than our kids programming. Quietly, we've been amassing a very big selection of original kids programming on Netflix. Kidscreen Magazine just voted Netflix the number 1 outlet for kids programming on television, which we're really proud of, that's going to continue to grow. We're also looking to grow categories like "Fuller House," which are programming that are watched together. Parents watching a show that their kids love, that they don't just tolerate, but they enjoy, too, and it's a real underserved market, and that's why we called that out specifically.
On the movie side, it was a great first swing, I think, with "Ridiculous 6" and "Beasts of No Nation." "Beasts of No Nation" is in the discussion about the Oscars. It didn't quite make it there, picked up nominations in almost every other category. The viewing we were thrilled with around the world and have been continued to be thrilled with as we've expanded into new territories. Both "Ridiculous 6" and "Beasts of No Nation" are watched in huge numbers in all of our new territories. We're really excited by it, and we've got an aggressive slate in 2016 to keep pushing on it.
Just shifting over to the hours data, Reed, that you gave in Las Vegas and then some in the letter. This comes up every quarter of people trying to understand the penetration growth curve in these international markets. If you look at the European markets where you gave the subscriber number last fall, I think penetration growth's pretty relatively light so far, certainly versus, say, the U.K., which was much stronger. What are you guys doing, maybe you and David, as you think about trying to accelerate the growth in some of these markets that have been tougher out of the gate? What are the characteristics that we, as investors and analysts, should look at in these markets to understand the dynamics that drive these growth rates over time?
The first year in the U.K. was a really tough market. It's hugely successful for us now, but it's not true that it always was. We saw the same thing in Brazil for different reasons.
Being light in the beginning doesn't worry us a bit. What we've seen in market after market, like Spain, Italy, France, Germany, is this building momentum as we do more and more local content. We've got this amazing show, "Marseille," coming out in May, that I think will really uplift the way our French members think about us, and non-members in particular. We're really looking forward to that. It's a natural building cycle, and I think the way you should model it is pretty consistent growth in all of the territories. The variation is pretty modest, again, if you time-adjust it from whenever we launch.
Just on your time spent number, I think we calculated in the fourth quarter anyway, about a 12% increase per average sub year-over-year, which is impressive given you added a lot of new international markets. Anything you can tell us about the highest or versus the lowest, and whether all markets are still growing? It would appear that the U.S. is still growing, which is impressive. Maybe you could talk about that a little bit.
Well, we're continuing to invest more in content, more in platforms in terms of the performance and the speed, the service is growing. I think it's natural that we're continuing to grow on all those dimensions on the per-membership basis as the service matures. The idea. Think about smartphone usage now compared to 10 years ago. Of course, the number of smartphones is up, the usage and utility is up. I think we've only scratched the surface. Netflix is a tiny percentage of all video viewing today. We have tremendous potential growth ahead of us if we can continue to execute, if we can continue to produce great shows, to have this global launch with no snafus. It's a lot of hard execution, the market potential is really quite large.
I would only add that the more content that we're adding, the more likely you're going to land on a show that somebody can't live without. I think that's what you're seeing as we're expanding in not just the volume of content, but also the breadth of genres that we're covering in our original shows and our original movies.
Reed, when we talked a couple of weeks ago, in addition to India, you called out Philippines, Saudi Arabia, as particularly important markets for you. Anything else you want to emphasize in terms of the 130-plus countries you rolled out a couple of weeks ago?
Well, those are a number of countries that have language match. Philippines, a lot of people speak English. We have English language content. We have subtitles in Arabic, we've translated our service into Arabic, that's a good match for Saudi Arabia. In much of the world, Russia, Poland, Central and Eastern Europe, we're still only in English. We've got a ways to go over the next two years. We'll keep adding more languages and make the service more relevant. We look at it in two categories, where we've got language match and where we don't yet. We're seeing both a growth, more substantial growth in those, obviously, where we have language match.
Beyond language, we have work to do on payments in terms of in each country, there are often local payments or different traditions around payments that we'll start to work on. Think of it as we've really begun on the international or global expansion rather than it's all sewed up and we're all complete on it.
We've had two weeks, right? We've been two weeks in terms of that launch.
What are you thinking about as you move into markets where mobile internet is the dominant way that people get online? Traditionally, people are watching you on a connected TV.
Yep.
What happens when they're used to watching or consuming things on a phone?
Yeah, same thing. You just watch Netflix on the phone, just like you watch YouTube on the phone. A lot of that phone viewing is on Wi-Fi because of the data charges. What you do on the cellular networks is try to have the most efficient video codecs you can have, and we're working hard on that. Think of it as it's the same way that people use other internet video services like YouTube.
David, I want to come back and maybe talk a little bit on the numbers. Can you update us on your expected cash burn for 2016? Help us understand the relationship between content cost on the P&L versus cash as we move through this year, maybe into 2017.
Yeah. There's no change here. We'd said before that we're on pace to burn about $1 billion of cash, mostly on our branded or originals content. That ratio of cash to P&L is about 1.3 to 1.4, and that continues to hold. You see that it'll run up at a peak in certain quarters if we take delivery of a lot of original content, and then runs back down. I think the 1.3 to 1.4 range of cash to P&L expense will continue to hold. So far, our expectations of use of cash have been about as expected. You see in the letter that we wrote that we're on pace to use about $1 billion or maybe a little more this year. We upsized our debt deal last year, about a year ago.
In terms of timing, we'd be looking at later this year, maybe early next year, before we would need to do any more on the capital side.
On the U.S. margins, I realize how you allocate costs between the U.S. and international markets may change over time. You had a lot more operating leverage last year than perhaps we all thought heading into the year, yet you maintain this 2020 guidance of a 40% contribution margin. Is that just being conservative, or do you expect maybe some change in amortization rate to slow the margin expansion down? What color can you give us about the pace of U.S. margins?
Well, not the latter. I would say there are a couple of points on this. One is that to the extent that we launched Rest of the World, it was a little earlier than maybe 24 months ago that we would've been fully global or near fully global, I would say the U.S. P&L did receive a little bit of relief. That's a one-time thing, and that sort of goes away. The second point is we continue to add content, and it's at an efficient level. We look at the hours viewed and what is generated by the content versus the cost. We continue to see new additions, even in the U.S. and markets that have been in place for four to five years now. We continue to see viewership, and Ted talked a little bit about engaging new audiences. You'll see us do that.
I think for the foreseeable future, we think we can grow both margin and grow the content spend, even in markets in the U.S.
Back to international, I know you guys aren't going to offer any more guidance on when you might go into China. When and if you do you imagine that you're going to have to restrict or alter the catalog based on censorship or other issues with the Chinese market?
Yeah. The standards, at least today, they're fluid, that the government uses restrict, like "Game of Thrones" reportedly had 10 or 15 minutes for many episodes cut from it. There are issues conforming to those local standards. That's true of all of the Western content that's produced, as well as the Chinese content of that market. We'll be on a level playing field with all other services.
In the same territory, would you have to enter via JV? Is there some way you could enter China without doing a JV?
There's all different flavors. If you look at how DisneyLife or iTunes or others have done. We're talking to different partners, building the relationships. Again, as I mentioned a few days ago, we have a very long-term look, and this could be many years of discussions, or it could happen faster than that. We're going to take our time. The clearest example is really the iPhone, which took many years for Apple to get approval for that, and now it's a very large business for Apple. Our view is, if we're looking out for the business a decade from now, we should just be very patient and continue to build those relationships and listen and learn. We're in no hurry, and most of our time and effort right now is going in how do we build the Japanese market?
How do we build the Philippines market? How do we build the Saudi Arabian market? Markets that are open to us and available right now.
I want to ask about content spending, maybe for David and Ted to comment on. We presume the relationship between subscriber growth and content spend is not linear going forward. As you guys think about growing the U.S. business, how should we think about the pace of growth in content spending? Ted, is the 50/50 original acquire ratio still your long-term expectation, or have the relationships with the vertically integrated media companies maybe altered that at all?
Let me take the first part, and then I'll throw it to Ted. I would say, Ben, it is true that once you get to $4 billion of spend, the rate of growth is going to slow down. That is definitely true on the U.S. side. Back to my earlier comment, we still think that there's great content to be added to the U.S. service that is efficient, that will continue to increase the competitiveness and attractiveness of the offering in the U.S. We're going to continue to add to that service. It's at a slower rate of growth, but it continues to grow. In time, it's not true yet, but in time, we will be adding more of our original branded content than our licensed content. Today, we've been adding both. We've been growing originals rather quickly.
We'll continue to grow originals quickly. But you're seeing a lot of that added to the U.S. market. To the extent that we're successful, Ted, maybe this is a good transition to you, about finding content that works across markets. There'll be a blurring of the lines between what is really U.S. content and what is international content and vice versa.
I think the art of this is going to be doing something that doesn't feel homogenized for the world, that still feels like great programming for everybody. We've had tremendous success so far. Like I said, with "Narcos," a primarily Spanish language show working in countries that speak every different language. "Making a Murderer," as Reed pointed out, in many parts of the world, these kind of true detective documentaries are incredibly popular in primetime television. We're pleased to see these continue to be real global genres. What you asked about our suppliers, and I think confrontation is probably overstated, but there's a lot of rhetoric going around right now about how quickly and how aggressively people will license. It's still a very competitive business. I think what happens is that people sell their programming to the highest bidder.
If we're that bidder, we get the programming. If someone else is, they'll get the programming. That's true today, and that was true five years ago. I think what's happening now is we're very pleased with the results of the original spend, and that's what's driving it up, not fear of being cut off on either end.
Ted, just on that point, what should we glean from your DreamWorks extension? Obviously, that's a family genre, and I think it's kind of an output deal. You could correct me if you're wrong. I know you don't like output deals. Then at the same time, The CW renewal has not happened. I think that deal is sort of still out there. Is that an example where you could get something done with an independent studio but not with a vertically integrated one?
No. The DreamWorks is not an output in the traditional sense, meaning that we agree to certain levels of programming, but we work together in what that programming is going to be and developing those shows along with DreamWorks. We've been thrilled with the results. We took it into more territories and expanded the number of years of programming that'll come through that deal because it's been working great. I think on The CW deal, it's just in the process of negotiation. It's not behind any normal process. As you know, it's a time-honored tradition to negotiate in the press, so you're seeing some of that from them. Right now, I'd say it's just in the process of negotiation.
You should also keep in mind that no matter what happens in The CW deal, is the programming that's currently there remains with us through the run of those series. So it's not like we're going to wake up one day without the programming. We'd like to make that deal work. It's great programming. We have a great relationship with CBS and Warner Bros. on that deal, we'd like to continue it.
Reed, you said you didn't think Time Warner should spin out HBO, if they ignore your advice, does that change your view of the way HBO would act as a global competitor for you? Do you think they have the ability to do things outside of Time Warner they can't do within Time Warner?
HBO's been a great competitor, one we admire for a very long time. You might have seen the recent news that they're now offering HBO Now direct to consumer in multiple new nations. They started just in the Nordics, then some countries in Latin America, now in Spain. They will be a formidable global competitor over time, again, independent of their ownership.
Speaking of competitors, Ted, why not offer a theory about why your competitors at NBC and Fox and other networks spent a lot of time talking about you last week at the Critics Association?
It might just be putting up a shiny object to deflect and talk about Netflix instead of what's going on in their own networks these days. I really couldn't tell you why. NBC was a particular puzzle, mostly because they used, as an example, a show that they produced for us to try to illustrate what was and wasn't working with some data that didn't feel very true to us. It was an unusual step that surprised everybody at NBC, too.
I think it's just a tactical miss, which is kind of funny in the press.
Does the talent or anyone else still ask for numbers, or are they happy now or accustomed to the notion that they're not going to have those?
No. If you follow the coverage from the TCA, most of them offered up that they're very happy with the relationship and not to be under the kind of weekly ratings pressure that wouldn't matter much to the success anyway. They're happy not to focus on it.
Coming back to David on some of the financials. David, I think you said at CES or at your presentation out in Las Vegas, about $120 million of loss a quarter internationally. I just want to level set and make sure that's the right way we should be thinking about the year. Then on raising more capital, you mentioned in the letter you're looking at lowering your cost of capital, which we presume would have been the case. What are you referring to specifically there? Are some of the gyrations in the high yield market causing you to think about raising capital differently than you have in the past?
On the first question, you heard me right in terms of $120 million. Looking ahead, I would say there's two things that might alter that, not materially, but plus or minus $10 million-$20 million. That would be foreign exchange. We continue to have an environment where we're running deep into some pretty heavy headwinds of foreign exchange. If that continues, that might challenge that $120 million upward a little, again, $10 million-$20 million. The other thing is just carving out a little bit of room for us. Like I said, we're 14 days, or two weeks or so into a global launch. We've got lots of markets that we're in early days of setting our level of compelling and competitiveness in our service offering. This year is about investment. You'll see that. We're focused.
We're committed to a global break even, we're also trying to build multi-year businesses in many of these markets. If we see opportunities, I think there's a little bit of room for us to pursue those later in the year, to pour some additional content marketing, whatever the right mixture of investment is. It is true, it's about $120 million. It won't meaningfully depart from that too much, but it could be $10 million-$20 million within that. You should assume the debt instruments are similar to the ones we've used in the past. We've been very happy with those. Sorry, Ben, on your last question. Nothing's changed there other than our confidence that we'll continue to drive some meaningful profit into 2017, 2018.
To the extent that people are focused on backward-looking financial metrics in terms of credit worthiness, we think that we'll become a better credit risk over time, irrespective of what's happening in the high yield markets. Today, our bonds have traded pretty well.
Can I just follow up, David, on your global break even point? I think operating income was down a bit in 2015 versus 2014. If I look at the 2016 outlook for international losses you just gave us, plus some U.S. margin expansion, I think operating income overall should grow a bit off the 2015 base, or maybe I'm thinking about things the wrong way. I just want to square that.
I think you're doing the right math. I think that question is a little bit of a modeler in terms of looking at the narrow numbers. That's true in terms of the math. In general, I would say this year is about our continued international investment. We're not really focused on making sure operating grows. The operating income growth is sort of an outcome of focus on international expansion, but also committed to consolidated break even.
Understood.
You guys said you're releasing people from grandfathering this spring. That means price hikes. David or anyone else, are you thinking about ways you might reach out to folks who are going to see their bill go up by a dollar or two and keeping churn as low as possible?
Yeah, it's pretty simple. We'll let them know that at a certain date, the price change takes effect. Nothing dramatic. Pretty straightforward, simple stuff.
Great. Reed, while I've got you here. Now you've been able to watch sort of what Amazon's doing with its bundle and Starz and Hulu. Any more thought about attaching yourself to any other over-the-top service in some sort of bundle?
Yeah. We do direct consumer research, we haven't been able to detect any significant take rate on those. We'll continue to watch and learn and detect are people on Hulu taking a lot of Showtime, or is it pretty much on the margin?
You're not seeing it right now?
We're not seeing it so far.
Thanks.
Let's talk a little more about the 2016 launches. Can you guys talk about how the go-to-market strategy is for these markets versus, say, prior international markets? Maybe at a high level operationally, when you're thinking about markets like India or parts of Africa, what's different about what you're doing here versus what we've seen before?
It's extremely similar to how we launched Latin America, where there's a couple of countries that we focused on directly, and there's still some countries that we haven't yet visited four or five years later, but we have a lot of members. The internet's a beautiful thing because of its openness. Again, it's very similar to our Latin America launch.
Anything you're doing on the payment side? Since you brought up Latin America, I think that was a challenge initially. I'm sure you've learned a lot, but what can you do proactively in some of these markets to help smooth that for the consumer?
I'll take that one. I think we've got a pretty robust payments team. We've invested internally in building that out, getting smart in terms of the payment systems across the world. We're pressing on gift cards and prepaid cards that might open up to the market to those people that don't have access to a credit debit card. In the rest of world, again, it's pretty early days, and I think we'll take the approach that we took in Latin America, which is just to look at our next best opportunities to open up additional pockets of the market. We've done this before, not just in LATAM, but in other places, and we'll continue with that playbook in the rest of the world. Our partners are another element of this. Reed mentioned iOS.
We'll be looking to draft off of large partners in the group in terms of iOS, Android, and other options. There's a lot of evolution going on in the payments world. I got misquoted at Citi by saying that we're interested in Bitcoin, but what I said was it would be nice to have, in five to 10 years, a borderless currency like Bitcoin. I think those people that are so excited about it are interested in breaking down those barriers and in using the power of the internet and the internet age to reduce the friction of payments that are existing today in some of those banking structures. We'll be drafting off those long-term as well. In the near term, expect us to continue to just knock down the best opportunities in terms of adding local payment methods, credit, debit cards, drafting off partners as well.
You're participating with T-Mobile and their Binge On program. Are you going to work with Verizon on, I think they're calling it FreeBee, thing they announced today?
I don't know enough of the details of FreeBee, generally, the great thing what T-Mobile is doing is making unlimited video consumption a possibility with freedom from worrying about the data caps. The quid pro quo from the customer standpoint on Binge On is that they only get DVD quality on their four or five-inch screen, which when you look at the DVD quality, is actually very good. That's a really unique program that T-Mobile's done, and it's seeing a great reception amongst our users, and we're seeing viewing going up, and I think T-Mobile is seeing some real positive benefits from that. We hope those kind of programs expand.
Reed, can you explain why you're comfortable in participating in programs like that, and how that differs from stuff you've complained about at Comcast in the past with their data caps?
Well, it's voluntary on the customer. Any customer of T-Mobile's can decide to turn it on or turn it off. That would be a big difference. Then they're not charging any of the providers. It's an open program. Many of our competitors, such as Hulu and HBO, are in the program also, it's an open, no-charge program where they're really focused on trying to give the customer some optionality of limited to DVD quality, and then you get unlimited viewing, which their customers are choosing in droves.
You don't feel it's a network putting its thumb and saying, "We favor this kind of programming from this kind of studio or this kind of service?
Correct. That's the big difference. That's right.
Thanks.
Reed, why'd you go with the $7.50, $8 price point in these international markets, particularly emerging markets where that's a relatively expensive price? Do you reserve the right to sort of go down market over time as well?
Well, we're starting off definitely appealing to elites. I mentioned that in Russia and Eastern Europe, we're still in English. In Vietnam and Cambodia, we're in English. We're serving elites. You can think of them as a shorthand as iPhone owners. They paid $800 for an iPhone. They're comfortable with entertainment in English. For them, $8, $10 is a sweet spot price. Certainly, in future years, as we do more and more in trying to expand into the mass market, we can look at additional pricing options. We feel good about our pricing and the value for these global originals right now.
Just on these international markets, there's been a lot of press coverage on the VPN situation and proxies, maybe you could walk us through what you are doing as a company that's going to change your policy from prior periods. Could you envision a situation where that might impact your net adds because you have millions of customers in an international market that suddenly went from having a fake U.S. account to having no access?
I don't think we'll see any impact. We've always enforced proxy blocking with a blacklist. Now we've got an expanded and enhanced blacklist. I don't think we're going to see any huge change.
Just to be clear, if you don't think there's going to be any huge change with the VPNs and the other proxy workarounds, why go ahead and do it at all? Is this purely to placate content providers?
You can call it placate or you can call it catering to their desires, which they have legitimate desires. If we license content in Canada, it's not fair for us or our customers to be getting that if we've only paid for Canada. We're trying to pay for it all by shifting to global licenses, and we're working with content providers on that. It's perfectly reasonable what the content owners want. We know there'll be some people affected that are using it today, which is why we wanted to be open about it. It's really a continuation of what we've always done now with this enhanced blacklist and some other techniques.
Remember, all of our originals are fully global. They go live in every country at the same time around the world. Increasingly, we are spending most of our licensing dollars on content that's accessible in that way, from small things all the way to big things like the Oscar-nominated movie, The Big Short will have the pay TV window around the world, so people will be able to watch that movie on Netflix wherever they are.
In the past, you've cited piracy as a major competitor. Any concern that the VPN and proxy workarounds will push some of your users back to piracy?
If we see that, there's probably so few of them, it's not a big contributor to overall global piracy. Overall global piracy is a big problem, we're working with all the content owners partially to be a great carrot, also to have the other services like HBO and Amazon be great carrots, so we can work together on this anti-piracy agenda.
Yeah. I think geo-filter hacking and piracy are maybe distant cousins at best. I think of geo-filter hacking as people hacking to pay versus piracy where people are hacking not to pay.
Thanks.
I'm curious if you guys could talk about where you're investing on the technology side. I think your long-term letter talked about over $700 million in tech and development in 2016. There's some comments in the letter about complexity-based encoding. What I'd love to hear, beyond the general areas you're spending money is, what are you doing to reduce the required speed or bit rate that's needed to stream and enjoy Netflix? I'm particularly thinking about the 2016, maybe mobile-first markets.
I think the whole industry is working on these advanced versions of H.265 to be able to do very high-quality encoding with small bit rates. YouTube's made great progress on that. We've made great progress. I think, again, people have been working on efficient video encoding for 50 years. That's one of the classic computer science problems. We're seeing good progress there. We're seeing a lot of progress on our algorithms and being able to rank videos for each person even better, being able to promote to the right person the right content. Hopefully, you've seen some of that in your own experience, where the suggestions, that is the billboard at the top of the page, are more often very appropriate and something you're just dying to watch.
What are the minimum speeds you think someone's going to need in a market like India on fixed line or on mobile to actually stream Netflix?
Well, the minimums are around half a megabit. That's been consistent in the past. That's a fairly low-quality picture. It's around 700 Kb or 800 Kb to be able to do DVD quality.
Thank you.
You guys have said a few times now that "Making a Murderer" surprised you, its success surprised you. Can you talk a bit about why you had more modest expectations for it and whether the surprise of that success has had you rethink your modeling?
Well, it surprised me because I know so little about these things. When I met with the filmmakers and heard about the murderer sequence, it was interesting, but I thought it would be a specialty thing. I would say Ted and his team aren't that surprised. They always believed in this content.
Yeah. There was something very special about it from the beginning. When it came to us, it was seven years in the making already, and this came to us over three years ago and recognized then, even before we were making original docs, that they had something really special on their hands. The surprise has been to see it perform at the level of some of our scripted series. Even our best documentary series have done very well but not performed in such mainstream numbers.
Given that surprise, have you thought, "All right, we're going to rethink how we evaluate some of our shows"? Or are you just sort of, "All right, this is a happy success," and you're happy to move on with it?
Yeah. It's on the continuum of expanding our genres anyway. It's only our second documentary series. We started with "Chef's Table" which was a very different show, and the next documentary series will probably be very different from "Making a Murderer" as well.
Ted, some of your competitors-
Including, in fact, it starts in a couple of weeks, or this week, I'm sorry, Chelsea Handler's "Chelsea Does" will be our next documentary series.
We should take one more question and then let everyone go.
Real quickly, Ted, I guess for Ted. Your competitors report that you're, in many cases, overspending them by a significant amount for original programming and as well as repeats. Do you think that gap's going to continue? Do you think it's going to increase, or do you think eventually you'll fall in line with what they're spending?
First I'd like to thank them for endorsing our spending to talent. The truth of it is, the only reason we can, in John's own words, have shock and awe spending for a series is because we get shock and awe viewing on that series. Like David said earlier, the efficiency of the content spend has been great, meaning that we're spending a lot on some great shows, and they get a lot of viewing relative to licensed programming or relative to other programming as well. We've been excited about it, and I think it's a competitive marketplace, and overspending is relative. I'd say if a show like "The Get Down," like "The Crown," which are relatively expensive shows, are successful, it's money well spent, the way it was for "House of Cards" and "Orange Is the New Black.
Out of respect for one of our longtime questioners and your colleague, Rich Greenfield, who had a question about Charter and was it good if Charter acquires TWC for the internet industry, the OTT, I'll answer proactively that I think it would be a tremendous positive for the OTT industry because Charter has agreed to a multi-year strong net neutrality policy, something no one else has publicly agreed to, and that would cover not only the Charter footprint but the Time Warner Cable footprint, and that means that we, Hulu, Amazon, and others can compete on an open basis. We think it would be a huge step forward for U.S. policy in terms of OTT. Thank you all. Peter, thank you, Ben.
Thank you.
We'll talk to you again soon.
Thank you.