Good afternoon, and welcome to the Netflix Q2 2022 earnings interview. I'm Spencer Wang, VP of IR and Corporate Development. Joining me today are Co-CEO Reed Hastings; Co-CEO and Chief Content Officer Ted Sarandos; COO and Chief Product Officer Greg Peters; and CFO Spencer Neumann. Our interviewer this quarter is Doug Anmuth from J.P. Morgan. As a reminder, we'll be making forward-looking statements and actual results may vary. With that, I'll turn it over to Doug now for his first question.
Great. Thanks, Spencer. Great to see all of you, and thanks for having me host again today. There's clearly a lot to talk about on advertising and new initiatives, but let's start with talking about recent trends. You expected to lose about two million subscribers in the quarter, and you did a little bit better at a loss of 970,000. What drove the slightly better than expected results in the quarter?
You know, looking at the quarter, Doug, you know, we're executing really well on the content side, obviously, Ozark, Stranger Things, lots of titles, lots of viewing. We're improving everything we do around marketing, improving the service, the merchandising, and, you know, all of that slowly pays off. If there was a single thing, we might say, Stranger Things, but again, we're talking about, you know, losing one million instead of losing two million. You know, our excitement is tempered by, you know, the less bad results. Looking forward, streaming is working everywhere. You know, everyone is pouring in. It's definitely the end of linear TV over the next five, 10 years, so very bullish on streaming. Our core drivers are just continuing to improve.
Of course, we'll talk later in the call about monetization and how that's improving. You know, tough in some ways, losing a million and calling it success, but, you know, really we're set up very well for the next year.
Doug, I'd just add to that. I mean, the business remains really resilient. I mean, basically what you see in the quarter is it played out generally as expected, as Reed said. The -1 million versus -2 million is slightly better in terms of member growth. Then on revenue, operating income, cash flow, other than the strengthening US dollar, which I'm sure we'll talk about, it affects multinationals around the world, our revenue was in line with guidance. If you adjust for that and our restructuring costs, our operating income was above guidance, our EPS was above guidance, and our cash flow remained strong. Overall, generally delivering on as expected.
Almost all of the subscriber base has seen a pricing change over the past year. How do you think about that in terms of a factor, just, you know, perhaps in 2Q and, you know, maybe even going forward just in terms of gross adds or churn? I think you still have, perhaps some rollout in UK and Ireland and maybe the tail perhaps in 2Q, in the US.
That's right.
Maybe-
Oh, go ahead. Go ahead, Greg, and then I'll chime in.
Okay. Yeah, I'll kick it off and then you can take it, Spence. I would say most of what we've seen in the countries that you mentioned are the big ones that we've done so far this year, U.S., U.K., Ireland. We've seen pretty much the standard response that we've seen historically over the last five years or so, which is that we typically have this adjustment period where there's slightly higher churn post the price change. That's certainly what we've seen in those countries.
If we do a good job basically at taking those price changes, which are significantly, you know, net revenue positive, and you know, investing those into more great content and the you know, the product experiences and marketing and magnifying the conversation around our titles, then you know, we know that we'll deliver more entertainment value and we'll be able to return those metrics. That's certainly what we are seeing you know, in the United States, for example, where we're seeing those like the churn for example, that you mentioned, return to pre-price change levels. Largely that performance is as we've seen historically and what we would expect.
Yeah, Greg, you hit on it at the end in terms of the. It's part of what you see in the Q2 performance and the Q3 guide, that we're getting further away from some of those price changes. We always expect to see some slight elevated churn after a price increase. As Greg said, highly kind of revenue positive. We had some elevated churn early in the quarter because we had some big price changes, you know, big markets that had price increases like U.S., U.K., Ireland, some other parts of EMEA early in, you know, both Q1 and rolling through Q2. But then as we get further past that's part of why you see you know, positive paid net adds guidance in Q3.
Okay. When you think about the back half, and Spence, you just mentioned some of them, but some of these factors seemingly improve just as you get perhaps greater distance from some of the pandemic pull forward. You mentioned greater distance from pricing, better seasonality. I think the content slate builds through the year. I guess the question is, why only one million net adds in 3Q? How do you think about subscriber growth for the, you know, for the back half overall and for the entire year?
Well, you kinda hit on it. We talked about some of the things that were near term kinda headwinds to the, at least the subscriber growth numbers, as well as revenue growth in our business, whether it's the combination of growth in connected TV homes around the world. It's a little bit of paid sharing, it's competition and some of these macroeconomic factors like higher inflation, as well as the invasion of Ukraine and the knock-on effects around EMEA and other parts of the world. We still kind of working through that, but exactly as you say, we get further away from price increases, we get to a stronger seasonal period, we get to strength of slate, and we're, you know, working to address all these things.
Some of them take a little bit more time to address, like what we talked about with paid sharing, which we'll talk about in the letter and I'm sure you'll get to that, but some of these we actually have to take action to further address.
Okay. The business was very different clearly in 2008 and 2009. In a recession and just tougher macro in general, how do you think Netflix and streaming more broadly would hold up?
You want me to take it, or you want somebody else?
No, I'll just say this, Ed, real quick. I think it's really important that in particular in tough economic times, that consumers see Netflix as a tremendous value. Adding great content that they love and, you know, they can't wait for the new season to add tremendous value in the form of. This Friday, what do you see? This movie The Gray Man that's gonna be premiering on Netflix. This is an enormous big budget action film that normally people would have to go out and spend an enormous amount of money to go see. They're gonna premiere it on Netflix. Then we've got a steady drumbeat for movies like Me Time with Kevin Hart and Mark Wahlberg coming up, and a new edition of 365 Days, next three, 365 Days, a big franchise.
A new season of Cobra Kai. Obviously, we saw the impact from Stranger Things this quarter. That's just, like, the tip of the iceberg for the value that we're bringing to the consumer, and I think the consumer will embrace that even more so in tougher economic times.
Okay, great.
Maybe just to extend that just a touch. I mean, you know.
Sure
We think, you know, Netflix is a great entertainment value. We wanna keep making sure that it is a great entertainment value. We try to provide a range of price points to consumers around the world to make sure that service is accessible even, you know, in the current environment. I would say, I'm sure we'll get to this in a little bit, but I think that, you know, our ad-supported offering is an extension of that, you know, sort of pro-consumer wide range of prices that will increase the accessibility of the service, especially in the years to come.
Just to build on lastly, just to the risk of beating. Oh, Spencer, go ahead. You'll hit on it. Go for it.
Oh, sorry, Doug. I was just gonna add, if you zoom out a bit and look at past economic cycles, at least in the U.S., most forms of entertainment have been fairly resilient to downturns. There's a level of escapism, I think, that entertainment provides. Also, if you look at the pay TV business over economic cycles, it tends to be a bit more resilient as well, just because the value of in-home entertainment increases as you know, folks perhaps you know, don't go out as much. As a subscription business, it tends to be a little bit stickier. I don't you know, obviously, every recession and cycle is different, so we don't wanna take that for granted, and we're monitoring pretty closely. That's hopefully a little bit of helpful context for you.
That's helpful. Thank you. Let's shift gears, talk about advertising clearly on everybody's minds. Reed, you've talked about making the Netflix ad tier a better ad experience than what's available on TV today. Can you give us an update on what the product will look like, some early thoughts there, and then also about more around timing, which I think you said early 2023.
That's a great question for Greg here.
Yeah. I think we're looking at this as an extension of, you know, two things that we think that we've historically done, which is, one, be very consumer-centric and think about the customer experience. Also just taking an innovation-oriented view, whether it's, you know, sort of how we started in streaming to how we think about, you know, great quality of experience and you know, the innovations we've led and I think in the discovery and choosing side. We think that we have a real opportunity here to, you know, you know, through a period of years and iteratively. I wanna set expectations at the onset. You know, we're gonna take an iterative approach. This is what we call the crawl, walk, run model.
At the beginning, it'll look, you know, what you're familiar with, but over time, we think there's a tremendous opportunity to leverage that, you know, that innovation DNA that we have, as well as a bunch of just sort of enabling characteristics around addressability and measurability and things like that to, one, provide an incredible experience for consumers, those who choose to take the ad-supported offering, but also provide an incredible experience for brands and advertisers who wanna work with us to make sure that we're doing, you know, a good job of elevating what that looks like for them. There's a bunch of lines of inquiry, lines of innovation that we're going after that sort of support all of that piece, and I think we'll get into that iteratively as we go.
I think, you know, when you look at the scale of our offering, you know, the technical DNA, the partners that we've got lined up, I'm pretty optimistic that, you know, over a couple years, we can deliver an experience which is, you know, fundamentally different from the ad experience on linear in a way that supports all of the stakeholders.
Greg, when you say the partners that you have lined up, I mean, Microsoft obviously a key one, but are you referring to advertisers here as well? They're already, you know, taking a lot of interest. Maybe you could talk more about what that looks like at this early stage.
Yeah. We've seen a lot of excitement in our early discussions with brands, holding agencies, holding companies and the agencies because, you know, I think for them, you know, they've wanted to connect with the titles, the incredible content that Ted's team is putting out there. I think we also share, you know, a perspective on what is a great experience for consumers and for advertisers when we think about, you know, the kind of advertising we see, frequency caps, what's a great ad experience, and we're noticing a high degree of alignment there. That enthusiasm, that alignment, you know, is increasing sort of my optimism and the excitement that I've got to basically get this out there because I think it's gonna be a win-win-win for all parties involved.
In terms of the Microsoft deal, will ads be sold early on exclusively by Microsoft? How do you think about your desire to build out more of your own sales force over time?
Yeah. All of the ads that are served on our ad-supported offering will come through Microsoft. That's an exclusive arrangement with them. One of the reasons that we're partnering with Microsoft, there's a bunch of, you know, fundamentals. They've got the technical capacity, which is, you know, complementary to ours, a go-to-market capacity, which we need to leverage, and it'll be very important for us. A key component of what we liked about this partnership was that there was sort of a flexibility and that innovation orientation that I mentioned before. They very much, I think, are approaching this as an opportunity to work together, to collaborate and to sort of evolve both the technical capacity and also, you know, sort of what the experience is and what the go-to-market approach is.
We've got lots of flexibility to work together there and evolve that over time.
Okay. You already have tiers across a range of prices. What do you anticipate will happen in terms of members switching plans and perhaps trading down to the ad-supported tier? Do you have a view kind of long term what percentage of subscribers might be on the ad-supported tier?
Yeah, I would say in general, we know that there's, you know, price sensitivity around, you know, consumers. That some of those consumers are folks that have never actually ever signed up for Netflix. Some of them are folks that were members for us for a period of time, and they decided to cancel for a variety of reasons. Some of those are folks that are, you know, currently watching Netflix, but they're using another paying member's account credentials, right? Those all, I think, represent opportunities for us, because we're bringing a wider range of prices through the ad-supported offering, a lower consumer-facing price, to be able to attract a broader set of members. That's sort of very consistent with our wide range of pricing and our general goals there. We think that's, you know, that's great for consumers.
It's good for us, obviously. When we run the models and, you know, in talking to brands, advertisers, to Microsoft, you know, we look at the monetization that, you know, is the complement to that sort of subscription part of the ad-supported offering. We're, you know, quite optimistic that the sort of unit economics work to make that monetization sort of equal or maybe even better than what we would see on the comparable side for the, you know, non-ad subscription-only kind of plans. We think that this is again, you know, expansive from a member reach perspective, but also, you know, neutral to positive on the unit economics and monetization. That's great for us, you know, obviously from a business perspective.
Should we be thinking about this as a single tier essentially below the basic plan?
I would say over a period of time, you know, we think that this is sort of one of the dimensions that will inform sort of our plan structure. I would say generally we're thinking of, you know, going from our good, better, best model that has been sort of, you know, the core offering that we've had into making that, you know, slightly more complicated because we're gonna have more sort of differentiation features that you know that would inform what you know offering consumers ultimately choose to get to. Will it be a little bit more complexity there, and ads, no ads will be one of those dimensions?
We wanna work into that model and obviously you know, while we're thinking about, you know, sort of the right pricing model there, we also wanna keep it as simple as we can from a consumer-facing perspective. In terms of the on-ramp, the plan selection, how upsells happen, we wanna sort of, you know, work those flows iteratively over time so we build into that complexity without making, you know, it overwhelming for consumers.
Sure. Okay. You talked about advertising monetization essentially helping, you know, close the gap perhaps with current ARM or getting above that level. How do you think about timing and perhaps how long it could take to get to kind of current ARM levels on the ad tier?
I think about the timing more as sort of how we roll this out and how we sort of build, you know, more subscribers on those ad-supported offerings. You know, a component of this is countries. Obviously we're launching first in the countries that have sort of the more mature ad markets. You know, we feel more confident in the ad monetization. We'll sort of explore, you know, next tiers of countries over time. That's a dimension of growth. I would say the, you know, initial response that we're getting from a brand and advertiser perspective is quite strong.
We feel, you know, quite confident that as we sort of grow into this and we, you know, have more subscribers, you know, over time on these plans, that at least initially the unit economics are gonna be, you know, are quite good. We don't sort of see this as sort of, you know, building, you know, in that, call it CPM side so much more as that we're actually building the total amount of volume on those plans and then the total, you know, amount of revenue. Again, you know, this is gonna start small relative to our total revenue mix, but we think we can grow it to be substantial over a period of time.
I think that's key, Doug, is that this is gonna build over time. It's not like all of a sudden all folks on ad-free Netflix are gonna join advertising Netflix. Supply-demand, I think probably works in our favor between both geography as well as opening up the aperture to our members.
Okay. You talked in the letter certainly about the ad product as having the potential and likelihood to drive overall member growth and then certainly overall profitability. Spencer, maybe you could talk a little bit about what it means for margins and some of the puts and takes there versus the current business.
I'd say overall, Doug, these are, you know, this is our focus is, as we've talked about, you know, these initiatives across paid sharing as well as advertising as ways to better monetize our viewing and grow members. As Greg said, you know, advertising as an example, it can do both. We believe we can do this both as in a revenue accretive way as well as a profit accretive way. As we roll out a solution for paid sharing, that probably has a more near-term impact once we get to a solution that works and there's not a lot of incremental expense to that. On the advertising side, you know, we have some obviously some incremental costs that go against that business. As Greg said, there's incremental revenue, we believe at the unit economic level.
We think we can manage that pretty much at an operating income neutral to positive pretty soon out of the gate. It's a slower build over multiple years to have a material impact on the business. Our focus across 2023 and 2024 is to build out to kind of return to a more accelerated revenue trajectory for the business.
Okay. Along those lines, there's been a lot of discussion around that Netflix needs to renegotiate deals perhaps with content providers to monetize through advertising. Also a lot of your viewing clearly comes through original content. Maybe you can help us understand what needs to be done on the licensing side and how to think about some of those incremental costs.
Doug, today.
Ted, do you want to take this?
Yeah, thank you. Today, the vast majority of what people watch on Netflix, we can include in the ad-supported tier today. There's some things that we're in conversation with the studios on. If we launched the product today, the members in the ad tier would have a great experience. We will clear some additional content, but certainly not all of it. We're looking. Don't think it's a material holdback to the business.
Okay.
It's certainly a nice to have, Doug, but it's not a must-have.
Yeah.
We as Ted says, we can launch today without any additional content clearance rights and, you know, hopefully we can supplement that, but we'll, you know, we'll be disciplined in what we do.
Yeah. Got it. Okay. Why did you choose Microsoft over other potential ad partners?
You know, at some basic levels, they've got the technical components we need. They've got the go-to market components we need. They met a bunch of sort of fundamental what I'd characterize as table stakes pieces, which is, you know, a strong commitment to privacy data protection for our consumers, things that we, you know, cared a lot about and were fundamental to us. I would say, you know, at the, you know, beyond those things, it was really what I mentioned before, which is that we saw a high degree of strategic alignment in their interest in innovating in this space and, you know, really working with us over the next several years to basically try and create, you know, a new ads ecosystem around, you know, premium TV, connected TV, you know, ads.
You know, both from the consumer perspective, because that's really important, you know, and I think we've seen this sort of long arc of advertising towards very pro-consumer, you know, let's make advertising part of the quality of the experience, rather than detracting from it, as well as having a really, you know, strong brand and advertiser kind of focus on what do they need to support their goals from there. You know, we saw that as being, you know, a lot of alignment out of that, and we're just excited to sort of work with them iteratively on making that happen.
Is it fair to think that there are some significant, guaranteed revenue commitments here over the next few years?
I would say we're not gonna go into the specifics of any of the deal, the terms of the deal.
I'll try one more. I'm not sure what I'll get. Microsoft, look, is the deal. Can this be broader, and can it be a more strategic partnership beyond advertising? Can it involve elements of cloud, gaming, perhaps other things over time?
Yeah. A couple things there. First of all, we picked Microsoft as our ads partner because we think they're gonna be great as an ads partner. That was really the criteria that was used to inform how we thought about the choice. You know, you mentioned cloud. You know, we're super excited about Amazon and our partnership with them and, you know, we haven't changed that relationship. We haven't changed our focus on AWS as essentially our cloud infrastructure partner there. We also have, you know, we've done other stuff with Microsoft. We continue to do work with them on, you know, sort of go-to-market partnerships, things like that. We'll look for those opportunities as they exist with Microsoft and with other companies, you know, as well.
I would say, you know, this doesn't foreclose on anything like that. But you should think about this as this was about, you know, a great ads partnership deal at the end of the day.
Okay, great. Let's shift gears, talk about account sharing a little bit. You put out a blog post yesterday kind of expanding your efforts to monetize account sharing in LATAM across five new markets, but a slightly different implementation than in the first three countries that you announced in March. Just curious what you've learned here early on over these last few months and just how you're thinking about these different implementations going forward.
Yeah. First of all, it's exciting. I'm excited to get to this stage. You know, we've been sort of working behind the scenes, you know, for almost two years and building the technical capabilities to get this stuff rolled out, and now we actually get to put something in front of consumers and see how they react, and this is sort of where the rubber meets the road. We've got the two models as you expressed. You know, essentially both of them are similar in that they ask consumers, you know, not to stop sharing so much, but just to pay a little bit more for different forms of sharing. The first model that we deployed, it's, you know, pay a little bit more to add a member and share with those additional members.
The second model we're trying is pay a little bit more to add an additional home and, you know, share the account with the additional homes. You know, really at this point, we'll sort of see, you know, what works for consumers. That's obviously the reason we're trying these different approaches is to learn more. We're learning a lot, every day on a daily basis at this point in time based on what we've deployed. I would say while it's early, you know, to call it, obviously we just, you know, are getting going on the second approach, so we'll learn more from that.
I would say we're tracking quite well to, you know, sort of the plan that we had in place and I am increasingly confident, you know, that based on what we're seeing, that we'll have something that we can deploy next year as we were planning.
Okay. Can you talk about some of the technology that you're using here, just to ensure that you're not limiting access for you know, legitimately paying members who are traveling or perhaps away from home, you know, whether that's IP addresses or device ID or other things?
Yeah, one of the reasons, you know, we've been working on this quite some time is because we were building those capacities in the background. You know, these are mostly technical implementations that understand through a variety of network signals and stuff, you know, at what is happening. You know, with sort of putting it through the lens of the consumer-facing model. In each of these two approaches have, you know, slightly different characteristics, but generally, we're trying to lean into, you know, a consumer-friendly model that supports, you know, legitimate use cases. You know, travel is a good example of that, you know, personal device use using, you know, your mobile phone as you go around the world, your PC, things like that.
Supporting those legitimate use cases, but also making sure that, you know, we're doing a good job at, you know, getting paid as a business when we're delivering entertainment to folks outside that household or that home in a way that, you know, is reasonable, where we're asking for a little bit of extra monetization to make that happen, make it a smooth transition as we can for users. Really trying to balance that, you know, sort of very consumer, pro-consumer, consumer choice model with, you know, what we think are practical considerations as a business. Those approaches are different, and that's obviously why we're trying these different things to figure out sort of which is gonna work better in managing that balance point.
Okay. Timing here, I think you said is also 2023. Do you need to have account sharing and kind of lining up with the advertising tier rollout, or are there some benefits in doing that, or is it not kind of strategically important to you?
You know, we're pursuing both independently because we think that there's, you know, value to the business and value to consumers, frankly, especially on the ads plan with a wide range of prices. We're pursuing them independently now. There's a great, you know, synergy that happens when, you know, as we think about on sharing and paid sharing. You know, part of this is being able to offer to a range of folks who may be borrowing Netflix because they didn't quite see as much value from the entertainment and the viewing, to sort of motivate getting their own plan. That's part of that segment. Part of the segment, you know, we just have to encourage them, push them, and nudge them to get to that point.
Part of, you know, what's great about ads is that obviously we get to give, you know, folks that are seeing a little bit less value a lower price and be able to convince more of them to sign up through that ads plan.
Okay. Ted, we're gonna talk about content, I promise. All right. Maybe you can talk a little bit about how content performed in Q2 and how you're thinking about it into the back half. Stranger Things, you know, obviously your best English series debut of all time, Stranger Things 4, but go ahead.
Yeah, look, I think these titles continue to hit new heights, which is really, you know, fantastic that we could still be doing this, back-to-back and delivering hits on top of hits. I think that really belongs to the content teams that do such a phenomenal job around the world. Bela Bajaria, who heads that TV group, and they keep surpassing records like we have been able to do with Stranger Things and Bridgerton and Squid Game. Our biggest hits have all come out in the last 12 months, which is a really kind of a phenomenal sign of progress. Scott Stuber and his film team really killing it. Again, I'm gonna call back to the Friday release of The Gray Man because I think it's a unbelievable proof point of what kind of films that this team can put out.
I think that this is, this is kind of back to back to back where I think The Gray Man will join Red Notice and The Adam Project to be and Don't Look Up, as among the most popular movies of the year, not just on Netflix, but period. I think that really is a testimony to these teams and the teams around the world working great with creators, to create a platform for them to do the best work of their lives. I, we've been really pleased with the output. We've been pleased with the performance.
35 of our original shows are nominated for Emmys this year, which says a lot about the work that's coming out, including three best drama nominees, which happen to be among our most watched shows on Netflix ever. The fact that they could be crowd-pleasing and award-winning is a pretty tough and pretty gratifying combination.
To kinda toot Ted and the team's horn at driving engagement, which is really the North Star driving viewing because then we can drive member growth and monetization around it. As we referenced in the letter, using the U.S. market as an example, Nielsen's gonna be reporting later this week 7.7% screen time share for Netflix, which is the highest we've ever been, which is again testament to the team and the quality and engagement of what they're delivering.
All right. Hopefully, they won't mind that you gave that number a little early. Okay. Let's go back to Gray Man for a minute. Ted, how are you approaching the marketing differently perhaps for this title versus some of the other big movies that you've had in the past?
I think you've seen a lot of it out there. I think we've done based on the marketability of the projects themselves, this is why our marketing spend is a bit lumpy, 'cause really you're trying to focus on the titles that mean a lot to our members, and that create a lot of excitement and conversation around the world. Gray Man is certainly one of those movies that's going to attract a very broad audience, so you'll see the marketing spend out there pretty aggressively. I wanted to point out, you know, Marian Lee, our new CMO, is doing a phenomenal job. She came from inside of Netflix. She was running the U.S. She hit the ground running with that remarkable Stranger Things campaign.
I think our best campaign to date, one of the strongest marketing campaigns I've ever seen. She's in there straight up with Gray Man. I think these campaigns are really doing a ton to bolster conversation around the world around these projects. It's not enough just to watch, but also to get your friends to watch with you too. It helps bring folks along in the conversation.
With "Stranger Things 4," you know, your best English series debut of all time, which we talked about, are there ways that you can leverage that record-breaking viewing to drive engagement with other shows and learnings that you can take to build out additional franchise content?
Yeah, look, I think that the engagement is such an important metric because the time spent on Netflix means you come in, and you're exposed to everything else we're doing as well. Greg and the product team do such a phenomenal job of, you know, audience matching to put the most relevant thing in front of you when you come to Netflix, that you're bound to be exposed to something you're gonna love. You also see it in the kind of targeted post-play mechanism. Once you get through that last episode, and you're getting that one second of anxiety about what am I gonna watch next, you've got a couple of great choices in front of you.
Folks use that tool all the time to find the next great thing to watch on Netflix. It's a pretty great audience where I think it's rewarded in that when the more you watch, the more you'll find great things. I think we get a "Stranger Things" that really pays off. We get a "The Gray Man" that really pays off. We just gotta do that constantly, Doug. The idea is that not only can we deliver on that, but people should expect it back to back.
Ted, how do you balance out driving both that high-quality content and the significant scale? Because you're clearly releasing a lot of content on an annual basis. Does anything change in your process around content going forward?
No, look, I think the focus on quality has always been there, and it's intensified as competition's intensified. I think we've gotta really focus on. I think the output of great content is generally the result of 1,000 great decisions, and the most important one is the creator that you're working with and picking people who really wanna win for the audience and working with our teams to create great TV shows that can go on for, you know, multiple seasons, or great movies that spawn sequels, or just great content that comes in and lives through its life and its episodes and makes people feel great. I do think that the focus on quality and the thing that I've always said from the beginning is scale.
Scale's the thing that we're going to do that no one else has ever done yet. The way that we're doing it today is that kind of distributed decision-making among the teams, the decision-making on the ground, in country for our teams making original content, is what enables this thing to scale. If it all bottlenecked behind one or two or three decision makers in California, we wouldn't be able to do what we're doing today for sure.
Okay. So to support that content, you know, you've talked in the past about kind of the $17 billion-$18 billion spending for this year. Spence, maybe you can update kinda how you're thinking about it for 2022. You know, as we talk to investors, there's probably about half of them that actually want content spending to come down some and to be kinda reined in a little bit, and then the other half wants that to continue to grow and find more hits and go more globally. How do you think-
Have one more and have one less, Doug. Have one more less. Welcome to our life.
I hear you. How do you think about that content spending going forward?
Sure. I can take it, and maybe Ted, you chime in.
Sure.
You know, as you said, we're expecting to spend on cash content spend about $17 billion this year, Doug. As we look forward, 2023, next couple few years, say we're probably in about the right zip code. So cash, you know, we've come through a pretty big business transition for us and the most cash-intensive portion of that transition over the last 5, 10 years, where we moved to original Netflix originals predominantly and producing our own content largely. So about, you know, 60% of our content assets on the balance sheet are produced content. So that's been a pretty big transition. We've come through that.
You know, cash content spend's a little bit choppy, so we went through a bit of that COVID wave, where we were coming out of COVID. We got into production when we could as quickly as we could on some things, including when talent was available. That pulled forward some cash content spend in 2021 and 2022. I'd say just generally when we look out the next couple few years, we'll be probably right around in that zip code, which puts us in a good place. It also, as we said, we were trying to, you know, work through moderating our growth in content expense. Our ex-content expense will continue to grow, but it's more moderated as we adjusted for the growth in our revenue.
We think we've gotten a lot smarter over the last decade or so of being in the originals business as to where we can direct our spend for most impact, highest impact, and highest satisfaction for our members. That's about, you know, roughly how we're thinking about it.
Yeah, we spent a lot.
I don't know who that makes happy, by the way. No, I don't know if it makes either one of them happy.
It's half of them. I would say, look, we spent the way we've spent to get to where we are today, and we think that we're about in the right zip code. Spencer said that COVID distortion in the last two years will kind of throw, you know, make it a little murky. But in general, I think that we're kind of in the right zip code. I agree.
Doug-
Doug, just to give you a sense, we have about time for two more questions. Reed, I think you wanted to add something.
Ted Sarandos, maybe just talk about "Stranger Things 4" as an example. How much did COVID inflate the production costs in your view?
Well, that particular show was probably affected as much as any because of the young cast and the size and scope of the production and the multiple locations we shot in. It was a very expensive burden on the show to make sure that we could deliver it. You know, one of the catalysts of splitting the season in half was how long it took to produce that show. A lot of that was stalled because of early shutdown of the production and restarting production and being extremely careful with the cast of the show early on in COVID. It was more financially impacted than a lot of our other projects were.
I think if you did it all again, it's been off the top, you might even get a couple of extra episodes out of it.
More broadly, maybe, Reed, is the way to think about is throughout COVID, we were at various times, 5%-10% of our overall spend was kinda COVID-related cost that, you know, it started higher, worked down lower. So on these kinda numbers, that's significant, and it's obviously much smaller now. That was a big, you know, kinda drag on our overall efficiency of spend that we
Yeah, that wasn't an overall 5% across all production. Some of them impacted a lot more than others.
Exactly.
Okay. I wanna make sure we talk about operating margins and of course, free cash flow. Operating margins, Spence, I think you're talking about 19%-20% for this year, but ex restructuring and then also I think the FX changes from January when those numbers were first provided. Maybe you can just provide a little more context there.
So, when we had our call, we basically are holding to our margin guidance. At the beginning of the year on the Q4 2021 call, as we launched and started this year, we said we already saw a kinda slowing revenue growth, and we said given the slowing revenue growth, we're gonna maintain or we're gonna manage to a 19%-20% operating margin before any impact of major swings in FX. That's what we're still holding to. This year, we've got the FX moves, and then we also mentioned the $150 million of restructuring. We're not expecting more restructuring costs throughout the year, so that's what's baked into it, and we're holding to our margin guide and similarly holding to it for 2023.
Basically we're saying until we reignite revenue growth, we're holding flat to that margin guide. Overall underlying very healthy operating metrics. I mean, when you look at the revenue side, it's, you know, we're tracking, you know, it's 13% constant currency revenue growth this quarter. We're guiding at 12% next quarter. Can see the read-throughs in a kind of a similar range for the full year, and to 19%-20% operating margins for this year and next. But obviously the strengthening of the US dollar is a major outlier, and we just need to kinda work through that and operate our, you know, as, you know, as best we can on what we can kinda control in the meantime.
Okay. On free cash flow, so 2022, really your first year of sustainable, kinda strong free cash flow. You're talking about $1 billion or so for the year. How are you thinking about some of the key puts and takes around that, and what does substantial growth mean in 2023?
Well, it'll be more than roughly $1 billion. Again, the numbers we provided are again, you know, assuming no major additional kinda big swings in FX. Hopefully we've seen the most of that given, you know, the extraordinary moves in the last three-six months, more than we've seen in the last 20 years. As you say, we're guiding to $1 billion ± a few hundred million of positive free cash flow in 2022. We think that'll continue to grow substantially next year. It's a combination of what we said before. We're through that kind of cash-intensive transition of our business. We're also operating about kinda roughly similar levels of cash content spend next year as this year.
In fact, as we said, we pulled forward a little bit of cash spend into 2021, 2022. Those things are kinda working in our favor as we continue to scale the business. I don't wanna put a specific number out there, but assume it'll be kinda meaningfully more. Obviously as we, you know, kinda work through what we expect to do in terms of accelerating our revenue growth and then start ramping up operating margins again, and, you know, hopefully there's a little bit of reversion on these various global currencies. All those things accelerate cash flow generation down the road.
Okay. We just want to maybe close out with what content each of you are most excited about in the back half. I don't know if it's The Gray Man for everybody or not, but I'm sure there's a lot of other good things.
Well, The Gray Man has a recency advantage for sure 'cause it's coming out this Friday, and it is mind-blowing.
I'll go with another.
I was gonna say for me, Doug.
Another re-
For me, Doug, I'm super excited for Knives Out 2. I've heard great things from our content executives on that one, so definitely anticipating that one for me.
Spencer, you beat me to the punch there.
Oh.
I was gonna go Knives Out 2, but I will, I'll flip back to what I'm currently watching, which is The Umbrella Academy, which is a great current season.
I'll jump in and let Reed close it out. I've been going through Stranger Things to catch up. I just finished that, and I am really looking forward to Extraordinary Attorney Woo. I'm hearing great things from-
Awesome
everyone throughout the hallways, and I'm excited to watch it soon.
I'm gonna be in trouble 'cause we just watched Michael Pollan about hallucinogens and a great documentary series.
How to Change Your Mind .
Blow your head. Yeah.
Thanks. Thanks a lot, Doug. Hey, billions of people around the world love streaming TV and film, and we only serve a few hundred million of them, so the opportunity for growth here is enormous. We have some headwinds right now, and we are navigating through them. Remember this company and this team has navigated through a lot of change in the last 20+ years. We've seen entertainment formats come and go. We've seen entertainment business models come and go, and we have managed to grow through all of them, through all kinds of economic conditions and through all levels of competition. We're super confident that as long as we make the films and the TV series and the games that people love, we're going to continue to lead this exciting and young industry. Thanks a lot, Doug.