Great. Hi, I'm David Wells, CFO of Netflix, I'd like to welcome everyone to today's Q1 2014 earnings interview. I'm joined today on the company side by Reed Hastings, CEO, and Ted Sarandos, Chief Content Officer. Interviewing us will be Rich Greenfield of BTIG Research and Doug Anmuth of J.P. Morgan. We'll be making forward-looking statements in today's earnings interview. Actual results may vary. At this point, I'd like to turn it over to Rich Greenfield for our first question.
Thanks, David, thank you to Reed and Ted as well for having both Doug and myself co-moderate your Q1 earnings conference call. I think we're going to go back and forth and switch between Doug and myself asking questions. The first question we'd like to address to Reed Hastings, the question that I think is on everyone's mind right now is, why is now the right time for a price increase? I know a few years ago you had talked about the need to wait a few years to raise pricing. Is it merely that a few years has passed, or is there something else driving the need to raise pricing? Then attached to that, how should people think about the flow-through of the revenue you're going to generate from that higher price increase?
Will that be reinvested in content, or should we expect all of that to drop to the bottom line?
Rich, over the last couple of years, we've been improving the content selection on Netflix and broadening it, most recently with the addition of the amazing shows like "House of Cards" and "Orange Is the New Black". If we want to continue to expand to do more great original content, more series, more movies, we have to eventually increase prices a little bit. We're not doing much. We're doing a dollar or two, depending on the country. All the existing subscribers keep their current price. They don't get an increase. Therefore, the revenue increase to Netflix will be quite modest in the short term. Eventually, as new members come in, they pay a little bit more, and with that, we'll be able to license much more content and deliver it in very high-quality video.
Reed, would you still think about tiering going forward, or does this potentially remove that possibility over time?
No, that's definitely a possibility. We're continuing to look at that. This is the big focus is on this increase, we want to get this done well and make sure we grandfather people cleanly, it's something we're definitely looking at.
You still believe a tiered structure over time is possible. What are the things that you could potentially tier on: concurrent streams, standard def, high def, number of devices, content? How do you think about that?
Well, we have tiering now. We have two plans. We have the two stream at a time, that's $7.99, we have the four stream at a time, which is $11.99. We have tiering today, it's definitely something we're thinking about in terms of expanding the options that consumers have, some of it being on the criteria that you referred to.
Is the two-year read that you talked about in Ireland for grandfathering, is that what you deem generous as you think about how to properly support the current subscriber base that you have with the price increase? How will you actually communicate the risk to a consumer of dropping out and then being tagged with a higher price if they choose to come back?
Well, you're talking about a $1 or $2 difference per month, so I don't think it's a huge difference. Yes, the two-year is very generous. We'll do between a year and two. We're still looking at that. We'll be able to announce more details later.
David, how would you think about how you would reinvest the dollars from the price increase into additional content or allowing that to fall more down to the bottom line?
Well, we've said before that mostly it's going to be towards content. It's about improving our service. If you think about generous grandfathering, that's going to bleed in over time in terms of the average subscription price. It'll take a while. I think it'll be gradual. At the point where we reach 30%, where we think is coming up, we'll look at the business and make the right long-term choices for both profitability as well as a long-term profitability, which you get from a very strong consumer offering, which means content as well.
David, I think actually on the last conference call, Reed had talked about as you get to the 30% domestic contribution margin, it would get tougher to expand by 400 basis points a quarter. Does the price increase doing it now actually change that forecast? Is it easier to add 400 basis points to margins domestically in both 2015, 2016, and beyond?
Adding revenue makes it, by nature, easier. What he's referring to is the fact that the numbers get larger, right? That margin is a % of revenue. As that number gets larger and larger, it gets harder and harder to add 100 basis points or 400 year on year. I don't think it changes anything in the calculus when we say that when we reach 30, we'll look at the situation, we'll look at the company, and make the right smart, long-term choices, including how much we put to content, how much we put in terms of streaming delivery and product, how much to marketing, and then how much to profit.
Ted, do you want to talk for a minute about the new content and some of the things, at least in the general, that we'll be able to do post the price increase?
Yeah. We're rapidly expanding our original production. We have several productions running today all around the world. I think when you look at the size and scope and the ambition level of some of these projects, you'll see that this is a great time for consumers because people who were never working in television before are thrilled to be working in television today and doing some of the best work of their life. At higher budgets, sure, but that's a good thing for everybody, including us, because we're in the position to be able to bring that kind of production level to our members.
David, the comment about international profitability from existing markets expected by the end of the year, is it fair to assume that the U.K. is profitable now with Latin America still experiencing losses?
We didn't say anything specifically about individual markets. I think what we've said, and we'd reiterate, is that each market has gotten better, both has been growing and has been improving in terms of a loss, but we didn't give any specifics about it. We wanted to give that comment about our overall profitability of all of our existing markets to demonstrate that before we launch another substantial expansion, that we're pretty confident in our existing performance in the markets we have today.
Doug, I'd add that we're very confident of our success in Latin America as well as the U.K. We're making great progress in every country, which is giving us a big ambition for this next round of European expansion.
A question for David, though, to follow up.
Sure.
When you look at that $300 million-$400 million, I think that you kind of got hit by as you launched both the U.K. and Latin America, should we expect a similar type negative impact on profitability internationally as you get into markets like France and Germany?
Well, we didn't give specific guidance, Rich, in terms of an actual number. I would say that if you think about the U.K. and looking at our financials at the time we launched the U.K., that was a substantial market for us. If you look at what our financials would be today and into 2015, given the comment about our international profit starting to be profitable starting in 2015, you would have to assume that those investments will be of that size.
Just moving over to profitability on the U.S. side, I think in the quarter, you saw about 460 basis points of year-over-year increase in contribution margin. David, where do you feel like you generated the most upside here?
You mean in terms of the year-on-year growth, Doug, are you talking about versus forecast?
Yes. Sort of versus the 400 basis points.
Sure. Year-on-year growth really is about growing our members faster than we're growing our content spend. I don't think there's any one particular leverage point other than a managed level of content growth. We continue to get more efficient across other parts of our business, the content spend is the largest piece of that, it's about managed growth.
Question for Ted. When you look at "House of Cards," I think there's been a lot of focus on the fact that, or you had even said before that Season 2 would have a bigger impact on your overall subscriber growth and net additions than Season 1 because people had become comfortable with the show. When you look at what happened in Q1, did that actually bear itself out? Is there a way to actually show or tell that Season 2 of "House of Cards" actually had a greater impact than Season 1?
Yeah. We're getting more sophisticated about how we measure it as well, Rich, and I think that what we see is a hungry audience for Season 2 versus a curious audience in Season 1. In Season 1, Netflix subscribers had no idea what a Netflix original series would be like. There was some curiosity, but certainly not a lot of excitement going in. In Season 2, there was a lot of pent-up demand. We saw a lot of very early front-weighted viewing for the launch, which kind of told us that America was ready for more and dug in right away. As we mentioned in our letter, we've been absolutely thrilled so far with the show from the early launch relative to how you'd measure television on any show on basic cable or premium cable.
I only give you that information, by the way, to help you understand kind of the class of viewing to think about a show like "House of Cards.
Do you think that shows are becoming more expensive, prompting you to need to raise pricing to afford the shows that you want to create just because the cost of an individual episode is rising throughout the industry?
Yes, it's partially, Rich. I think what's happening is that we're committing to larger budget shows, not that the same show is more expensive to make year-on-year. We're looking at the kind of shows that we're competing with. We're still only competing with kind of the top end of cable for those shows. Think about it like a sports team where the bidding can get quite high on a couple of key pieces of talent, but the overall salaries stay kind of in check.
Ted, do you feel like you're seeing a similar dynamic play out as you head toward the second season of "Orange" as well here in terms of the way the viewer base builds?
Yeah. We had said before, "Orange Is the New Black" has been our most-watched show. We're pretty excited to see what an even bigger mob looks like when "Who is hungry for Season 2?" starting June 6th.
Ted, when you look at HBO, they had a big hit this last quarter with "True Detective," and I think it was a show that Netflix was bidding on and actually wanted and thought would work well for Netflix. Curious, they still rolled it out on a week-by-week basis and seemed to build a lot of excitement and social media buzz around their releasing strategy. Do you ever look at kind of what is happening at HBO and say maybe there are other ways of doing things in the U.S., the way you even experimented with some doing it overseas?
Yeah. We look at it all the time. I think that works well for them, and I think this works well for us. I think the promise for our members is that we're going to stay focused on what they like, and what they like is to watch more than one at a time. We don't know the exact magic number of how many at a time, but giving people the option to watch as much as the entire season I think works well and fits well with our brand promise. By the way, it may be that in the future, we could roll out shows in different release models the way we did with the Turbo Cartoons, and like to your point, we are in other countries with other American U.S. TV shows.
That we premiere outside of the U.S., like we will with the "Breaking Bad" spinoff, "Better Call Saul," as we did recently with "From Dusk Till Dawn," and we will with "Fargo.
A question for Ted and for David. Are you still on track, would you say, to double your investment in originals in 2014, but still keep it below the 10% of total content spending level?
Yeah. It had been in our previous, that's the way it's still trending.
Yeah, this is David. I would say, Doug, that we've sort of migrated away from the 10% number just because that number's going to grow. It's going to get bigger and bigger and bigger. Yes, it's still accurate to say that we've doubled year-over-year, but it still, as a percent of our overall content spend, is less than 10%.
I guess this is a question for Reed, although it probably could be addressed to a few of you. When you think about the amount of money you're going to be investing in content in 2015, especially with the firepower you're going to get from the price increase, how do you think about your total addressable market in the U.S.? Is it starting to move towards higher levels than you had thought before, just given the amount of content you're actually going to be producing?
Rich, about three years ago, we identified the model that we think, in the fullness of time, we can be two to three times larger than domestic HBO, linear HBO, which would be 60-90 million subscribers in the U.S. That model anticipated that as we got to 40, we'd get better. As we got to 50, we'd get better. I would say all of those improvements in the model that we think of are built in to our 60-90 million member projection for the domestic market. We'd stand by that. Every year that we add another five or six million members makes us feel a little bit more confident of getting into that range, which is great. With that, we're able to add more content and continue to make the service better.
Just following up on that question. Reed, can you comment on whether the recent subscriber growth performance is coming more from gross adds or from lower churn? In particular, can you give us some more detail on what has been happening to churn in the U.S. over the past year?
Yeah, think of most of the growth, Doug, as coming from member satisfaction. When members are really satisfied, they tell their friends about the service, they retain better. It's really driven from that member sat. When we have great shows coming and unique exclusives and things that make people feel passionate about Netflix, they're, again, more likely to tell their friends and more likely to stay. It's a mix of both of those things, but fundamentally, it's member satisfaction. Without member satisfaction, you can't get much growth, of course, you don't have good retention. With it, both aspects are very good. That's what we've been really focused on. In the letter, we talked about our advertising strategy evolving towards more emotive and brand and content and away from direct response.
We've realized through testing that we don't need to be running around saying, "Netflix free trial" nearly as much. That's very commercial and reductionist. By focusing on the core elements of member satisfaction and the content that you get if you join Netflix, we can get to a much bigger market share and a better connection with members. When they come to our website and see that they get a free trial, they're doubly happy. That's not the core reason to come to Netflix.
If I could, Reed, too, if I could elaborate on it, and go back to Rich's earlier question about satisfaction. The all-at-once model, the one thing that sure generates is a lot of satisfaction. If you're stuck in Washington D.C. or New York in the middle of a snowstorm and you want to spend the weekend watching "House of Cards," it's something not only that brings people a lot of joy, it's something you can't do anywhere else. That's why we invest in that model as well.
Reed, it sort of seems like you're looking at HBO, where they never talk about, "Hey, HBO is $15." They just talk about the value that HBO brings to the consumer from a content standpoint. Is that fair to think about?
Yeah, I wouldn't say it's because of HBO. I think of it as many great services talk about how they're great, and then the pricing is fair and you have to pay to get the thing. You'd want to talk about the great aspect of the service and bring that to the fore. That's generally great marketing, and HBO is an example of that great marketing. We're not trying to copy them specifically. We're learning and doing best practices as they've been doing for a while.
Reed, just another question, a little bit related to the competitive landscape. Amazon has seen some strong growth recently in terms of Prime subscribers, saying that they're basically north of 20 million at this point, also rolling out Fire TV. How is all of that impacting Netflix, and what are your thoughts on the recent Prime price increase and whether that has any impact to you?
Well, Prime's a great service. I'm a Prime member, and most Netflix employees are Prime members. It's coming across to most people in our societies as very complementary to Netflix. People look at them as multiple channels. You saw that Amazon included us on the Fire TV, and of course, we've been before on the Kindle Fires, and it's a great relationship all around where we've got unique content, they've got some unique content. They're also doing originals. There's multiple networks out there. It's very much not a zero-sum game, and we're building this ecosystem together that's about internet video. The more players they are in internet video, the bigger that ecosystem gets. The big theme is internet video is taking share away from linear video. So we're all participating in that transformation.
When you look at Net neutrality, peering interconnection, Reed, you wrote a letter that basically made it sound like you thought that peering and interconnection was a direct Net neutrality violation, or at least violated the principles. FCC Chairman Wheeler has said they are more cousins than they actually are the same thing. You had said, I think two calls ago, that you would not need to pay distribution, meaning ISPs, for the amount of content you were serving. You reversed that this quarter. I guess just from an overall standpoint, could you just address what happened this quarter with Comcast and how you think about the future of the internet?
Sure. The internet is in constant evolution in terms of the relationships and interconnection that we see. We did end up choosing to pay Comcast to improve the video quality that our members experience. We don't think we should have to, but in the short term, we felt like we had no choice. We've got that deal in place. In addition, we're lobbying for this idea that we think is very natural, which is interconnect is part of Net neutrality. It's a stronger form of Net neutrality. Now we're in opposition to the Comcast-Time Warner merger because we're really concerned about what happens when the combined entity, if the merger were to go through, would have with over 60% of U.S. homes passed and eventually over 50% of U.S. homes subscribing to cable internet, that's a worrisome factor.
We think it's more in the public interest to either not have them merge or if the government goes ahead with it, to at least put some significant merger agreements, settlements in there.
Reed, just as a follow-up, when you say that you had no choice, I'm assuming that's coming from a member satisfaction perspective. Did you see a change in relation to churn or just overall member satisfaction in the Comcast footprint? Then can you also talk about since that deal was signed, and you've obviously seen big pickups in speed since then, whether you've seen a corresponding lift in member satisfaction as well?
Not that I know of. I don't think we've surveyed member satisfaction differentially between Comcast. I imagine it is very much true, but we had years of a good experience on Comcast broadband for our members, then it was only in the prior six months when it started declining rapidly. It's a fairly short-term thing. We're glad we've got that now fixed. I think it'll work out over time if we can get to no-fee interconnects, not only for Netflix, but for Cogent, for Level 3, for Akamai. We're going to have a bigger, stronger internet if everyone can agree that that's a better model than say, retrans, which started off with a very small fee and then escalated into this blackout-type model that's been a real problem for the industry and for consumers.
We're trying to avoid that by seeing if we can move everyone to no-fee interconnect.
I assume if we had Brian Roberts sitting on this panel, he would basically look at what you've just said and say, "I spend $ billions to dig trenches to get the internet," meaning to get Netflix from your offices all the way out to consumers all across the country. If you're going to take up so much of that capacity and force me to actually spend even more money to reach that end consumer, that's not all going to be on me. You're going to have to pay for some of that. What's wrong with that, I guess, in terms of you sharing the burden? The reality is there's always been paying on the internet, whether it's been Level 3 or Cogent. It's not like the concept of peering and interconnection being paid peering is a new concept.
No, actually, it is. In the original days of the internet, it was the opposite, which is the ISP paid Level 3 for interconnect. It's only the very large ISPs that now are able first to demand they're not paying and now to demand payment from the transit. There's been a real shift in the last five years. Brian Roberts is incredibly thoughtful. I'd say if there's anyone that you wanted to trust with controlling half of the U.S. internet, you might pick Brian Roberts. He's very thoughtful, very long-term about it, and very reasonable. I don't know that we want anybody to control half of the U.S. internet, and that's the real basis of our objection to the merger.
Reed, how do you think about the likelihood that you would potentially do similar interconnect deals with other providers, with telcos, for example?
Well, we've got peering agreements and interconnect agreements with probably 100 ISPs around the world, including many very large ones. That's an ongoing state. It was only in the case of Comcast when it got to such a bad state and then recovered very quickly, thankfully, that it was so visible.
Just a question for David, I guess, tied to all of this, could you give us any sense on how these deals are structured? Meaning, is there any way to think about what the cost of interconnection is going to be to Netflix from a provider like Comcast? Does it account for 4K or when you launch 4K, do you have to pay Comcast substantially more, et cetera?
Well, Rich, we don't talk about the exact specifics of the deal, but as you might imagine, we have been thoughtful about what might be important down the road in the future, including those items that would be important for us to provide our consumers. Comcast and the interconnect fees that we might have to pay or a portion of the expenses that we've borne, including increased content, as we've added more and more content. I would say it's part of the pattern. Content continues to be our largest piece of expense on our P&L.
Reed, just to follow up there. When you think about the amount of bandwidth capacity that Netflix is utilizing as well as other just large internet companies, is there a longer-term capacity problem in the U.S. just in terms of bandwidth, especially as you push more toward 4K TVs?
Doug, you can think of it as Netflix is using this bandwidth, but I think it's more correct to think of it as consumers are paying for a 20 megabit or a 50 megabit package from an ISP they deserve to be able to use that speeds that they've paid for.
The importance of IPTV boxes to your business. We went to the Amazon Fire TV launch. When we were using the box, we noticed that when you said something like Yep.
Sorry.
Hello?
I'm being told that we're going to interrupt for a second. Just stand by, we may have had a blip here. We're going to restart.
Okay.
Sorry. I'll have to ask you to restart your question.
Okay. Tell me when.
Sure thing. At least this time we had a protocol for a restart here.
Did we lose the last question?
Yeah, I would assume. Sorry, this is David Wells. Are we back live? Okay, great. This is David Wells. I apologize for the interruption. I'm going to ask Rich Greenfield to repeat the question he just asked. Rich, please repeat.
Hi. Reed, we attended the Amazon Fire TV launch recently. When we were using the device, we noticed that if you said the words "Downton Abbey," it immediately brought up all of the content that was available as part of your Amazon Prime subscription. When you said something like "House of Cards," it immediately did bring up the content. However, it was only for Amazon's paid service. You had to actually buy each individual episode. When we asked why it didn't actually direct you to the Netflix app, which is a featured app, it said because they don't have access to your API unless you want them to have access to your API.
I guess that brings to the question of, how do you think about how you work with an IPTV box like the Fire TV, which is also a competitor in Amazon Prime for video?
Amazon's been very straightforward about treating that platform as an open platform, we definitely want to be in voice search, we will be in voice search. We're just still working on the mechanics of it. There's no fundamental issue. It's just some timing and scheduling things that came together. I wish we could've made the initial launch date, it's definitely something that'll come out this year.
You don't mind the overarching search being driven by Amazon search versus your recommendation engine?
We have that capability also on different MVPD boxes, also on the Roku, where there's an overall search for titles. We recognize that. Now, when you're in the Netflix app, you get a more custom-tailored search experience with various suggestions, it's up to us to continue to improve that. Amazon's been extremely straightforward and open about allowing us to use that voice search, that's something we're working on.
Reed, in your letter, you mentioned MVPD integrations coming in the U.S. this quarter. Is it fair to assume that you'll continue to maintain that billing and customer relationship going forward? Will they look like the initial MVPD set-top box deals that you've done in Europe?
Definitely, that's a way to start. It can also look like the Apple TV, where that's billed through iTunes. Whether it's iTunes, PayPal, or Virgin doing the billing, it doesn't make that much difference. You'll always have, as a consumer, multiple options in how that's integrated, as long as it's a separate line item on the bill. That's whatever the price of Netflix is in that territory.
Reed, given the peering interconnection deal you signed with Comcast, is it fair to believe that at some point this year you'll actually be on the X1 box, which I know is something that you've talked about wanting to be on?
Yeah, we're definitely staying in a state of we want to be on it, but I don't have anything more to announce today.
Ted, just in terms of content, we get a lot of questions about "House of Cards" Season 3 and what's going on in Maryland in terms of production. Reed is smiling now. Can you just give us a little more color in terms of the status there? Is there any concern here for Netflix customers or investors going forward around that third season?
Keep in mind, the relationship is fairly complicated there, where you have the production company who receives the benefit of a tax incentive from the state of Maryland to keep the show in Maryland. There have been ongoing negotiations between MRC, who produces the show for us, and the state of Maryland. I would anticipate that these are overcomeable issues, and it's a very competitive world out there in terms of attracting production. The tax incentives in place for House of Cards in Maryland have resulted in hundreds and hundreds of jobs, and not just for actors, but for carpenters and waitresses and hotel workers. The amount of hotel nights and meals that the production of a television series brings to a state is staggering. I think this has been one of those really interesting kind of political volleyballs in Maryland.
Maryland's been really great to the show, and we love being there, and we're hoping that MRC and the state work that out. The investors and fans are not at risk in any way.
Ted, as a follow-up on content, have you started to see leverage from your international distribution footprint in terms of getting the rights to a series? Meaning, now that you're in X number of countries outside the U.S., is it becoming easier? Is that an advantage to actually buying series, or is that still on the come until you launch more major countries in Europe and Asia?
It's helpful that's where I think we'll see a lot more meaningful measurement of it as we expand more aggressively. I think even seeing things like doing licensing North America together, you see it in where we're launching, where we're premiering shows that premiere on U.S. networks on Netflix around the world. Being a single buyer for multiple territories puts us in a unique class of buying. We hope that we realize some economic advantage of that, but also just in being able to coordinate a massive marketing relationship with the studios and networks that produce those shows that we can then take and be a one-stop for them in a world that's pretty fragmented today. I think we could bring a lot of efficiencies as a global buyer just today that studios and networks aren't set up to be global sellers yet.
Ted, just following up on that, do you want to move more toward owning original content directly, more end-to-end, and the effect giving you sort of greater control over international rights distribution going forward? How do you think about that?
Doug, I think we see it as what we want to do is we want to be able to make those decisions for how the content is exploited. The more ownership you have, the more likely you can do that. You can also do that through in negotiations in very long-term license deals as well. I don't have any religion around ownership versus licensing, as long as we get that suite of rights that we're looking for. You'll see us going forward doing a mix of both. Once you decide you're only going to do programming that you own, I think that you forego a lot of great programming. I think we've actually seen that in the kind of weakening of the programming on networks today that lean more to almost 85% ownership, that the quality of the programming suffers for it.
We want to put the quality of the programming first and then the set of deals second. All along, what we want to do is be able to have much more control over the way the content is exploited on and off of Netflix.
Ted, are deals that you're not getting purely based on price, meaning you just don't have enough dollars that you can allocate to original programming, and so you couldn't bid to win something like "True Detective"? Or are there still shows that want to be on one of the existing kind of linear traditional television outlets?
No, I'd say that a lot of the programming that we're seeing premiere are shows that have passed through these doors. It's not that we couldn't afford them, it's just that relative to what we believe the audience is, the deal didn't make sense. You either want to make a deal at the price that you want or one that you'd be happy to see your competitor pay. A lot of that is at play. I don't think there's any we would rather be on one versus the other. I think that Netflix is a number one or a number two spot destination for these shows almost across the board these days. We're very proud of that and happy with that.
Ted, where do you stand with rights to recent originals like House of Cards and Orange in international markets? Would you launch in certain markets, for example, France and Germany, if you did not have all of your original content there?
Yeah, sure we would because we're going to have a lot of new original shows that will launch between now and then. We'll also have shows that we're premiering in France and Germany and other markets around Europe that we won't necessarily have in the U.S. It's like we talked about earlier with From Dusk Till Dawn, the Breaking Bad spinoff, Better Call Saul as examples. There's a lot of ways that we're backing. The original offering may be slightly different outside of the U.S. in multiple territories. Some of those original shows, as we launch in other territories around Europe and around the world, we'll go back and renegotiate and pull some of those rights back.
Maybe that's a good segue to talk about international. Reed, when you look at international markets, a lot has been made of France and Germany being the next two markets that Netflix targets. I guess as you think about those markets, how do you think about the competitive landscape in continental Europe, as well as the appetite for U.S. content relative to where you've launched previously, which are generally more English-speaking markets?
Well, we've seen tremendous success in the Netherlands, where we launched six months ago, that I think encourages us about being able to figure out the right programming formula in each nation. When we've had success in Argentina, we've had success in Mexico, in the U.K., and in the Nordics, and now Netherlands. We're going to get into a broad set of markets. We're going to learn as we go. If we're very fortunate, we'll have programmed it completely correctly from day one. More likely, we'll figure out some stuff's working, some stuff's not. We'll adjust the formula. What we've become really convinced about is around the world, people want the convenience of internet on-demand video, and that really is a very big and broad need. We're stepping up on the international expansion, and we're just going to be pushing ahead market by market.
Keep in mind, our original shows like "House of Cards" and "Orange Is the New Black" have become enormous successes in all of those territories. In France, as an example, the most popular television show in France is "The Mentalist" from CBS. I don't think that there's some unique hindrance because it's not a primarily English-speaking territory for Netflix.
Yeah, Ted, this is David. I was going to make the same point in terms of Brazil being a very non-English speaking market and lots of demand for Western or Hollywood-produced content. Doug and Reed, I think we've got time for one question from each of you.
All right. One more each. Pressure is on. In your letter, Reed, when you're talking about the 2Q guidance or the outlook there, you use the words "even in a year with full-year growth" in terms of subscribers. I guess, what gives you that confidence this year in 2014 that you can deliver more net adds than you did in 2013?
We always hope to grow net adds both on a year-over-year basis and quarter-over-quarter. We're making good progress on that. I don't think that we have specific guidance. We don't have specific guidance for the year. What we're saying there is really a mathematical point, which is even in a year where you're up year-over-year, you can have Q2 be down year-over-year because of the increased seasonality. You wouldn't want to interpret that or misinterpret it as a backhanded way of sliding in full-year guidance. We're just sticking with our quarterly guidance model at this point, and things are looking good.
Reed, when you think about international expansion, one of the things that I think a lot of investors have emailed us about is pay TV penetration. Obviously, your service rides on broadband, but a lot of people look at the relative pay TV penetrations in several of these overseas markets. Do you look at that as a key driver of where you decide to launch, or is it all about broadband penetration? Meaning, what are the key things you're looking at to figure out where to launch next and what the total addressable market is in each of these countries?
Well, I think we're going to turn out to see that the total addressable market over time are human beings that enjoy TV shows and movies, because everybody's going to be on the internet. In terms of pay TV penetration, it's relatively low in the U.K., about 60%, and we've been very successful there. When we look at that, we just see there's an unmet need. Whether something is a relatively small broadband, or, sorry, small pay TV penetration or already large, like Canada at 90%, we've been successful in both of those kinds of markets. Again, it comes back to the fundamentals of people wanting to have the convenience and simplicity that the internet enables, whether that's on a smartphone, on a tablet, or a smart TV. That's what's making us optimistic about the long term in international.
Each quarter, we'll have some real work to do to figure things out. I think we're going to find that it's a very big opportunity. Go ahead.
Are you seeing wireless become a bigger part of your story in terms of actual time spent watching, especially overseas?
There's a funny dichotomy. There's a good amount of watching on a mobile phone, but usually when it's on Wi-Fi because of the data caps. Wireless plans, cellular plans generally have data caps between two and five gigabytes, which you can use up pretty quickly. Consumers are very aware of whether they're on Wi-Fi or not. They're using the mobile phones and tablets, but mostly on Wi-Fi, rather than on cellular. If with 4G, we see more competition and lowering prices and eventually uncapped plans as they try to compete with wired, then we could see more of that. Right now, that's not what we're seeing in wireless.
With the FCC
Go ahead.
I was going to say, if the FCC kind of seems focused on encouraging intermodal competition, if Sprint and T-Mobile were to actually merge, that could actually create more competition for Comcast and be good for Netflix?
It's a long way till 4G. They first have to be competitive with Verizon and AT&T Wireless, and that's quite a challenge that they're focused on. I'm afraid that that as a realistic alternative is very speculative at this point that they would be able to compete for residential broadband with cable. At this point, cable's the dominant technology. With that, let me thank you guys for being on and interviewing us. David, did you want to close?
No, I was just giving you the heads-up that we're out of time. Please conclude comments and go ahead.
Great. Okay. Thank you, everyone. With that, we'll sign off.
Thank you.