Good day, everyone, welcome to the Netflix second quarter 2012 earnings Q&A session. At this time, all participants are on a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ellie Mertz, Vice President of Finance and Investor Relations. Please go ahead.
Thank you, good afternoon. Welcome to the Netflix second quarter 2012 earnings Q&A session. I am joined here by Reed Hastings, CEO, and David Wells, CFO. We announced our financial results for the second quarter at approximately 1:00 P.M. Pacific Time today. The shareholder letter and the Q2 financial results and the webcast of this Q&A session are all available at the company's investor relations website at ir.netflix.com. As is our standard practice, we will begin the call with questions received via email. Please email your questions to ir@netflix.com. After email Q&A, we will also open up the phone lines in case there are additional questions not covered by the email Q&A or letter. The dial-in number is within our investor letter, let me repeat it now. Please call 760-666-3613 if you'd like to get in the queue.
We may make forward-looking statements during this call regarding the company's future performance. Actual results may differ materially from these statements due to risks and uncertainties related to the business. A detailed discussion of such risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed with the commission on February 10th, 2012. A rebroadcast of this Q&A session will be available at the Netflix website after 6:00 P.M. Pacific today. Let's move directly to questions. As is our standard practice, we have organized the questions by topic as we've received them via email this afternoon. We're going to start with questions about subscriber metrics and our guidance. First question, how closely tied are hours viewed per subscriber and your subscriber metrics, especially churn? Has there been any material improvement in customer churn in domestic streaming?
If not, why does not the higher engagement reflected in the higher hours translate into improved churn?
Well, absolutely. Viewing and retention are connected. The more a subscriber uses Netflix, the more that they stay a subscriber, as you would expect. There's significant variation between those who watch an hour a month, 10 hours a month, and 50 hours a month. We're always trying to improve the experience, more content, better viewing, better streaming, to increase the amount of viewing, because then subscribers prioritize the $7.99 for Netflix above other expenses.
You said in the letter that Netflix's goal was to become the world's most popular TV and movie service. Presumably, you're defining success by the number of global streaming subscribers. The bears believe that Netflix cannot become this large because at $8 a month, the company cannot compensate the content providers enough. Can you comment on this?
Well, we've been charging $8 a month for streaming for several years, and we've continued to grow the subscriber growth and to grow the content. We're basically continuing to execute on that game plan. That's helped us grow very considerably. I don't see what the issue is per se with an $8 service if you get a lot of members, and that's what we're focused on, to be able to continue to build out the content.
On guidance, I'm curious about the Olympic impact comment. In previous Olympics, how much did the games impact subscriber growth?
It's hard for us to gauge the Beijing 2008 Olympics because we had a three-day DVD outage right at the same time. I would say that we did feel some impact, and there's uncertainty around whether that impact is permanent, meaning it's just a permanent reduction in acquisitions or if it's just a deferral through the games. I would say that through the first three weeks of 2012, we would've expected to be above 2010 levels, and what we're seeing is that we're nearly at 2010 levels. It gave us some more uncertainty in terms of what Q3 would look like in terms of being at a 2010 level of 1.8 million net addition.
A related question. You talked about some of the headwinds you're facing on subscribers, including the Olympics this summer. Given these headwinds, what will it take to reach your full-year goal for net adds? Another question, what are the risks in your Q4 net add guidance to make that seven million number?
I think there's a number of puts and calls. There's Netflix's reputation as it continues to build back. There's improvements that we make between now and Q4. There's all the smart TV sales that all the manufacturers are very focused on Q4. Those would be all the positives. Negatives would be if there's substantial new competition between now and then. Other factors like that. Economic issues don't tend to affect us much because we're such a good value. I don't think we have much risks on up and downs in the economy.
Question on devices. Does the slowdown in game console and DVD player sales impact new streaming adoption? What about the slate of low-end tablets in the back half? How are you thinking about the benefits from smaller and cheaper tablets?
Well, let's see, take the second part first. On tablets, they're mostly used at this point as a laptop substitute. We don't see it as net incremental availability because everyone who's got a tablet also has a laptop and could've been using us on a laptop. Blu-rays, the questioner asked about DVD slowdown. That's true, Blu-rays haven't yet slowed down. Presumably, they will eventually. Most Blu-ray players can play Netflix. The big category growth is in smart TVs.
Can you give us some color on U.S. streaming growth adds and churn during the quarter? Were both metrics as you expected? Was there a seasonal pickup in churn?
We hit basically right above the midpoint of the range. Yes, both churn and growth additions were as expected. We saw a small seasonal decline in retention, which we have seen before from Q1 to Q2. We were right where we thought we were going to be.
Moving to questions about content. Has there been a shift in content acquisition away from large-scale buys to a more focused, cost-effective approach that targets lucrative niche areas such as kids TV, past seasons of original series such as "Mad Men," not to mention your original programming? It appears that a more streamlined, focused strategy can help rein in content costs, while quite possibly improving the streaming selection. In other words, is this a focus on quality over quantity?
One, we're not trying to rein in content costs. We're continuing to invest more and more each year in content. Two, there's no shift. We're always focused on what does a piece of content cost versus how much we think it's going to get viewed. Where you see us get small or interesting films or TV shows, it's because we think the economics work in the amount we pay versus how much we think it's going to get viewed. That's been consistent for several years.
What are your release plans for original programming? While consumers would clearly love you to follow the all-at-once strategy to enable binge viewing, that strategy appears far from ideal vis-a-vis churn, as disconnecting and connecting Netflix is so easy. How do you balance those two dynamics?
We're fundamentally focused on making it a great consumer experience, and we do think it's an improved experience that only an on-demand service like Netflix can offer to have all the episodes at once. We're going down that path. I don't think there's a negative churn implication to it. I think there's a positive implication because it's a better and unique experience. The more we develop compelling experiences, the bigger our market opportunity is.
I would also add to that our expectation is if we're successful with our originals, that we'll have multiple launches. The availability of one season of one particular title might be followed up by another title that becomes available.
As an example of that, Lilyhammer season two, which I know all of you are hanging on, is going to be available next year.
Another question on originals. You indicated you would, quote, "blow away already impressive streaming hours when originals launch in 2013." What gives you the confidence that it will not simply be substitute for existing Netflix content?
I think what we've seen is growth in viewing that's just huge over the last five years, and we expect that growth in streaming to continue, including the originals. We've been very happy relative to the investment on Lilyhammer, so we're feeling quite good about the rise of Arrested Development season four, House of Cards and our other originals.
Final question on originals. Why have originals slipped to 2013 from late 2012? Is production on schedule?
Production's on schedule for first quarter 2013, yes.
Streaming consumption seems to have swung heavily towards TV shows, Netflix is benefiting from having some high-profile exclusive TV content like "Mad Men." Is this a core strategy, or at the right price would you shift your content dollars more aggressively back towards movies?
We're in the business of providing great entertainment to our members at a very low price. Part of that is the programming strategy, which is to acquire content that relative to the dollars we pay for it, gets viewed a lot. We're agnostic as to whether that's features, TV, kids TV, different kinds of episodic. Where you see dollars shifting around, it's because that's where there's value to offer our subscribers. Yeah, we'd be totally open to getting good value either on the feature side, on the many different types of television side, including originals.
It sounds like you'll have non-exclusive Epix content for one more year. Are current discussions on potential exclusivity complete? Any chance of keeping the content beyond one year?
Well, Epix is great content, and we have it for the next year guaranteed. Then we'll go from there. Certainly, it's working very well for both Epix and us at this point.
Another question on that. How would you expect Netflix to be impacted by the likely appearance of Epix movies on competing services?
We wouldn't expect to be affected significantly. Epix is not a particularly large source of total viewing. Much more of our viewing is on our exclusives as was referenced, "Mad Men," "Breaking Bad" and such shows.
Do you think the recent renegotiations between MSO and cable companies will negatively impact your access to content or the price you'll be asked to pay going forward?
No, we don't have that expectation.
Question on HBO. In the letter, you commented on working together with HBO. How would you work together with HBO? Would you license HBO programming and/or co-finance programming? Potential timing?
I'm not sure what we would do. My point is that we're just another network, and that when you have multiple networks, they often find ways of working together. It's a general point that it's not a zero-sum game between HBO and Netflix, and that in fact, there may be ways of working together. There's nothing particularly pressing.
Moving to a question on competition. How does Netflix plan on competing with growing online streamers, for example, with Amazon, Hulu, and Google?
Well, we've been competing with two of those. Google doesn't really have a subscription premium TV service at this point. With Google, we advertise a lot on YouTube, and we're one of the biggest advertisers there, which is very successful for us and for Google. In terms of Amazon and Hulu Plus, if you look at the Sandvine data on streaming usage in the U.S., we've got a huge lead, and that lead is only growing.
Okay. Moving to questions on international. What gives you the confidence that you can achieve break even, let alone profitability, in international markets outside of Canada, arguably the 51st state?
Well, we've seen increasing engagement in those markets outside of the U.S., and we've seen our ability to improve our losses from Q1 to Q2. Now, we've made the decision to raise our content spend in the U.K. like we did in Canada because we are encouraged by the early results we've seen. I think it's the ability for us to demonstrate the growth in those markets quickly and in the engagement in those markets that gives us the confidence that we can-
That we can get to profitability.
Both break even, and it's not just to break even, and to substantial profitability.
Correct.
Some of these are related questions. What would cause the company to slow its international plans down and concentrating on growing consolidated profits instead?
When we have finished our international expansion, we would certainly do that. Until then, our model, as we've explained, is to get back to profitability and then open a new market, get back to profitability, open a new market. That's based on the view that there is an extraordinary once in a lifetime or once in a generation opportunity to build a franchise in many markets as we've been building. We think that our U.K., Ireland, and LatAm expansions to date will, over time, prove to be very valuable, and we'll all be very happy that we've done it.
Does it just mean that the Street should not assume meaningful growth in reported net income for the next few years, with losses from new market launches offsetting rising profits in the rest of the business?
Yes, that's completely consistent with what we've been saying. As long as there are good markets to enter around the world, that we would take the U.S. profits or the global profits and put them into faster international expansion.
I'd say, just to round that out, that the three conditions for additional expansion that we've said before were, one, that we would get back to global profitability to a break-even level, two, that we are pleased with the progress that we're making in our existing markets, and three, that there would be an additional market identified that we think represents a good opportunity to expand.
Given the capital needs for launching new markets, particularly for content acquisition, is income statement-based profitability the right metric to use in determining new market launches? Is there a component of cash flow or cash balance that you should also use to determine the timing and size of new market launches?
If international was a user of cash outside the P&L, that could be true. It's not. It's substantially neutral between cash and P&L on international. The only big cash uses relative to P&L are the originals and some of the movie output deals. Anything else, David, on?
No, I'd say that. There's a minor thing in Q2 where we had content added in the U.K. to the site that came in mid-quarter that was a small use of cash.
Mid-quarter. Yeah.
Other than the mid-quarter, that's correct. Our content expense is matching our content cash other than those exceptions he mentioned.
Do you have enough data to discuss whether or not the usage trends in the international markets differ compared to the U.S., be it TV shows versus movies, amount of time spent watching, et cetera?
There are many interesting similarities and differences. For competitive reasons, I'm not going to go into them.
Okay. In your letter, under the Latin American section, you state that you have modified your signup flow to improve free trial to paid conversions. Can you flesh that out for us and tell us exactly what you mean by that? What do you mean by modifying your signup flow?
I'll let you answer that, Ellie.
One of the challenges we have in Latin America is that there's great popularity for trying a free trial, yet a month goes by and we try to run your credit card, your payment method, and we can't get the payment method to run. What we've done in Latin America is increase our upfront checks to make sure that when that free trial comes to completion, we have a valid payment method on file. What we've done is increase the validation and seen the results through improved conversion. Turning to some questions on marketing. Given the solid earnings results, I would like to know if you believe you might have been able to dial up a few more subscriber adds with a somewhat larger marketing budget. In other words, why did you decrease marketing expense quarter-over-quarter with net adds slowing?
Narrowly, yes, we could have, but that would've been inefficient spend. Typically, marketing goes down from Q1 to Q2 because it's a less attractive quarter to acquire new subscribers. I don't know if you would add anything.
Why do you emphasize content titles so much in the investor letter but not in your marketing?
In our marketing, we're really focused on "Try Netflix for free," then a consumer gets to experience the content. It's a little different with investors. They already know of the content. They're generally users, and what the content in the letter helps do is flesh out the picture of the new things that they might not otherwise be aware of. They're sort of two different audiences.
Some questions on your DVD business. Redbox Instant by Verizon unveiled its management team this morning. Does the coming Redbox Instant subscription offering increase the importance of your Netflix DVD business?
Netflix DVD business is very important both amongst its nine-plus million members and for the profits it generates. We don't see any change in that. The Redbox Verizon streaming subscription service will have a long way to go just to break through the top three. We'll see what happens as they launch.
We have heard and read increasing complaints about extended wait times for Netflix DVDs. We are curious how DVD inventory per subscriber compares to your historic metrics and whether you are using DVD inventory as a margin lever.
We measure something called First Choice here and have for a long time, I would say that metric was flat through the second quarter. There are certain titles that get caught in between content negotiation deals, I would say HBO for the HBO titles, we're one of the only places you can actually get HBO through physical delivery. We may be seeing some concentration of demand on those titles. In general, it's not a large profit lever for us because most of our shipments are cataloged. I would say that the profit characteristics of that from Q1 to Q2 were more driven by reduced usage that's seasonally low in Q2.
How sustainable are the contribution margins for the DVD business going forward, especially beyond this year?
What we said in the letter would be flat going through this year. I would say with the postal increases that we expect going forward, there'd be slight decline.
Of the 850,000 domestic DVD subscribers lost during the quarter, how many of those just dropped the DVD subscription but kept streaming or swapped from DVD to streaming?
The migration pattern stayed consistent through Q2. We've got a bunch of people that join the streaming service. Some leave and come back as rejoins, and a smaller percentage join DVD only.
Question on the service offering. It seems that you are now more consistently policing the policy of limiting to three simultaneous streaming devices. Do you see revenue lift opportunity for family plans or additional personalization?
To clarify the premise of the question, there's no limit on devices. There is a limit for a standard Netflix streaming, $8 streaming account on two concurrent streams. Of a couple, you can each watch one different show at the same time, or kids can watch one and adults can watch another. That's been consistent for several years, it's been quite a while.
Does Netflix plan on streaming current episodes that were aired a few days ago to its customers for a small premium?
No, we're really focused on prior season and helping the current content developers build audiences. This is what we've done with "Breaking Bad" and "Mad Men" and other shows that are quite serialized. That's a good way for us to build out the total ecosystem. The only shows that we would have fully current, we would have current and exclusive, will be our original series, "House of Cards," "Arrested Development" season four, and similar.
A question on streaming delivery and Open Connect. Open Connect already serves some 10% of Netflix's streaming traffic. Can you break out the cost of hardware deployment so far or characterize the expected long-term cost savings? What pace of transition from third-party CDN do you expect?
The cost savings will show up in the P&L more than on the balance sheet. It'll just continue to grow. The 10% will continue to rise every quarter, and then it partially depends on the economics. I'm not sure about two years from now what the ratio will be, but we'll just continue to invest in Open Connect. It's a more efficient, more tailored, single-purpose CDN for our needs.
Has Netflix changed its position with respect to paying MSO and telcos for preferred data access? Do you think this will evolve differently for wired and wireless?
We don't have a position on paying for preferred access, and we don't pay for preferred access.
A few questions on the financial statement. Why did the fully diluted share count increase from 55.5 million in Q1 to 58.8 million in Q2, a 5.9% jump?
We swung to a profit. GAAP accounting would have you bake in the fully dilutive effects of the convert we did in November, and that's not the case when you're in a loss position.
What is the balance streaming content as of 06/30/2012 that are currently reflected on the balance sheet?
I think I know what you're asking, which is what is the minimum streaming obligations that are reported in our commitments table. Last quarter, in Q1, it was $3.7 billion of long-term liabilities and obligations not reflected on the balance sheet. That's $3.8 billion, roughly flat. If you include the $1.2 billion in short-term liabilities, the total is $5 billion, corresponding to a $4.8 billion total in Q1. Again, up slightly.
At this time, I'd like to turn it back over to the operator, we'll begin taking call-in questions.
Thank you. If you have a question on the phone, please press star one. If you have a question on the phone, please press star one. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Heath Terry from Goldman Sachs. Your line is open Heath Terry from Goldman Sachs. Please check your mute button. Thank you. Our next question comes from Anthony DiClemente from Barclays. Your line is open.
Thanks. I have two questions. First, for Reed. You've talked in the past about how TV Everywhere authentication is potentially a big long-term competitor for you. In a lot of the negotiations between the content programmers and the distributors, digital, I think, has come into play. I don't know whether it has to do with ratings declines. You could argue the presence of some programming on Netflix is having a little bit of an erosive effect on linear TV ratings, or whether it's just the digital rights themselves. I think some of the distributors would like to have them in the traditional multi-channel bundle. I think you said earlier that those negotiations should not, or you do not expect those to impact pricing or availability of digital content. I just wonder why not, and why wouldn't they?
Anthony, that sounded like just one question. You said you had two?
Yeah, I wanted to also ask about a comment that you made about profitability. I think you said that it would be either a couple or a few years before you stopped reinvesting profits or contribution margin from the U.S. business into international. We're just trying to model earnings going forward, and it sounded like you'd mentioned the company would be operating at breakeven for the next couple of years. I wanted to clarify that too.
Yeah, it's true that modeling earnings, global earnings for Netflix for the next couple of years is a relatively easy task. As the U.S. and our profitable international expansion become positive, we'll tend to turn that money around and invest in additional markets.
Okay.
Back to your first question. Think of it as it's whoever pays the most money. If a content owner wants to make money, the most money possible, they'll offer those digital rights both to us and to the existing distributors, and sometimes exclusive one or the other, or sometimes non-exclusive to both. Then it's just a matter of who bids the most for the different content sources. They've been active bidders, all the networks have, as well as Amazon, Hulu Plus, and others. That's why I say there's no particular effect to, say, the recent battles between programmers and distributors because for several years, programmers have wanted to get as much money as they can, which they should. There's no particular climate change in the last three months.
Could one potential climate change be that now the distributors have their own broadband distribution solution, whether it's Comcast X1 or different sort of Netflix-like service that's in the multi-channel bundle that now they're clearly paying so much more in overall affiliate fees that they could integrate or bring in the digital rights as a holistic package with the content that they're buying already, such that they get the hometown discount? I guess that's a concern.
Yeah, it's a concern, ultimately the programmer if we offer $N million, the programmer will then use that as leverage against the other distributors and say, "Hey, we want at least $N million more." Again, if you look at it from the producer's standpoint, having more bidders, us and the other distributors, is good for the content owner because then there's more bidders at the table. We've said from the beginning that we think TV Everywhere and improving MVPD is our long-term competition, and that thesis remains intact.
Okay. Thanks, Reed.
Our next question comes from Mark Mahaney from Citi. Your line is open.
Great. Thanks. I wanted to follow up on two things. First, Reed, I know somebody asked you earlier about tablets, but I wonder if I could draw you out just on the impact of smaller tablets. I know we've had very few in the market, but your thoughts on what kind of impact that could have, maybe overall to video streaming that would seem to be less cannibalistic or substitutable, whatever the word is, for laptops. Then secondly, could you just go over again the personalized plan options or the revenue opportunities new, if you have any that come from the extent of simultaneous streaming you're currently seeing amongst your user base? Thank you.
Sure. On the smaller form factors, if they're Wi-Fi connected, they're used in the home in pretty similar situations to how a laptop might be used. As they come in, it makes a better viewing experience. The battery life is better. They're easier to hold. That would be a mild positive. There's certainly nothing negative about it. It's just not a revolutionary new way to watch. For example, a mobile phone, when you can watch out of the home, subject to the data caps, that's more impactful. Then on personal streams, think of it, let's see, today what we offer is a two simultaneous stream program. Some large families that doesn't work for. They'll have three or four simultaneous streams going today. What that family has to do today is get two Netflix accounts, and then they have to partition their devices.
Some set of TVs only work on one account, and some set of TVs work on the other account. Ultimately, we want to help those families save money by being able to offer a family account, which has more than two simultaneous streams. I wouldn't model it as a revenue opportunity. If anything, it would be a discount for those families and a lower price for more consumption. In whether it's a slight reduction or slight increase, it's very much on the margin.
Thank you, Reed.
Our next question comes from Jason Helfstein from Oppenheimer & Co. Your line is open.
Thanks. You talked about the increased streaming usage helping to reduce or increase actually member retention. Can you talk directionally, over time, one would imagine that we get to some type of 75% retention rate, which is typically what we see of subscription services. If you could just talk about directionally, are we going in the right place and, do you see that as a potential level over time? Then secondly, on the international front, you do talk a lot about the letter, and most of us know about the competition in the U.K., but can you talk about the competitive environment in Latin America? Thanks.
Yeah. In terms of retention, it'll sound strange, but we really don't focus on it that much. We want to make it really easy for people to come in and out of the service to give consumers a sense of control. At a high-income level, consumers don't care about that. They just leave it on. At a lower income level, they really value that ability. What we focus on instead is total net additions in any period or any geography, so that as there's more and more positive word of mouth about Netflix, we get more and more net additions. In terms of LatAm competition, there's a couple of streaming companies, one in Brazil, one or two in Mexico. Some of them do pay-per-view, some of them do subscription. Telefónica has an offering also. There's a wide variety of competition.
None of it with the global scale and the ability to invest in the R&D to be able to have really incredible streaming and choosing experiences. We think we have a really big advantage over any single nation firm that tries to compete.
Thank you.
Our next question comes from Tony Wible from Janney. Your line is open.
Hi, I was hoping you could speak to the drop in amount of content acquisition in the cash flow. You alluded to earlier that the spread between you and Amazon is growing on title count. It does look like it's up substantially, I guess, in the U.S. in the last three months. Are you just getting better terms, or can you discuss why you guys have seen such a nice improvement there?
I just want to correct you. There's been no reference to relative to Amazon in terms of title count. The reference is in terms of viewing hours, as judged by the Sandvine or other reports about internet streaming. Do you want to handle the cash flow?
In terms of the cash flow, basically the increased commitments would indicate that we were adding content through the quarter, but that content was coming on the balance sheet and off the amount that wasn't recognized or met recognition criteria before. I don't think you can conclude from the cash flow that we got better deals.
Just adding on to my prior answer on LatAm competition, piracy is one of the biggest competitors, and I didn't mention that. In each country, there are pretty developed piracy networks, and that's a significant source of competition.
Second question is, you guys haven't acquired anybody in the past. What would it take for you guys to consider acquiring your way into new countries? To flip that around, what triggers would you need to see to consider merging with somebody?
We haven't given that a ton of thought. As you pointed out, in 14 years, we've never acquired anyone. I don't know that we would never do it, but it would be a pretty high bar for us to want to do that versus do what we do best and continue to grow organically.
Okay, great. Thank you.
Our next question comes from Barton Crockett from Lazard Capital. Your line is open.
Okay. Thanks for taking the question. I wanted to make sure I was understanding what you said in your letter correctly about Epix. You said, "Our online exclusivity expires shortly." Does that mean you've decided not to pay more money to retain exclusivity for the balance of the contract? If that's in fact your decision, I was wondering if you could talk about why you chose to do that.
Barton, it's something I don't want to add any more comment to besides what we put in the letter.
Okay. Well, if I could try one other question then.
Sure.
You spoke about the Beijing Olympics. What about the Winter Olympics? Did that have any effect on subscriber growth a couple of years ago?
It had a small negative effect in terms of as much as we could discern from it.
Okay. All right. Thank you.
You can see, Barton, that people are viewing the Olympics and partially instead of viewing Netflix, which it's harder to tell is do you make that up in the balance of the time period and sort of delay. There's definitely during those 10 or 14 days, people are shifting some consumption there. We saw that on a lesser level with Euro Cup. An interesting anecdote is when the U.K. was in the Euro Cup, our viewing was at a certain level, and then they got knocked out of the Euro Cup, and Netflix viewing expanded sharply the next day. That's to kind of give you an eye of the sort of substitutability of I'm looking for entertainment, and if my nation's team is competing well, then there's less viewing.
Well, if I could follow up on that. Are you seeing more of an impact early on from the Olympics now than you did with the Winter Olympics? Are you just guiding-
The Olympics haven't started, Barton.
You referenced caution in your guidance.
Sorry, we won't be able to see the impact for a week or two.
Yeah. To narrowly answer your question, no.
Okay. All right. Thank you very much.
Our next question comes from Andy Hargreaves from Pacific Crest. Your line is open.
Hey, I know you weren't planning on talking about the next international market in detail until Q3 report. I was wondering if you could give us any sense for what the initial startup costs might be relative to the other markets that you've entered.
We haven't characterized that, again, for competitive reasons, Andy. When we announce the market, I think you'll be able to ballpark it reasonably.
Okay. Can you give us any update on how you guys are thinking about Facebook integration now that kind of regulatory-wise we're in a little bit of a quagmire? Are you changing the process? Do you still plan on going ahead with that this year?
It's working very well for us in the U.K. We're continuing to learn and expand that approach around the world outside of the U.S. As you pointed out on the legislation, it hasn't come out of the Senate at this point. We're trying to figure out what's the best option there.
Thanks.
Our next question comes from Doug Anmuth from J.P. Morgan. Your line is open.
Thanks for taking the question. Just want to ask two things. I apologize if I missed this, on Amazon, you've talked in the past about them potentially becoming more of a standalone competitor, breaking away sort of with Prime Video. Any updates there on your view? Secondly, can you give us any kind of color on how we should think about content costs going forward given that you won't have the exclusivity with Epix? Thanks.
Doug, on the Amazon question, I assume they'll eventually break it out of Prime. Our view that they would do that earlier this year hasn't yet proven to be true. I don't have any further update on that. Any cost savings from going non-exclusive on Epix, we would tend to turn around and invest in other content to continue to have more content consistent with the 100 basis point growth in contribution margin.
That's what I was going to say. Great. Thank you.
Our next question comes from Nat Schindler from Merrill Lynch. Your line is open.
Yes. Hi. Two quick questions. One, about a year ago, you guys were saying that exclusivity in content usually cost about 1.3 to 1.5 times what just access to the content non-exclusive rights cost. Is that holding true now that Amazon has become aggressive in buying? Wouldn't you expect it to rise if Amazon is in fact buying a lot of the similar content that you are? I have another quick question after that.
Nat, yes, you're right. You would expect it to rise as there are more bidders. Anecdotally, that can happen in some places and not in others. It really depends on the type of content.
Okay. Great. The other quick question I had is with a little bit on your decision on where and which countries to move into and when. I noticed that you're making a move into another European country in Q4, you made the big move into the U.K. after earlier had said that the U.K. probably wasn't one of the best markets for you to move into early on. As I look at both the U.K. and a lot of the other European markets, their viewing habits for TV content and their willingness to pay for TV content based on their history of pay TV are pretty light compared to the U.S. and Canada. Wouldn't it make sense more to go after countries where they have a bigger history of that and a history of viewing more TV content in general?
Much more like the U.S., maybe something like Australia.
We see a big opportunity in Europe to provide an on-demand service, the likes of which really have not been seen. It's very different than just another linear ad-supported network. While Australia is indeed a great opportunity, it's relatively isolated. For now, we're focused on Europe because we've been extremely pleased with the U.K. launch and with the 1 million subs in the first six and a half months. We really are feeling quite good about our competitiveness in Europe.
I would say, Nat, you were referencing earlier anxiety or worries around the U.K. competitiveness balanced with the pros of it being a more developed market, more device penetration, more online viewing. That was the sort of debate we were having about developed versus developing markets and the relative pros and cons in going into each. Europe obviously has more developed markets that have much more attuned factors for people to watch online viewing.
Great. Thank you for taking.
Our next question comes from Heath Terry from Goldman Sachs. Your line is open.
Great. Thank you. I was wondering if you could give us a sense in the markets where you have been able to leverage Facebook integration, and obviously realizing that those are all very early markets for you in general, what kind of response you've seen? Then within the U.S., has Facebook or even social in general, the Netflix Twitter account is particularly active have those become meaningful channels for either paid or free customer acquisition for you?
Heath, it's Reed, I would say social around the world, both on our efforts in the U.K. and Ireland and in terms of our usage of social media in the U.S. have continued to expand, like they have for all of our peer firms. I don't think there's anything inconsistent or surprising in that which is the society is evolving to becoming more social and we're moving right along with that. In terms of the particular Netflix product integration, that's been very successful in the U.K. We've been very pleased with those results, and now we're continuing to try to figure out how to make it legal for U.S. consumers to get access to that.
Got you. Thank you.
Our next question comes from Richard Kang from Tiger Asia. Your line is open.
Hi. Thanks for taking my call. Reed, could you comment briefly on any future plans as it has to do with applications or apps specifically, and app developers who might help drive viewing and users into Netflix by creating their own communities or other types of services that ride on top of Netflix's platform?
Richard, we don't have any near-term plans like Spotify to develop an app ecosystem. We think with video and its consumption patterns, we're better off by making our experience better and better. That's what we're focused on.
Got it. Thank you.
Our next question comes from Vasily Karasyov from Susquehanna Financial. Your line is open.
Hi. Thank you. Good afternoon. Just wanted to clarify first, did I understand correctly that when you were answering Anthony's question, you said that you most likely will not be profitable on consolidated basis because of international investment for 2015?
We haven't guided to that. What I said is consistent with what we've said for the last about half dozen calls, which is our basic model is to become profitable again on a quarterly basis as we have last quarter and expect to this quarter, Q3, and then to add an additional international market, which generally drives us negative slightly, and then through growth in the profit streams, gets us back to positive, and that's what meters our rate of international investment is to stay approximately break even or sort of in and out of profitability.
I noted earlier that the three conditions upon which we'd launch another market would be that global break even, that we were pleased with the progress that we're making in our existing international markets, and that we'd identified a third market or an additional market, the third condition being we'd identified an additional market.
Thank you. Would it be fair to say that you have more than one target market in mind at this point?
Our basic view is that as the Internet becomes very global, as an example of this, if you look at YouTube viewing around the world.
Right
that there's no reason why an on-demand service for movies and TV shows like Netflix shouldn't be highly successful. In general, China would be difficult for us, as you would all appreciate. Any nation that has extreme online piracy would be difficult. Outside of those two conditions, most of the world will have services like Netflix, and we would like to be that service.
All right. Thank you very much.
Thanks, Vasily. That's the last question for today. Reed, would you like to offer some closing remarks?
Great. Want to thank you all for your support. We're extremely pleased with our U.S. streaming profitability growth. Our contribution margin is expanding very nicely and shows us and everyone what can happen in scale. Now we're focused on getting our other markets to those same scale and profitability levels as we continue to invest. Thank you very much.
Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.