Welcome to the Q1 2015 Netflix earnings call. I'm David Wells, CFO. Today, I'll be joined on the company side by Reed Hastings, our CEO, and Ted Sarandos, our Chief Content Officer. Interviewing us will be Mark Mahaney from RBC and Michael Nathanson from MoffettNathanson. I think Mark has the first question. Over to you, Mark.
Okay. Thanks, David. First question is for Reed. This was maybe an inflection-point quarter in terms of the domestic streaming sub adds. They came in materially ahead of your guidance. They were actually up a little bit year-over-year, which is a bit of a surprise. In the press release, you talk about both getting more subs in and retaining them better maybe than you had expected. Could you provide a little bit more color? Is this something that you think is happening across the industry, the greater focus on streaming offerings is just helping the leader in the market, or is there something specific that you're doing on both of those ends, the gross sub adds and the churn?
We've continued to focus on the same things over the last couple of years, improving the content, improving the streaming, improving the user interface. We've seen the rewards of that in continued growth. I think this quarter in particular, we had some amazing original content with "Unbreakable Kimmy Schmidt," with "House of Cards," with "Bloodline." All of that compounded to really push us forward. Certainly what you're seeing is all of Internet TV growing. The attention of the new launches of the competitors is only creating a bigger ecosystem, drawing more and more people into thinking, "Hey, I got to check that out and try this Internet TV thing.
Reed, for some time, you've talked about a long-term goal of 60 million-90 million subs. At this pace, sooner or later, the financial markets may actually agree with you. Any updated thinking on where we could fall in that range and when we could get to that?
Well, I'd say they agree with us already. I mean, at a $25 billion-$30 billion market cap there's a lot of growth priced into it, I think you'd agree. Yes, $60 million-$90 million feels great for us. We're continuing to grow. That's $60 million-$90 million in the U.S. market. Of course, the really big upside beyond that is in international. For most global Internet firms, the U.S. is 20%-35% of usage and revenue. We're not anywhere close to that yet, but we're continuing to invest in international.
Reed, in the past quarter, we've seen new entrants like HBO Now and PlayStation Vue come out with pricing that looks pretty expensive relative to Netflix. I wonder, do you think you have a pricing umbrella given where they've launched their products relative to where you guys have priced today?
Well, no, I think HBO at $15 is a great value. I've traditionally paid more than $15 for my cable company for it. I think they're doing great work with their premium content. It does create an obvious underline of just how great the value is of Netflix with prices ranging from $7.99-$11.99. We're really comfortable with that strategy. We're continuing to grow with this strategy, and it is an incredible value. I think you should really think about it as all the Internet services, HBO Now, Netflix, and Hulu, are great values in comparison to the big bundle.
Okay. David, for the current quarter, can you talk about the trend on churn? I know you guys don't give out churn numbers, what was the impact of original content on churn this year versus a year ago?
Well, as Reed said, just picking up on those comments, you really do see the improvements in the service, both on the content, the interface, the payments across the globe really move together. You see that with acquisition and churn improving. We did see improving churns. We are saying that we saw improving retention through the quarter, and that contributed to that net add performance and growth that we saw in Q1.
Great. And David, if I could stick on the U.S. business. Last quarter, you talked about 30-ish% margins. 90 days later, we're already materially above that, and you're telling people to expect your business to be above that. I know there's some stuff in the press release on it, but any more color on why there's such a pretty material shift in the margins? To what extent should we just be concerned that you're just pushing content costs in the international market, so really there's not an improvement in the leverage here in the U.S. business?
Well, it's both, Mark. There's absolutely an improvement driven by the growth. We're growing revenue faster than we're growing our expenses. In terms of the outperformance relative to our target of where we would want to be in terms of U.S. margin growth, it's a couple of things that we talked about in the letter. One of them is we're shifting marketing from the U.S. to international. We think we can grow a little bit faster on international. It's more efficient to do that. The second thing is a little bit of just the mechanics of how we allocate content cost by geography. By going faster internationally and putting that allocation more towards international, it's going to provide some relief to those global originals and the global projects that we do have that are allocated to the U.S.
We intend to continue to invest in that. That's also why we put in the letter that our target remains the same, 40% in 2020. We want to continue to balance the growth of profit with the growth and the competitiveness of our service. We want to reinvest in the service prudently along the way.
Let me ask a two-part follow-on question to that, one for David and one for Ted. David, cutting back marketing spend in the U.S. in an increasingly competitive market, at some level that feels a little extra risky than you should be doing. Can you just talk through why you're so confident you can cut back on those marketing dollars in the U.S. beyond just one quarter of better-than-expected results? Ted, last quarter in the letter, there was this bolded section, therefore it caught my eye, about content spend being more efficient with original content than with licensed content. Do you feel like you've really reached a point that that's what we're seeing in the business model today, that you're continuing to see more leverage, just that original content purchase?
Yes. I'll take the last question first there. What we're seeing is the dollars invested in our original programming are more efficient in that for every dollar spent, we get more bang for the buck in terms of hours viewed. Hours viewed leads to higher retention, more word of mouth, and more brand halo. That's why we say that it's turned out to be not just an important strategic investment, but also an efficient one.
Mark, on your first question about our relative comfort with moving dollars out of the U.S. and into international with just one quarter, I would say we've had multiple quarters of strong growth. Marketing dollars have been up, they've been down. I don't think there's a direct connection within one quarter in terms of the level of marketing spend and the level of growth that we see. We have migrated over the last two to three years to be more content forward in our marketing, more digital in our marketing. We're getting smarter and more efficient about how we put those dollars to use. Right now we think there's a greater opportunity with international, and that's what we're doing. We're moving to international spending.
Ted, in the past six months, we've seen Viacom and Turner write down the value of acquired syndicated content. Clearly, the value of the content wasn't worth what they were paying. Can you talk a bit about your own usage trends on acquired content, and whether or not you think the long-term trend for what you're acquiring will be declining on a per-hour basis?
Look, as we continue to grow, the thing that's most encouraging is that the content we're licensing around the world has got equal and sometimes even disproportionate value to us outside of the U.S. What we're seeing real global value from licensing shows in multiple territories. As we're continuing to grow domestically, we're seeing those viewing hours on licensed content, even older licensed content like we saw with "Friends" last quarter, where the viewing just continues to grow. We're still seeing a lot of value from that programming, both our original and our licensed programming from all those sources.
You would expect the price paid going forward will be trending up or down for the acquired?
It's tough to say. Mostly it's a reflection of how many buyers are in the market. We got a few other people into the market. There's some value in having a larger footprint and being able to bring more value to the franchise for it being on Netflix that we get to realize in our negotiations. I think most of those prices up and down is driven by the number of competitive buyers in the marketplace.
Okay. Let me ask one for David. You mentioned before on the content spend shift between U.S. and international. Can you remind us again how you amortize content between domestic and international markets? How do you decide what the allocation rates are between the two geographies?
Sure, Michael. How we amortize is straight line. For originals, there's accelerated. How we allocate across countries or territories between the operating segment of domestic and international is based on the relative value of that content. We use the PwC Media survey to help validate what that content would be worth in that market. There's pluses and minuses to various types of allocation. We've looked at many types, and we think that's the most accurate in terms of ascribing the relative value of content within each market.
Thanks.
David Wells, if we have a global content, where does the allocation for Poland show up today?
Today, the allocation for Poland is going to be spread across because we haven't yet launched that market. What's a little bit new for us is we now have clear line of sight that we are launching the rest of the world, which is new relative to the last six to nine months. We've shifted a bit and you're seeing part of that Poland, if we sign a global right for Poland, distributed across our current territories. A year ago, you would've seen us, if it was going to be launched in the next year, park that on the balance sheet and then start amortizing it once we launched Poland.
If we prospectively signed up for a Poland right, and we just didn't have a line of sight to the next year whether we were going to launch the territory, that would be spread across the existing territories that we were in, which is what we would do today with.
If you back it up a few years, we would've sold off Poland, not knowing what to do with it and look for it later.
That's right. Okay. If I could get back to Reed on a question that came up earlier about pricing and maybe carrying power. Reed, your latest thinking, given the momentum in the business and the ability to raise fees or raise ARPU over time, and particularly via tiering, either via service and number of lines or content, your latest thoughts on your pricing and tiering power today.
Well, Mark, we're super happy right where we are. We've got a great mix of pricing plans and options. For those who get a new 4K television and are excited about 4K content, we're the leading service in the world for 4K, and that plan's a little more expensive at $11.99. As more 4K TVs sold, we'll get people to upgrade to the $11.99 plan. In terms of the total pricing structure, we couldn't be happier with the way it creates an incredible value for the consumers, feels fair to them, and it's propelling our growth.
Okay. Let me pivot over to the international market. We also had subs upside in the U.S. We had subs upside internationally. Could you talk about where that came from? What wasn't mentioned in the letter was Germany and France. Those are obviously major markets. Maybe they're growing in line or a little less than you thought. What was mentioned is Australia and New Zealand. Any particular color there on which countries are performing in line better and worse than expectations?
Sure. That's somewhat of a recency bias. We launched France and Germany six or eight months ago, and we talked about it in the immediate aftermath also that they were successful launches. Now we've added Australia and New Zealand. In all of these markets, the internet and internet television is catching on, and we're leading relative to competitors. We've got competitors all around the world. In each market, there's a series of competitors. We're feeling very bullish on the long-term in all of these markets. We've seen when we entered Latin America three or four years ago, that it takes us a year or two to build the brand and get awareness. Think of it as every country in the world or consumers in every country in the world want the benefits of internet television choice and selection and price.
Absent severe piracy that might be in some of the newer countries, I think we're going to see large commercial success.
Mark, this is David. There was no one particular market that drove that, there were multiple markets that drove that outperformance relative to what we thought to our forecast.
In Reed's tweet a couple of days ago, you mentioned 10 billion hours consumed in a quarter. Can you give us a sense of consumption rates domestically, internationally? Are there any international markets that jump out to be above normal consumers?
There's variation between countries, some countries are amazing and the U.S. is one of them, but it's not the biggest. For competitive reasons, I'm not going to give you a precise color, but there's variations. What's great about the viewing is if you look two years ago in this call, we said it was $4 billion hours in the Q1. Over those two years, we've gone from $4 billion to $10 billion hours of viewing. You can see along with our membership growth, we're also having engagement growth, which given all the new competitors, improving television, is really impressive that Netflix is growing not only the subs, but engagement also.
Okay. Ted, you recently mentioned that in China, it sounds like you have a go-alone strategy. What is your timing on China's launch, and how does that strategy impact your actual launch in China?
Well, Michael, a bit of that press was lost in translation a bit. I was explaining to the questioner why we have not taken on partners in the past. It's not a reflection of what we want to or what we're willing to do in China. We're anxious and open to all forms of doing business in China. The press was a little bit out of context there.
Okay. David, last quarter in your script press release, you bolded one of those things was the expansion to all global markets by the end of 2016. Is there an update on that given what's happened in the first half of the year? Are you accelerating that timeline?
There's no update other than that the expectation for us to launch in 2016 was as an acceleration of our earlier stated objective. No further update.
For the June quarter, you talk about an increase in the operating loss to $101 million. You've got bigger launches in the back half of the year. Help us think about when the peak operating loss quarter is in international and what the size of that could that be. If it's $100 million in the June quarter, what's the worst-case scenario? Are you willing to run at a $200 million loss in any one quarter?
Well, I don't provide specific guidance four or five quarters out for operating loss, but we've said that we're committed to running the business at global break even, and we have ambitious plans to launch international. This quarter, you see what you have. You see our guide with the full sort of Australia, New Zealand. You see our guide with additional investments in marketing and some content. We'll have some bigger launches, and we've described those as meaningful and significant in the back half of this year. You should expect those losses to trend upward and into 2016, and then to improve from there.
Recently, Reed, you changed your terms and conditions to alert people who use VPNs that they can be shut down from usage. We've heard a lot from our clients who are outside the U.S. that they do use VPNs to watch U.S. content. Why did you change the terms and conditions? For Ted, are studios asking you about VPN usage? Is that part of the reason?
With VPN usage, that's where someone, to bring up Poland again, where we're not yet operating, has the money to pay for content. They want to access content. They want to pay for that content. Netflix is not yet in Poland. They'll use a VPN to come to the U.S. virtually over the internet, pay for content. It's certainly less bad than piracy. It's not something we encourage. It's actually very hard to detect because VPN gets very good at covering their tracks for all the obvious reasons. Because we're focused on getting global very quickly, I think we'll see this issue disappear, and it'll disappear because we'll be able to meet the demand directly in all the countries. Ted, anything on the studios as our partners?
It's one of the many things that we have discussions with studios about on an ongoing basis, we do continue to work with them and work with these VPNs. To be honest with you, it's kind of a whack-a-mole to get ahead of the different usage of VPNs. It's become kind of a lifestyle thing for a very small segment of the population. The real great news is, in the piracy capitals of the world, Netflix is winning, and we're pushing down piracy in those markets by getting access. The best way to really make the VPN issue a completely non-issue is through global licensing that we're continuing to pursue with our partners.
Mark, to annotate to Ted The only comments that I would add to Reed's earlier pricing comments were piracy is a governor in terms of our price in high-piracy markets outside the U.S. We wouldn't want to come out with a high price because there's a lot of piracy, we have to compete with that. There is a little bit of a governor on our price outside the U.S.
David, one question we had a lot is about your content obligations. They grew in this quarter. Could you talk a bit about your comfort of meeting those obligations, and when do you think you see a peak of your obligations on the balance sheet?
I am comfortable with the level of content commitments we have, and there's a couple of reasons that I am comfortable with that. One is that the content is working. We see engagement, we see value for the content, it makes me more comfortable and confident that we're investing in something that has lasting value. Two is that we really are scaling along with the business. We have grown from $9.5 billion in streaming content commitments in the table to $9.8 billion. That's about a 31% year-over-year growth rate, and our streaming revenue has grown at 31% year-over-year as well. That makes me a little bit more comfortable. Now, that includes what we know in terms of licensing commitments. It doesn't include things like Disney output. Let's take that as an example. That is for future film output at a future box office.
We're unable to know the licensing amount on those films. We do have to factor that into our forecast as we have from the very beginning. If we look ahead and we factor that in, we think it's an additional $3 billion-$5 billion of content commitments over the next three years, and that's already baked into our forecast. We've been doing this from the very beginning, we've gotten a little bit better at sort of making sure that we waterfall deals, we have the flexibility we need to balance those commitments and that expense level over time.
Michael, if I could interrupt for a second, I'd also add that you should look at that as a signal of future access to content, because as we identify the high-value content, we seek to lock them up in long-term deals. That does increase our long-term obligation, for things that we want and attract revenue and viewing.
Ted, let's stick on that topic on the content and especially the Disney output that's coming on board next year. Just remind us of some of the details on that. When you think about the white spaces of Netflix, the content areas that you'd really like to most fill out, how important is Disney as part of those white spaces?
Our Disney partnership is phenomenal. Last week we launched our Defenders series from Marvel with our first series, Daredevil. It's been a huge success. Disney is a licensing partner with us around the planet, and we're really excited about the output deal coming on. It's probably one of the few output deals that I'm enthusiastic about because the Disney content is global. It's tent-pole, it's family. It's a lot of co-viewing among families for the content that gets watched, and it's a great brand to bring comfort to families who subscribe to Netflix. It's a bit of a play between movies and kids programming that I think is successful for us.
The white space you referred to is with all the excitement about the golden age of television and all the excitement about our own series, about a third of the viewing hours on Netflix today are still movies. When we see something like we did early in the year with The Interview, where we were able to close that window to 30 days, we had a phenomenal reaction in the U.S. and Canada to that movie. I want to keep pushing on behalf of the consumers to get those windows narrower and narrower, including premiering original movies on Netflix. Much is why we're doing that to fill some of that white space.
A two-part follow-on on that. Were there direct outputs from that The Interview deal whereby you think you can actually do this much more often in the future? Reed, can I swing it back to you afterwards and ask you about products and major product pipeline for the next 24 months? I know you mentioned in the letter the enhancement of bringing video playback forward into the browse experience. I'm not sure I actually understand what that means. Could you explain it and then help us think about how material that could be to the user experience?
I would say that you should look at The Interview as a beautiful one-off. I say beautiful because bypassing the theaters and premiering on-demand, Sony managed to raise about $45 million in revenue from between a modest theatrical and primarily from digital on-demand. A very strong fee from Netflix for our license 30 days following that, which took what could have been a financial disaster and turned it into a financial win for the studio. If anything, you want to look at that and say, "Wow, it's a beautiful possibility for a future disruption in release patterns.
As Ted said, Mark, we're really sorry on the circumstances for Disney. Sorry for Sony in that case of "The Interview", and we certainly would want to see more of that. We are focused with our original new movies, trying to push those windows up so early. You asked about the product enhancements. We're doing so much. We try to sample a little bit in the earnings letter. The particular improvement that we're talking about there, today, when you browse for movies, it's a bunch of stills, and then you say play, you wait a couple of seconds, and then it plays the content. What we're learning is how to use real-time video as you browse so that things are auto-starting, making that easier on the display pages, on the detail pages. I think you'll be really impressed.
Think of it as symbolic of a whole long series of 100 improvements per quarter that we're always working on that in accumulation, continue to make our experience better, which pushes up the satisfaction, which helps retention and growth.
Ted and Reed, when you first started building a streaming product, Ted would be in Beverly Hills giving people checks for content, and all my content companies would say, "This is incremental to the pie. We're happy that Netflix is a buyer." In the past 9 months, we've seen ratings for cable and broadcast tumble to levels that I never thought was possible. I wonder, do you worry that as our industry, traditional media, worries about ratings trends, they become less likely to sell you content, and therefore, it becomes harder to source really good second or original content? I wonder how you feel about that.
I'm not seeing any actual evidence at the table in terms of that there's any reluctance to continue to sell. They definitely are trying to juggle the terms of their core business versus their licensed business, but that's true not just of us, but they're also seeding these opportunities for themselves, where you see the networks launching their own on-demand services. I think they really are trying to find the right balance. That generally, I think we are still very healthy for the business, both in terms of our licensing dollars and in terms of the audience generation that we're able to build for the shows on broadcast. It's very encouraging that even with all of the disarray that you spoke about, that Fox can have a phenomenal cultural hit like "Empire" in the middle of all that.
I do think that there's obviously plenty of concern about the old way of doing business, but there's lots of action going into how do we do it going forward as well.
Michael, it's pretty natural. You've got linear TV has been an amazing 50-year run. Internet TV is starting to grow. Clearly, over the next 20 years, internet TV is going to replace linear TV. I think everyone's scrambling to figure out how do they do great apps. Things like Noggin are fantastic, and that'll just keep getting built up. It's a transition into figuring out the internet. The way people do that is to get involved with us, with our competitors, to try to start to learn what are the new patterns and modalities. Because internet TV is the way that people will consume video in the future.
Okay. David, can you just talk a bit about your cash spend versus your P&L spend? I think this quarter is about 30% higher cash spend than P&L. Is that the right way to think about this year and even next year as well?
Yes. Michael, we've been pretty consistently telling people that prior to the build-out of originals, it was 20% over the expense. Now it's drifting up to 30%. It could drift up to 40% and peak around there in certain quarters, especially if we take delivery of a lot of original product. In general, we're building out our original content investment, and that is cash intensive, as we put in the letter, and we've been pretty consistent about this. I think what you're going to see now is several persistent quarters and going forward of negative free cash flow while we build this out.
On that, David, you did that $1.5 billion debt offering in the March quarter. Should the expectation on the market's part be that you won't need to come back to the markets for the next year and a half? Or do you want to have the flexibility to, if international launches really do even better than you think, to come back for even more?
Well, if we're successful in building out the content, and if we want to get to ever-increasing mix of original content, meaning that up to 50% of our business is really our own owned content, then we're going to continue to invest in that content and that will require more and more cash. I don't think we're saying no, that we're good now for the future. I don't think we're saying we're definite. Likely, we will need, if we're successful, to go back to the market at some point to continue to build that investment.
I want to ask a net neutrality regulatory question to Reed. This actually came from Rich Greenfield. That with the FCC laying out this clear oversight of interconnection in that newly filed net neutrality order, do you think if that had been around before, that Netflix would have had to pay for the interconnections? If those rules had been in place, would they have had to pay for interconnections as they have been for whatever the last year or so?
It's awfully hard to tell. Going forward, as we think about interconnection, it's a new climate with the FCC Title II in place, and we'll try to figure that out. We have a number of contracts that are in place already. There's no immediate actions. We're very encouraged by the general consumer perspective and political perspective that broadband access is so important that it is a utility. It is like power distribution, where it's a natural monopoly in the last mile. There should be one fiber or one cable going to a home with super high speed, and that's the architecture of the future. Everything around it being a utility is great for internet companies like ourselves, and it's great for consumers.
Reed and Ted, in the past couple of weeks, we've seen the NFL, of all people, explore internet TV when they've announced they're going to stream a game over the internet. We've asked you in the past, but given the changes in the model, do you think you can add sports as a category to Netflix at this point?
Michael, I think part of our core consumer proposition is on-demand. We make viewing certain kinds of content better because they're on-demand, and I don't know that on-demand sports is markedly better than live sports. That's why we haven't been that excited about why we haven't chased it. There's economic reasons as well. I think in general, that sports is great for live television.
The great thing, Michael, about the emergence of sports online is it frees people up to be more a la carte, which gives them more money to be able to spend on Netflix. If we can anchor the entertainment side for movies and TV shows for every consumer and somebody else or other set of leagues anchor the sports part, which is still over the Internet, then the Internet TV proposition is even more powerful for consumers.
Okay. Over the past year, Reed, I've asked you about the Comcast-Time Warner Cable merger. You've said we'd love to see deal conditions put on that in order to protect the Internet. You've gone above and beyond with the FCC Title II support. One of the questions we have at our firm is price regulation, Title II. Where do you come down on the FCC's ability to regulate pricing? Is that a good or a bad thing for the development of Internet TV?
We'll have to see. It's very clear that broadband is a necessary utility across the land. I don't think anyone is a fan of price controls. Our main goal at this point is to get the government to block the Comcast-Time Warner merger. We think were that merger to come together and as DSL fades, that company combined would have over 50% of U.S. residential Internet homes. Frankly, that's just too much in one company.
I wanted to ask a question on marketing to either David or Reed. You talked about maybe shifting more of your marketing budget online. Any more color beyond that? There's a lot of different places, ways to spend money online, including via Facebook, et cetera. Any more color on that? Why the switch to online? Is there something that's made the offline marketing channels less efficient for you?
Well, it depends on the market, Mark. In places where our brand is really well-known, we've noted that we're much more efficient being very targeted with that and being very specific around content marketing. Outside the U.S., in markets where we're building a brand, you should see a mixture of that. You should see some offline and some online in terms of our spend. Every year, we get more efficient and more knowledgeable about where that money is best spent. We're an experimental company. You know that. You've followed us. You should see us continue to test around the edges of where things are better spent.
Okay. A question on the actual end usage of Netflix. Maybe a broad question for Reed. When you think about the different use cases in the living room TV, on the go with mobile devices, et cetera, have you seen over the last two or three years a dramatic shift in how people are consuming Netflix content? Particularly as you go into international markets, which may be more mobile-oriented, particularly in Asia, are you set up the way that you want to be set up on devices and the formats to kind of work that mobile trend?
We're feeling really good about our preparation for continuing to expand around the world over the next two years in terms of devices, in terms of networks, in terms of content. Yes, we've thought through a lot and studied the patterns of consumption. We're ready to at least begin that journey by launching around the world. What we'll be able to do is learn from there, frankly, as we did in Latin America three or four years ago.
Reed, following on that question, has there been a handoff on tablets versus smart TVs? A couple of years ago, we kept thinking, okay, smart TVs will be the device that drives Internet TV. Have you seen a difference on consumption by tablets versus smart TVs the past couple of years?
No, we've seen smart TVs just continuing to grow in usage and sales. Virtually every new TV sold now is a smart TV, at least at the middle and high end. It's natural for people to use. Now, do they also watch on tablets? Yes, and on phones. Really all those categories are experiencing absolute hours growth. On a percentage basis, smart TV is one of our fastest-growing categories.
Okay. David, you called out the impact of foreign exchange in the first quarter. Can you give us a sense of what the year's going to be in foreign exchange? When do you expect to break out revenues by region so we can get more details on the regional international exposure?
If I knew what was going to happen with foreign exchange, I'd probably quit and then run a hedge fund.
How about for today's market? As of today, okay?
I would say, in Q1, most of that below the operating income foreign translation loss was unrealized, right? We did have a change in our functional currency for our European entity. When we first launched into Europe, we were very U.K.-centric, most of our operating cash flows were in British pounds, which leads you to an accounting decision to a functional currency of pounds. Since we've expanded in Europe, and particularly into mainland Europe with more and more, our operating cash flows switched to the euro, we switched it over. There's some impact of that in that translation adjustment. Going forward, it really does depend on what happens in terms of the dollar strengthening further into the euro. We're about 25% in terms of revenues exposed to foreign currency, and that's growing. If we're successful, that'll grow to 50%.
We also are pretty transparent that we don't hedge. We're not really concerned with those accounting translation adjustments. We're pretty transparent to you as an investor that we don't hedge. You have the option to go out and hedge if you feel like you're exposed with your Netflix investment. We're watching in terms of our opportunities for natural hedging. With the move to a global license, we may see more and more of those be dollar-denominated. I'll have to update you along the way in terms of our foreign currency exposure.
Why don't we hit it with one more question each, guys, then we'll wrap up.
Let me, David, just check off real quickly ARPU in both international and in the U.S. market. In international markets, assuming currencies kind of stay where they are, does ARPU kind of stabilize where you've guided to implicitly in Q2 and where it came out in Q1, then start moving back up as price increases go into effect? Or should we just kind of straight line it? In the U.S., ARPU has been rising. Is any of that caused by tiering of services? Are you getting a lot more people signing up for the $11.99 plans, or is that just the impact of the price increases?
It's both, Mark. Just to answer your question on both domestic and international, we are seeing ARPU progression because of people taking the higher tier and the higher value plans. We're also seeing the expiration of people sort of coming off grandfather, rejoining, or joining the service new at the higher price point. Obviously, we have a lot more subscribers in the U.S., so you're seeing that ARPU increase disproportionately rise internationally versus the U.S. just because we're building from a base of much fewer grandfathered subscribers outside the U.S. You see both. Your very first question was, should we see that progress? Yes. We have a large body of U.S. subscribers that come off grandfathering next year. You can waterfall your churn models, and you would expect that the U.S. has a much larger base of folks at the older price point.
Reed, over the past 10 years, you guys have pivoted perfectly from selling DVDs to streaming, to making your own content, to going overseas. I wonder, when you look at your business plan, what gives you worry? When you look at the challenges ahead, what's the thing that worries you?
You're nice to say we pivoted perfectly, but I think you're forgetting about certain incidents four years ago.
I apologize.
We have succeeded in getting through them, and the key thing is that the company's very agile. We're just a learning machine. When you think about how Ted has grown our original content muscle, it's just so impressive how we're continuing to expand international. It's just like we're learning country by country. We don't get everything right up front, but we fix that. I think the fundamental is we're just open-minded, curious, we're learning. Frankly, it's that internet TV is growing around the world at incredible rates, and we're really propelled by that big macro trend. To wrap up here, Ted's producing so much content. I thought, Ted, maybe you could share a little bit of this quarter's highlights, like "Chef's Table" and "Sense8" and "Orange Is the New Black," and just the amazing things that Netflix is debuting.
You definitely get a sense of the diversity of the programming that we're going to be offering up just if you look at just what's coming up next quarter with our first original documentary series called "Chef's Table" from the director of "Jiro Dreams of Sushi." We've got our third season of "Orange Is the New Black," which is a global sensation that'll break in June. We have a comedy with Lily Tomlin and Jane Fonda called "Grace and Frankie" that we're really excited to share with the world. "Sense8" I think will show everybody what global TV series can really be like, filmed on location in nine cities around the world. Spectacular scale and scope of a theatrical film directed and created by the Wachowski siblings.
Even original series for kids with "How to Train Your Dragon 2." We're super excited about both the volume and the quality and the diversity of everything we're doing in the original programming next quarter.
Ted, all those series globally available on Netflix?
Globally available on Netflix.
I love that.
Mostly in 4K.
Thank you so much, everyone. In 4K. Thank you so much, everyone, for your support, and I look forward to talking to you over the next quarter.