Welcome to the Q2 2016 Netflix Earnings Call. I'm David Wells, CFO. I'm joined today on the company side by our CEO, Reed Hastings and dialing in remotely, our Chief Content Officer, Ted Sarandos. Interviewing us today will be Ben Swinburne, Morgan Stanley and Scott Devitt from Stifel Nicolaus. And I think Ben, you have the first question.
Yes, thank you. Reid, I'm sure we're going to spend a lot of time on the quarter and the long term outlook, but I'd love if you could just give us a sense. What gives you confidence in the churn of the shortfall in the quarter was really driven by, sort of confusion among members around the price increases or the un grandfathering versus other factors, for example, content or competition. And any color you might have on the volume versus nonvoluntary insurance, maybe you could help us put some color around what happens to your expectations?
I'm getting a lot of echo there. Ted, maybe you could mute or something. The U. S. Question, why are we confident of this explanation?
Well, the obvious explanations other than this are competition, which we're pretty confident is not a factor because we got this slight up tick in churn in multiple countries the same week. And of course, that's not a competitive signature, including Canada, where many of the other SVOD services don't operate. There's a separate set, Crave and Xiaomi that operate in Canada. So that's why we're pretty confident it's not competition. And then again, if it was saturation, what we'd be seeing is hit to gross adds more than we would in terms of churn.
So other possible explanations were that we did something on our service around that week, but we've looked at everything. And the fact that it's coincident with that Google trend data we included really indicates that people don't like price increases. We know that. It's a necessary phase for us to get through. And then with the increased revenue, we're continuing to invest in better and better content.
So that's what makes us feel very strong and positive about the long term and that this is a short term phenomenon.
And David, just as a follow-up, when you put the Q3 guidance together, are you assuming that this sort of churn throughout the entire base remains elevated? Or have you seen that initial April churn subside? And really what we're looking at is just the impact from the on the actual on grandfathering, which you talked about in the letter being in line with expectations.
Ben, we're assuming that it persists. So we might be wrong on that in terms of it relenting a bit or gets better. But so far, we've seen it sort of persist through the Q2 and into the early part of the third. So we're assuming that persists into Q3 and maybe into Q4 as we continue to un grandfather. And just a cautionary, the usual customary language, I realized I sort of went straight to your question, but we will be making forward looking statements in this call and actual results may vary.
We'll go back to our regular questions.
Thanks. This is Scott Devitt. Reed, I was wondering if the effects of the un grandfathering have any longer term ramifications in terms of how you think of pricing power on the platform globally?
Not a ton. We're continuing to improve the content, which is the fundamental driver of value for subscribers, how much they watch, how unique the content is, how exclusive it is. We're going to continue to improve. And again, with new members, we haven't seen any effect. We changed prices to our 8, 10 12 last October.
And we've had a couple of quarters of great growth on the gross ad side. So I think this is really around change resistance. Whatever the price is for something, people don't like it to go up. But in terms of new members, which is most of what drives growth, the new pricing is working great.
And in terms of for David, in terms of the timing, the links that you provided to Google Trends, I think the uptick started the week of April 3rd. So it was the 3rd through 16th that predated when you gave earnings last quarter. What was the response? Was it immediate in terms of the uptick in query volume and interest? Or was it somewhat delayed?
Well, let's keep in mind, Ben or Scott, that the, what we're talking about is a very small change, right? But because of the large base, a small change can result in sort of 300,000 subscribers, which is the miss that we had on domestic resulting. But we did see it. We've learned through the in the past not to overreact to immediate trend changes. So it was a swing factor when we were discussing Q2 and into Q3 even and sort of trying to sift through what might affect us in the quarter.
We saw a little bit of it, but it was very right before we sort of set earnings and we were on this call 3 months ago. And so we felt it was a small factor, but it did persist through the quarter and that's one of the major driver of the lower year on year growth and also the lower growth versus expectations.
And just sticking on the theme for around churn with another question. David, what are you seeing with the ungrandfathering members as they face different pricing options? I know you tested a lot over the last couple of months. What are you seeing in terms of their choices? And how does that impact sort of your ARPU expectation?
And when should we when would the grandfathering process be finished in the U. S? Is that something in the Q4? Any help there would be great.
Yes, it finishes in the Q4. So it finishes about midway through towards the end of November. And then in terms of their choices, especially around plan mix, whether they choose the high plan or the low plan, it's as we expected. So we continue to see folks choose the lower plan in some smaller increments and the higher plan in some increments. So our expectations of ASP growth are still there, about consistent.
What we're talking about is the population that it didn't face an immediate grandfathering choice. That's the part that was a bit of a surprise to us and continues to persist.
And does any of your data suggest you've seen anything interesting around subscribers members that were inactive or maybe membership sharing as a result of the pricing changes?
No on both counts. So Okay.
And this question may have been addressed in the letter given that you gave un grandfathering commentary around international as well, but would be interested if you could just talk through your expectations for existing markets versus new markets and where you beat and miss?
Sure. Let's see. I would say that we can the trend was across multiple markets. And as we put in the letter, it was in markets that are more highly penetrated and less highly penetrated. That's why we think it is about the sort of pricing talk that was affected.
But in addition to that, we would say that our newer markets have an expectation of multiyear growth. So we know that we've got work cut out our work cut out for us, and that we've hit a point where we're not adding on any new additional markets, but we are going to be seeing periods of accelerated growth and decelerated growth and we've seen that in the past where some markets sort of pick up and then moderate and then pick up again. And I think that's what we saw in this quarter and forward. We're indicating that we've got multi years just like we have in Latin America to build that market to where it is, has taken us 4 or 5 years at this point to get it there.
And Reid, you've There's not something seen in
the new markets in Asia, Central, Eastern Europe that's significantly different from early Latin America. It paints a pretty similar picture, at least for these 1st 6 months.
And Reed, you reiterated the $60,000,000 to $90,000,000 in the U. S. We'd be interested if you could add some color in terms of where you think the friction points are, if it's content portfolio, competition, those being the 2 most significant, where you see sources of friction and what gives you confidence still in that range?
I don't think there really is any friction. I mean, smart TVs are continuing sell. Everyone's using Internet video and Internet television more and more. You see the rise of these virtual MVPDs. All of these things are building out the Internet ecosystem.
And I don't see why 10, 20 years from now, why every American household isn't subscribing to Netflix, except for maybe competition. So we've got to stay on our toes on that basis. But think about entertainment and pay television are pretty ubiquitous. So in the Internet video, that's a pretty big bet that's continuing to pay off. So you put those two forces together
just ask a little bit more about the guidance, David. Last quarter, you called out the comp versus Australia, which was, I think, a bigger one or a tougher one than we all understood. When you look at Q3, I think you have Japan and then Q4 Southern Europe. Could you just maybe put those at least in relative context for versus Q2, so we can think about what those headwinds may
or may not look like? Sure. I mean, there's always a headwind when we've had a prior launch of a large market or a market like Australia, where we saw strong initial uptake. In terms of that moderating, you've got a lot of pent up demand that then sort of reverts to a more normal growth pattern over time. That can take several quarters, it can take 2 quarters.
We've seen different experiences by market. So I would say, Japan was a pent up market in some respects and then starts to moderate. So that does factor into the comp. And some of our other markets may be experiencing flat or even down year on growth. It's just a mixture across that.
But like I said, we've seen markets that have decelerated then pick up again and accelerate. So collectively, across the all of our basket of investments in markets, we think there is a large long term opportunity that we're going to optimize against. And we know that we've got work cut out for some of our newer markets that will take time to get there.
And just wanted to ask you about the Olympics and where you're factoring that in or how you're factoring that into your guidance. You mentioned gross additions remain healthy, which at least to me sounds like flat to up, but I'll let you comment if you choose. Are you assuming an impact to gross adds? And if so, is it a U. S.
Phenomenon or a global phenomenon in the 3rd quarter?
It would be global. And so back, you're correctly surmising that gross adds, you can say roughly in line year on year. And so with an assumption of a hit from the Olympics, which largely affects us in the past on gross adds or on new subscribers coming in, that that's going to affect in terms of a year over year trend. We expect that to be a meaningful, small but still meaningful impact on the quarter, negative impact. You
have announced the X1, the Xfinity deal with Comcast and was without a timeline. I was wondering if you could give any clarity in terms of timing. And then more broadly, how you think about MVPD in the U. S. As a driver of subscribers in the way that years ago getting on to consoles and other devices actually led to an acceleration in growth?
Sure. We're very excited about the X1 integration. It's scheduled for the second half of this year, so between now and the end of the year. And really, we're focused on getting the integration points very smooth and the Comcast engineers are doing great work on it. So look for it later this year.
Penetrated than we were before. So I don't know that it's as big a breakthrough because many of those households, Comcast households now have a smart TV or have a Roku, but it will certainly help. And from a user perspective to just live on the Comcast remote and to be able to stay on that input as opposed to having the switch inputs is a great thing for them. And then the integration, I think, you'll
be pleased with. So, all of those is one more positive force for us coming later this year. And then secondly, maybe for Reed or Ted, the Disney deal is coming soon with content supposedly launching in September. How much of a factor is that in guidance? How significant do you think that content launches from Disney will be for the business?
Well, keep in mind they're U. S. Only, the output deal. And those films are, I think they're very important for watching and distinguishing Netflix as a different destination for parents because we'll have all the Disney movies, all the Lucas movies, all the Pixar movies, which distinguishes us separately, but I think it's just great high quality watching. But the movies are about 10 months old, so we don't expect them to drive a lot of new subscribers, but we do expect it to drive a lot of customer joy.
And they come in one at a time. So you don't get the whole load of movies, for example, that are coming on to Starz this summer. Those will stay with Starz for the 18 month window. So it will build up over the 1st 12 to 18 months.
When we think about the next 12 to 18 months or 24 months for the company, it would seem that the Olympics as well as the un grandfathering are to some extent one time events. And so as we think about 2017, I know you guys don't give guidance out that far, but I'm just wondering if it makes sense to assume that churn impact from this stuff rolls off and maybe the churn continues to decline the way it has been organically over the last several years across the service, certainly, at least if you're successful around original programming. I just want to give you opportunity to talk about what the business looks like as you come out of this sort of multiple headwind period here over the next couple of quarters?
Well, let's see, in the individual market, we would expect it to be, as you said, we would expect it to return to its normal patterns and continue to improve. As we expand throughout Asia and Central and Eastern Europe, the overall global may be a different number because those as new territories will be more high churn. But fundamentally, I think your analysis is right, which Internet television, which is continuing to be very positive. And then that's offset by competitors getting better, but that hasn't seemed to affect us in any of these markets. So I wouldn't anticipate, because all of the online competitors together were competing against linear hours and there's still so much linear hours to feed at, that there would be any material change competitively around the world.
Great.
And just on the rest of world markets, you mentioned, I think, Poland and Turkey in the letter. You also mentioned being economically prudent. Maybe you could just spend a minute on how you're thinking about these localization efforts, what that even means and sort of why the pace is what it is for that part of the business here over the next couple of quarters?
Yes, it's a small additional investment sub dubbing across thousands of titles. It's localizing the service, the different apps, and then it's doing local language marketing. And so we're just taking our time 1 by 1. The whole advantage of going broad in January was to increase our rate of learning. So we wouldn't have picked out Poland and Turkey in the absence of any knowledge, But now we can clearly see positive trends, so we're starting with those.
And we'll continue to roll out improvements in other markets, again, as we see that the content is forming a great match with the society and continuing to work on that content. And just to round out then, some of the factors and we could do partner deals in certain countries, we could do local payment options. And so those are
the ones that we're referring to depend on the economic prudence, like the size of the opportunity in those areas.
Ted, you've previously given aspirations of mix of 50% original versus acquired content. Could you talk a bit about where you feel you'll be in 2016 and whether fifty-fifty is still the right mix long term?
Long term, I think that's certainly a probable mix, maybe even a conservative one. But I think the growth of those original films, series, series for kids, documentaries have proven to be great investments in terms of their efficiency relative to other high profile content that we license, which is encouraging us. I think it's made our best of world launch possible by having content that people want to see in markets where we haven't yet operated. And it certainly helps in terms of the complexity of global licensing. So, we want to keep pushing it.
And we've also been able to manage very high quality at the same time of doing very high volume. So, we've put in the letter, but we've had 17 of our original film specials and series nominated for Emmy Awards, 54 Emmys this year. So we've gotten an add 33 for our kids programming and we've been able to manage both volume and quality pretty well. So, that's what encouraged us to keep pushing.
And you'll be at 600 hours of new content in 2016.
Yes, I expect that we'll surpass that pretty comfortably.
We've thought about the business longer term in terms how much content can you actually put on the service before you no longer need to add content. And the question is, as it relates to original specifically, is that a fair way to think about it when trying to think through longer term content obligations?
Yes, definitely. I mean, I think as we our appetite for licensing off net decreases with our appetite to increase our originals volume. And as long as the customers are happy with the transition, it encourages us to keep being aggressive in that space.
Well, and Scott, we've been able to expand our contribution margin in the U. S. And we intend to reduce international losses, which would imply that we're able to grow revenue faster than our content spend internationally. But we'd like to do both. I mean, the advantage of our global distribution platform, to the extent that we can find content that appeals broadly, there's an advantage in scale there in terms of distributing it.
So, we'd love to continue to expand that content spend and also to drive some to profit as we go. We think we can do both.
And I would just add real quick, one of the most positive developments from our original programming has been today an original show from Netflix can be just as attractive as a show from any network in the United States when licensing for territories around the world. So it leaves you what we're doing licensing first window for some titles in some countries, and second window for global. That we're finding is that when we're launching our new original series, there's a huge appetite for them around the world.
And Scott, I think it somewhat depends when you ask how much content is enough and whether you think of it as trying to attract 100,000,000 members where we are now or whether you think of it as trying to attract a 100,000,000 members like Facebook or YouTube are at today on the Internet. So it just depends upon the size of your aspirations. And as we accomplish one goal, of course, our aspirations grow. So I think you'll see content continuing to grow essentially forever.
Reeb, just going back to Internet TV as a segment and some of the initiatives there, how do you think about what we at least what we think this new Hulu product is going to look like, which is, let's just assume it's the best of cable plus a fairly robust on demand offering. How do you think that impacts your business in the U. S. One way or the other if they're successful?
I don't think it will. We haven't seen impact from existing Hulu. If there's a new cable system that's better, Sling TV is in the market today and our penetration among Sling TV users is quite high. So think of that as cable getting better or MVPD getting better and Hulu is a potential example of that if the reports are correct.
And Ted, when you think about your relationship with the owners of Hulu, particularly Disney, who's a critical supplier of yours globally, are you worried that they're going to start making an effort to deliver more content to Hulu versus Netflix? We noticed Disney did a deal for some kids programming during the second quarter. And Fox has already made some pretty big shifts towards Hulu from SVOD perspective. How do you feel about your relationship with those companies in the context of this Hulu launch?
Well, the relationships remain very strong. We continue to do business with every studio, every network in every territory. They're in the business of selling their content to the highest bidder. So I don't I'm not concerned that they would sell it for less to Hulu than they would to us, because they have participation problems with the talent that they have to work through. Now, they may get into a position where if they were really were to take that position and buy everybody out for everything, that would meaningfully change the economics of those networks studios.
So, I'm pretty confident that we're going to there will be business as usual with the networks and studios.
Thank you. Ted, in terms of local originals, understanding that every market will be different. Can you talk a bit in terms of us trying to understand longer term profitability in international markets, how you think about local originals as a portion of the mix, if you can take a few examples or paint a broader brush throughout the international platform?
Well, we're in the very early goings of our international original Liza programming. We launched Marseille, we've launched original shows like in Japan, we've launched in Mexico and we currently have productions going on in Germany, Spain, Italy, Korea, Japan, France, Brazil, Cambodia. So, we are producing around the world original programming. And it really has an outsized impact in those first couple of shows, because I think it does show those local markets that we're investing in their production infrastructure, we're investing in their culture, and then taking most importantly, taking those shows and distributing them around the world. So, when we release a show like Hibana in Japan, people are watching Hibana all around the world at the exact same time, which makes us a very important part of the entertainment landscape in those countries and ultimately to those consumers as well.
And David, you seem to have changed the language in terms of the 40% contribution margin by 2020 and adding possibly earlier as well. I know the trends over the intermediate term past have been trending better. Can you just add some color to that comment? Well, I think it's just acknowledging that, like you just articulated that we were running ahead on that. So we have to sort of acknowledge reality that we
may get there sooner than we sort of initially targeted. I think for us, broadening it back from just the sort of quarterly performance of that progression towards U. S. Contribution margin is the right amount to reinvest in the business. We know that we want to drive efficiency.
So we want some discipline there between profit and additional investment. But we also have to figure what's the right amount of reinvestment in the business to maintain competitiveness, both domestically and abroad. And I think the U. S. Business, I've mentioned this in the past that, to the extent that we produce an original for the globe, now that we're in additional markets, we're in more and more markets, the U.
S. P and L does receive some of that relief because there's a smaller share of that allocation going to the U. S. Than there was before. So some of those that was at play.
That was in the past, my team reminds me and nowadays the profit growth of the U. S. Is being driven just by growing revenue faster than content. But I think those two things were at play in the sort of last 4 to 6 quarters as we look at the trends. Thanks.
Ted, I just want to ask you to comment a little further sort of the market for acquired programming. I think there's a concern in the marketplace that it's getting sort of increasingly competitive and expensive. And I'd love to hear how you see the market today, especially versus your expectations or your strategy around avoiding output deals and really finding stuff that's globally exclusive? And maybe you could comment on the Amazon PBS deal as well as your own agreement with the CW, the Star Trek announcement today and also the Chuck Lorre announcement from a few weeks ago.
You covered a lot of ground there. So let me try to address some of them. For the CW, the CW is a real anomaly in terms of a network. They happen to produce programming that has a very consistent sensibility and a very consistent fan base. And it fits really nicely with a big viewing demographic on Netflix.
We've got a great relationship with them. We opted to re up that relationship even though it's a domestic only and an output deal. And we've individually licensed many of those shows for global distribution. And we are thrilled to do that and not only to re up our business, but also to move up the availability date of those shows to just 8 days after their last episode airs versus having to wait until just before the new season launches. So, the fans of the CW programming are going to love that development.
As far as the PBS Amazon, I'd say we have so aggressively improved and expanded our original kids programming. In fact, we have 35 different original kids programming kids shows on Netflix now, many more in production and various forms of development. So, more and more of that programming is leaning to our exclusive global programming and our original programming in place of massive loads of content from other sources. So, our appetite for that, meaning our appetite for high prices has gone down quite a bit. And what else did I miss there?
It's showing. The VST of Star Trek. So, Star Trek is an example of one that seems like an oddball because we don't have it in the U. S. But this is one of those overhangs of regional licensing is that CBS was not making the U.
S. Available. And we wanted to make sure that we could bring that show to the rest of our subscribers around the world. So, we're happy to premiere the new Star Trek series all over the world outside of North America.
Great. And I just want to maybe pick up on the content pricing. Go ahead. Yes.
You had mentioned also pricing. And I had mentioned this before and I think it still holds true. You should think about content costs like player personnel costs. At any given season, a superstar goes to reagent and that particular player's price goes through the roof, the player personnel costs remain pretty flat. And that's the case here.
Every once in a while, there's a breakout, very competitive title and the price for that goes up. But the overall spend, you have it baked into our business model.
Got it. And just following up on margins, David, if you look at the international markets, which I realize is a portfolio, Do you have a good sense for how much local programming you need in a given international market? I'm realizing there's a range. And does that percentage impact the profitability of those markets long term? In other words, if you need in a market like Germany, half the content just to make something up needs to be German, Does that mean that market is structurally lower margin than, say, the U.
S. Market or your broader portfolio? Or is it still too early to figure those things out?
I think it's still too early. I mean, the dominant aspect that affects profitability in any one given market is the competitiveness and that can manifest itself in the competitiveness for content bidding. It can manifest itself for competitiveness of the consumers' moment of truth, how much they're viewing, where they're viewing, what are their alternative sources of entertainment. So I would say that it's way too early. We've been very successful with sort of an eightytwenty model today and very, very disparate non English markets in Chile, in Finland, in the Netherlands.
And so, we do have markets, early markets like Japan that are tilted a little bit more towards local content, but I don't think the margin characteristics are going to be necessarily determined by the percent of local as how competitive the market is. Thank you. Reed,
time spent on the platform is such an important metric. I was wondering if you could update us just on time spent per user to the extent that there's anything there that's changed in either direction. And then secondly, Sandvine, the reports peak traffic showed a downtick in Netflix still dominant, but a little bit lower relative to peers in terms of that domination. You've implemented compression technology during that period. Can you just talk a little bit about how much of an effect that could have had on a metric like that?
Sure. I think on the sand vine, which covers North America, it might have been like 35% to 33%, something like that, which would correlate very well with what we think was the increase in coding efficiency. So think of that as a flat result as opposed to a down result. And then, what was
the first question? Just time spent per user, how that's trending. You've given periodic updates on that. I'm just wondering if there's anything
Viewing overall is pretty seasonal. So you have to look at it on a year over year basis. But on a year over year basis, total viewing, which is the fact that we sometimes release is up. I forget exactly the numbers, but think of it as we were I think it was $13,000,000 a quarter ago and it was maybe $10,000,000 a year ago.
Yes, Scott, we sorry, Reed. We did you did release those numbers at CES in January. So there was a data point there. And I think that's what Reid was sort of referring back to.
Total viewings continuing to grow. Okay. And then second one? On a year over year basis.
Great. Download functionality, which is a hot topic, some competitors have taken that on. You historically have suggested not interested and it seems like that's changed a little bit more recently. Can you talk about your interest there? And then also cost implications in terms of contractual obligations?
Yes, we're open minded about it as we've expanded globally. It's something we've taken more of a look at given the strength of cellular networks not being as strong in some of the new markets. So that's gotten us to take a look at it. And there's no material cost implications. As you know, some of our competitors in different markets in Germany, in the U.
S. And others include a local caching capability. So it's a pretty standard part of most deals.
Question for David, just turning to the financials that, member growth fell short this quarter as you guys acknowledged in the letter, but your comments about profitability next year haven't changed. You seem to expect substantial profits or material profits, excuse me, in 2017. Can you talk a little bit about the cash flow burn, cash burn outlook 2016 2017, David? And any comment around P and L expense versus cash now that the top line at least seems to be growing a little more
slowly than we all expected? Well, cash flow, despite all the perturbations of sort of content coming in and out and the uncertainty around when that content might time has been relatively steady at about a $250,000 a quarter. So I would say there's been no change on from my understanding and expectation that it's about $1,000,000,000 $1,200,000,000 in terms of the year and we expect that again going forward. So free cash flow will improve when we drive more profit and start organically funding more of our content investment. And in terms of the ratio of content cash to P and L, it's still in that 1.3 to 1.4 range, where it could peak up to 1.4, but it's staying in that 1.3 to 1.4 range.
And any color on the sequential increase on contractual obligations? I think it was 13.2% at the end of the quarter. How do you think about that number, again, given the context of the slowing or a little bit of a lower top line
than you thought? Well, content is one of those things where you invest, you don't invest by quarter, you invest several years or a year. So I think what you're seeing is our investment in rest of world, the rest of world launch and the growth of additional territories. You're also seeing You're also seeing increased investment in some of our younger territories, where they're growing their content expense at a faster clip than some of our territories that are more highly penetrated or have been operating for more years. But just like Reid was saying that the offline viewing or the downloading rights aren't really a factor, what you're seeing is the growth of additional territories.
So that's what's driving the content commitments. And again, I look at this periodically on a per member basis. And it stayed in that sort of band and is consistent with sort of prior trends and prior territory launches.
And you have to remember, Scott, that when we look at it, we've been doing this a long time. We've had these short quarters before. 9 years ago in 2007, we actually went down in subscribers. So this quarter we're growing, but not as much as we want. But in 2,007, we went down from $6,800,000 to $6,700,000 in this Q2, which is a generally a seasonally tight quarter for us.
And it didn't feel great going down, but now here we are at over $80,000,000 dollars So you just got to take a long term perspective. And Internet TV is going to be an enormous market. We're very confident of that. And our competitive position is very strong. So those are the 2 fundamental things that give us confidence in the long term and want us to continue to invest in more content.
Thank you.
Any update, David, on the chip card transition to the extent there's still any remnant that you may have seen in the quarter from that?
It's a small background issue. It was back then that was sort of became outsized, because we pointed to it as one of the explanatory reasons that we had an in ball turn uptick, but I would say it continues to be a small background issue.
And then for Ted, I don't know if there is a way to think of this that you've shared publicly, but in terms of the product portfolio today and global rights that you have, if you think of it maybe relative to your spend, what portion of the portfolio has global rights associated with it? And then secondly, as it relates to global rights, how are the allocations done between markets?
So, the allocations are done by media market share models. And you should think about our global allocations as all of our original programming is fully global. Several but we haven't broken out an exact percentage of our off net licensees that we do on a global basis. And then there's individual libraries from each of them from around the world that we have global rights for of a lot of content that you may never have heard of, but actually get healthy niches of watching all over the world as well.
And Ted, it's right. Some of the content, when we say global, that's global Netflix, like sometimes it includes China, sometimes it doesn't. Correct. So think of it as global to where we currently operate.
And with the exception of our on the original side, which to date has always included China.
Thanks.
Yes, talk a little bit about how the Asian market rollouts have gone so far relative to your expectations and whether you're thinking about maybe different price tiers or still sticking to the global price point as you look at the results there?
Yes, we thought about it after launch and debated, do we want to try to be a low cost service like a $2 service or should we try to add content to make it a viable $10 service. And at least for the next few years, we're very much on the ladder strategy. So we're going to invest to build a great $10 service. We look at the iPhone success globally. We look at some other high value products and we want to be an incredible content service at this $10 price point rather than be very low much lower cost or even free service.
And so that's what we're focused on as our current model. And then we already do have some price choices
in our tiering. So we do use the sort of entry level tier as a mechanism for those folks that might be more value oriented. So we do have some ability there to separate across price in terms of capturing those subscribers that might be more value oriented.
And just sticking with the emerging market theme, but markets you've been in a while, can you talk about the Latin American market and whether that continues to be strong and how you might think something like the 2nd season of Narcos might impact results there?
Well, go ahead.
Yes, Latin America has continued to grow well for us. And what's been fascinating is the growth has been pretty steady even in Brazil, where we see a significant recession and a difficult government situation. So it seems that neither of those factors really affect a value oriented business like ours. With the 2nd season of Narcos, we're hoping to see great viewing throughout Latin America, throughout the world, but similar to our other originals.
And that second season comes September 2nd. And it's one of the things that we think is very excited about the prospects of global television. We also have a new series we're filming in Mexico in Guggenable and a second season of Club de Cuervos in production. So we've got a pretty healthy investment in Latin America. But I think that where we're at in the emerging markets is exactly where we're at in the 1st few months of the Latin American market, trying to figure out what those people in each of those countries love to watch and creating a service that is worth every penny of the subscription fee.
Thank you. Ben and I have both asked questions around cost structure and other components of the international business, I guess, to try and get an understanding of longer term profitability. Understanding differences in ARPU and content costs by country and local originals and things of that nature, Is there a reason to think that international in aggregate shouldn't have contribution margins that are similar to the U. S. Over time?
Well, I think each market will be different. But when you roll them up, I think structurally, we can still get to where we've gotten to in the U. S. We've demonstrated a Canadian sort of proof point as well, depends on whether you include them in that international bucket or not. But we do think that we can see across the system sort of a variety, but if you average across it, we can get to those levels of profitability, at least with the markets that we've seen today.
I mean, we may penetrate into deeper into markets that have much lower ARPUs that may have a different characteristics. So then it's a choice of sort of how big of a market do we want to address at that price point. Is that the bigger pie from a revenue or profit perspective? Or do we want to experiment down in the price to broaden the market and go after sort
of a bigger market at maybe a lower margin. And I think we're too early to tell on that latter case. And then second question again for David, and apologies if this was answered earlier, but in terms of the un grandfathering process, where are you in the U. S. And where are you in the international markets that you named in terms of customers that are going through that process having seen it at this point?
Yes. I think that
you in the letter, we sort of characterize it, but we're roughly halfway through. And that will play out continue to play out over Q3 into early Q4.
And that's consistent U. S. And those international markets. Correct.
Now, a point worth making here is that our international markets, because they're newer, have more disproportionately more subscribers that are newer and already at the higher price points than the U. S. Does. That's what makes the U. S.
Unique in this discussion. Let's wrap up
with 2 more questions. You guys want to pick 1 each.
I just want to ask about Europe, especially the continent. You've been in a lot of these markets now for a couple of years, but I think they've been slow. For either of you or all of you, what do you think you need to do in sort of Continental Europe and Southern Europe to
sort of accelerate that growth? And what is how much of it is content versus some of the payment stuff or anything else you might call out that you're working on? Well, let's see, just to remind you, in Spain and Italy, we only launched it last October. France was and Germany was a year or so before that. And we've had really nice success in all of those markets with continued strong growth following the growth that we've seen, for example, in the U.
K. Or Canada, which would be the closest proxies in terms of wealthy markets with high pay TV penetration. So big competitive markets, but we've got a solid game plan. We're growing in those markets. Payments are not an issue.
So we feel very positive about those markets. Thank you.
Last one, Reed, you mentioned payments. You've had payments as a source of friction in some earlier international launch markets. Can you talk about that in the newer markets and what you're doing there to facilitate that?
Yes, around the world, e commerce is unequally well developed. So in some markets, there's very strong e commerce payment platforms like the Netherlands. In other markets like Cambodia or Vietnam, it's challenging. So today, we only accept international credit cards. So we'll develop really along with e commerce and that whole ecosystem, as people want to pay for things online and that may come through mobile payments like Android and iOS.
It will come along with 3rd party payment systems. But again, the general economy and people are moving online through mobile, and we're going to be able to take advantage or we are taking advantage of So in the long term, it's not a big friction point, because everyone's going to want to be able to purchase many things, including Netflix.
Thank you.
So thank you both and thank you to all of our investors. We apologize for the volatility. I know it's not easy on everyone. The big picture is very much intact and we're very excited about it. And so we're continuing to execute on growing the business.
Thank you very much.
Thank you.