Only muted for the start.
Hi, this is David Wells. I'm the CFO of Netflix, and I'm welcoming you to the 2014 Q4 earnings interview. Joining me today is Reed Hastings, our CEO, and Ted Sarandos, our Chief Content Officer, is joining us from Miami at the National Association of Television Executives meeting. Also at that meeting is Michael Nathanson, with too many conflicts. Reprising his role as interviewer today is Rich Greenfield, analyst from BTIG, and joining him is Mark Mahaney from RBC. We will be making forward-looking statements today. Actual results may vary. I'm going to turn you over to Mark, who has our first question.
Thanks, David. A question to start off for Reed. You had talked about an S-curve and the ability to get to 60 million to 90 million subs in the U.S. You beat the sub numbers for the quarter, but there's a year-over-year reduction in net sub adds. Walk us through what your latest thinking is on the ability of Netflix to reach 60 million to 90 million U.S. subs.
Well, it's looking very good. We're at 39 million in the U.S., adding five-plus million a year. The trajectory's great. If you step back and you say, "Is internet video going to be in every home in America in 10 years?" That's a pretty clear yes. Tons of potential there, we're very excited about just continuing to improve our service.
This is a question for Reed. When you think about the international growth profile, the comments that you made in terms of the cadence of market launches, basically saying that every single market would be launched over the course of the next two years, was a pretty big move from what I think we were expecting and what I think investors were expecting. Was there something that happened when you looked at the success you were having overseas, whether it be France, Germany, Latin America? Did something happen to change how fast you planned on rolling out the rest of the world to get you over the next two years?
Rich, there's two real drivers. One is the success that we've seen from Argentina to Finland. To have all of our first wave of markets from Canada, Latin America, Nordics, Netherlands, U.K., and Ireland be profitable together as a group, it's just a tremendous accomplishment. At the growth rates that they're seeing, it's going to be very significantly profitable going forward. That's been a big driver for us. Then I think Ted really had the vision to figure out how to start to get global rights for some of the content by moving up the food chain, and we've been pushing on that dimension to be able to get the global rights where we don't have to go country by country across 200 countries, instead can provide the producer upfront money, guaranteed money, and get great access.
Ted, do you want to add to that?
I think our success this year with "Better Call Saul" and "Gotham," where we had moved up the process, licensed for all of our operating territories and our future operating territories directly with the producers of those shows. "Better Call Saul" directly with Sony and "Gotham" directly with Warner Bros. Television. Instead of having to go country by country and piling up those deals and lining up windows, this enables us to make the service, the selection, far more global for viewers around the world who increasingly know exactly when these shows began and are hungry to see them as soon as they can.
A question for Reed or David on the international sub numbers. They came in materially higher in the December quarter, and you're guiding for materially higher than expected numbers for the March quarter. Can you give us any color on which markets, which countries did better than expected, or was this just a case of the European launch being a little more delayed than expected and you're seeing the full impact of that? Where was the upside from?
Mark, this is David. It's across several markets, and as you know, we don't talk specifically about individual markets for competitive reasons. I would say it wasn't driven by any one individual market. It was driven by several markets. We're really pleased with the growth that we saw in the fourth quarter and carrying into the first quarter.
If I could just follow up, David, on that question on Latin America, though. You did give out a 5 million subscriber, that you would reach 5 million subscribers during the quarter in Latin America. Could you give us any other feel for, are there any other milestones to think about as you think about other markets that you've already launched that we should be thinking about and why you're disclosing something like 5 million in Latin America without more detail overseas?
It's a nice round number, and we'll be giving out milestones as we hit them, I think, in other markets. It's incrementally better for us to talk about that with consumers in Latin America because it validates the quality, the breadth, and the size of the service. It's helpful from a consumer standpoint in the market. We weigh between the investment community and the consumer community, what's helpful in terms of incremental information.
What changed in Latin America? What changed that actually accelerated? It was an area that you had talked about as a problem historically on these calls. Why is Latin America now accelerating to the point where you're now really getting excited about the growth potential?
Well, nothing changed. We knew we would hit 5 million in the quarter, and we did. What changed may be that we gave you incremental information. I think what we've said all along in terms of Latin America, it was a challenging market. We've had payments issues and e-commerce trust issues that we've wrestled with and improved over the last three and a half years. It's been growing all along. I think folks may not have taken us at our word for that, but we're very pleased with it. It's been steady growth. We continue to see great growth and great potential in the market. It's a market with about 65 million broadband households. If you take that 5 million number that we talked about and 65 million in terms of addressable, we think we've got a lot of room for growth in the market.
David, I'm going to follow up on the global expansion. One of the two things you bolded in this press release was this line about completing global expansion over the next two years. I noticed the bolded stuff. I guess the question is, I know you talked about this a little bit before, it sounds like you're maybe buying international content or getting content for international markets more efficiently. Are there learnings from some of the international markets, the launches you've had to date, that have allowed you to be more efficient in rolling out new markets going forward? It's a pretty big statement to make, a very big change just over the last 90 days.
Sure, Mark. I think one thing that I would add to what Reed and Ted talked about in terms of our incremental confidence in international is that our originals programming continues to be highly engaged across markets outside the U.S. We thought it might be based on the type of content that those markets were enjoying, but we just didn't know. We've had another year of experience in originals. We see that the originals are in the top list of content watched in all those markets. It gives us more confidence that when we make something, we produce, we incur those production costs, that it'll be an asset that can be enjoyed across markets and across a bigger and bigger set of international markets. I'd say that-- go ahead, Mark.
No, please go finish, David.
I would say, the incremental lessons for us have been the payments lessons we've learned. We continue to grow and address each individual market separately because they all seem to have different challenges. The types of programming in each market, I think Ted's team is getting smarter and smarter, and we've become incrementally better in terms of knowing what to license upfront, what to add in terms of licensing over 12, 24 months to make the content better and better.
Could I follow up and just bring the question back to Reed, then? Reed, is the point that Netflix is really selling two universal goods? One is streaming, and the second is streaming of this content that has universal appeal, a lot of which is U.S. content. Not all of it, the most popular shows in one market pretty much largely transfer to be the top content in other markets as well. Is that the kind of the secret sauce?
Well, it's certainly true on the first part of what you said, which is the magic of streaming is on-demand, the control, being able to binge on episodes, watch a movie in the middle of the night, and that is a very universal truth, which is even stronger in developing markets where television is not as advanced as it might be, say, in the U.S. or France. The more that we expand out of that footprint, the more we are differentially great with the interactive side. Then in terms of the content, it'd be easy to overgeneralize from our experience in Western Europe and Latin America. There's some content like "House of Cards" that really does carry around the world. It's not on our service in China, it's been tremendously popular in China. Not every piece of content will carry equally well.
We've certainly been impressed on how there's a segment of the market in every country that follows Western, Hollywood, British content, and then we're augmenting that with all kinds of local programming. It's not quite as simple as we do our originals, that's the whole thing, it's everywhere, but that's at least a two-thirds impact. Ted, maybe you can add some color on how we look at the markets beyond Western Europe.
Yeah. It's been so encouraging how truly global these brands have been. When we set out our original programming from the beginning, obviously our markets were pretty limited. We were thinking about them mostly as U.S. shows and they would travel like other U.S. shows have. We've been really enthused to see, particularly in our Western European launches, shows like "Orange Is the New Black" and "House of Cards," even in later seasons, performing tremendous for us because people hadn't got around to seeing them yet, and we could get the brand out there and push it out there. "Marco Polo" was kind of a global phenomenon as well. To us, it was very encouraging that what the world really wants is high quality, big production values, great storytelling, and that can be truly universal.
It might be that there are some cultural barriers to U.S. content as we get into more exotic markets, my guess is that we're going to continue to see our original programming travel and carry the Netflix brand around the world.
This is a question for Ted, because you bring up "Marco Polo," I think the impact on the fourth quarter is really important to hone in on. We got a lot of questions mailed into us, basically with the sentiment of how much of a drag was "Marco Polo" and the negative reaction on Q4 subscriber metrics? Did the negative press impact negatively gross additions? Tied to that, as you've mentioned also, you've got "House of Cards" Season 3 coming. How much of your guidance for Q1 benefits from Season 3 of "House of Cards" globally? I think last year you made a comment that Season 2 had had a much bigger impact on gross additions than the prior year. Does that follow through, you think, again for Season 3?
Yeah. Rich, I think it's tough to get a big subscriber reaction to a new series that people haven't heard before. Even if they get excited about it, they're more curious about it before they've seen the first few. While "Marco Polo" had some negative reactions in the press, viewers have loved it, and the volume of viewing has been phenomenal. The rate in which people are completing the show is comparable to our other big tentpole original shows. We're thrilled that we made a show that viewers have loved around the world. Of course, because it's a Season 1, we had not baked in or had a big anticipation for a subscriber impact. "House of Cards" Season 2, "Orange Is the New Black" Season 2, and "Arrested Development" have been the shows where we've been able to track real measurable subscriber growth with their launches.
I think as we go forward with Season 3 of "House of Cards" and Season 3 of "Orange Is the New Black." "Daredevil" has a built-in fan base from Marvel. Our feature film, "Crouching Tiger, Hidden Dragon 2," has a built-in fan base from the original film. I think we'll see those kind of impacts that we saw from Season 2s in the past.
Part of the fear is that the marketing benefit that came along with originals that had good reviews had a big impact on just building the Netflix brand. Obviously, "Marco Polo," maybe it's getting good consumer reviews, but the critical press or the media, the general entertainment media, doesn't seem to be excited about it the way they have been about your prior originals.
I find it hard to believe that you can build sustainably on things that get well-reviewed and not watched. I'm thrilled that this has get watched and loved, I think that is sustainable.
Rich, we're really focused on the consumer and the social media that comes out of that. If you look at the commentary from people to their friends about "Marco Polo," it's extremely positive. The spectacle, the costume, the storyline, the exotic, but approachable. It's a great one. The investor audience tends to be highly educated, and that really skews towards "House of Cards." You're exception. You get some of that marketing to me kind of thing, where "House of Cards" for the investor audience is a tighter match than "Marco Polo." Really, "Marco Polo" has been a great success, and we renewed it for a season two.
Rich, one final comment regarding guidance. It's worth reminding folks that the investment community is hyper-focused on whether we're within 100,000 or 200,000 of our guiding number. When we're talking about our guide for Q1 at 1.8 million domestic members in terms of growth, the addition of even "House of Cards" season three is 100,000, 150,000. We're talking about on the margin, it's helpful, but it's not the big thing that's going to drive the growth in Q1.
Let me go back to Ted with two questions on original content. Does the success then of "Marco Polo" want to lead you to look to do even more of these kind of relatively blockbuster type of productions? Secondly, in terms of the viewing of the seasons, just to be clear, are you seeing greater viewing of each of the original content? "House of Cards," "Orange Is the New Black," are they increasing every year as you've seen really successful series do in the past? Are the audiences building up for each of those?
The audience is definitely building season on season for each of those shows. I think if you see in our lineup of upcoming shows, that we have some pretty epic and pretty spectacular shows upcoming, like "Daredevil," like "Sense8," that are done on a very big scale. Remember, we're releasing 320 hours of new original programming this year alone. In there's a mix of big epic spectaculars, some smaller productions, but probably think equally loved, like comedy from Tina Fey and Robert Carlock, "The Unbreakable Kimmy Schmidt," and other shows as well, like "Grace and Frankie" with Jane Fonda and Lily Tomlin. We're not going after one kind of audience or one type of show. Tastes are super diverse, and we have a big subscriber base, and we're trying to serve all of them.
When you look at the subscriber growth, David, obviously you're looking for slower growth or slower net adds as you look on a year-over-year basis. Should investors just assume that a kind of 20% annual decline, or the content that Ted's talking about, is there the potential to re-accelerate that, where you could have more adds domestically in 2016 than 2015? Tied to that, you gave out, I think, your first-ever margin guidance for 2020 of 40%. Was that tied to a specific subscriber number in your head? Or is there a pricing flexibility where you think pricing is notably higher? How do we think about how you get to that 40% contribution margin?
Sure. Well, I'll take the first part. We certainly could end up higher. Now, we've learned our lessons on giving full-year guidance on member numbers, so we tend not to do that. What we're saying is, look, the current trends that we saw in Q3 and Q4 extrapolated forward are down year-on-year in terms of net addition growth. We have a lot of content, as Ted just talked about, coming out in Q1 and the rest of 2015. We certainly could see it jump up. It's really hard to know. I think the prudent thing for us right now is to just continue to extrapolate the current trend that we're seeing, and that was down year-on-year, and that's what you see reflected in our Q1 guide. In terms of the margin guidance for 40%, it isn't the first time.
We actually guided to 30% in terms of setting a margin target out there. We wanted to give investors some guidance in terms of long-term margin growth. What it's about for us is the steady march upward of averaging about 200 basis points a year. We're going to have some lumpiness with the content coming in terms of heavy quarters of content introduction. We have accelerated amortization on that original content, which tends to pressure the P&L in those quarters when we launch a lot of content. I think for the 40%, it's the continued steady growth of the business, and we think that we have the flexibility in the model that doesn't require an 80-million subscriber or 90-million subscriber business to get there. We can get there with the growth that we see layered in today.
David, can I ask about pricing elasticity? You talked about that a fair amount in the press release. Two quarters ago, it seemed like there was a lot of conviction in the pricing power. Last quarter, some questions. Now it seems like there's greater conviction. Do you think you really have enough data points? I know you mentioned Mexico. It sounds like you did some additional research on some of the newer subs coming in. Do you have other markets that you've looked at and you've seen results from there that give you the confidence that there is this pricing elasticity or pricing power? Do you think we could then, going forward, seeing a $1 price increase every other year or every 2 years and maybe with a year grandfather?
I don't think we're talking about a $1 to the consumer price increase every year. What we're talking about is using our tiers to provide value and choice for the consumers to steadily grow our average subscription price over time. That doesn't necessarily require the frequency of an annual price increase. I think what you should expect from us is a steady growth of that ASP, and we'll disconnect pricing. I don't think there's any reason for us to have a global single event. We'll look at pricing in each market, and we'll grow it accordingly to what we think makes sense in each market. In terms of evidence, sure, we have seen growth persist through pricing introduction or raises through those markets. I think besides Mexico, we've got some other examples. Ultimately, it will rest upon when those grandfatherings expire, so we still have that to come.
We think we have enough evidence today to look at it and say, the growth that we saw that slowed down in Q2 and Q3 wasn't related to the pricing. We still scratch our heads a little bit in terms of explaining fully, and as I've said before, it takes several quarters for you to really get comfortable in the answer and to look at every piece of information. Right now, I think we've got enough information to say, based on Mexico and other markets, that there's still plenty of pricing power for Netflix and not a reaction to the elasticity.
Just expanding on that, Reed, when you think about the way you price, you basically foreclosed on advertising as an incremental way to drive revenue. Are there forms of tiering that could actually be interesting to generate more revenue for Netflix on a per-subscriber basis?
Sure. The biggest one is our $12 a month plan is our plan for Ultra HD. Today, there are very few televisions that are Ultra HD, and we only have a few titles. We have more than anybody else, but we only have a few titles. If you look ahead two years, four years from now, many of the TVs sold at Best Buy will be Ultra HD, and lots of our content will be Ultra HD, and it's a natural match. I think what we'll be able to do is, as the high end of the market spends $2,000 to get an Ultra HD television, it seems fair and natural to them that just like you pay for a difference between standard def and HD, that there's a difference between HD and Ultra HD.
That's a way that we get incremental revenue without making any changes ourselves, by just letting the tide come to us.
Reed, if I could add to that, I think what's exciting about this move is, unlike other kind of format changes, this one is led by a thin layer of content, but the front end of the content. We're shooting all of our original series, with very few exceptions, in Ultra HD. Our "Breaking Bad" licenses are all in Ultra HD, "The Blacklist," all the very frontline shows, and then complementing it with more and more of the catalog. It's not a kind of a show-off of weird, quirky things that look good. It's actually the programming that people are watching.
Another question for Ted. You talked about your ability to gain efficiencies in terms of your procurement of content. Can't tell whether the competitive landscape is changing at all. Amazon may be getting critical acclaim. It's hard to tell whether they're getting customer acclaim for their shows. Are you seeing anything in the market that suggests that your ability to acquire content, get content, is getting easier or harder?
On the original side, it's a very competitive market, we fortunately have positioned ourselves as kind of a premier destination for the biggest and best projects. We don't say yes to all of them, and we see them show up in other places. We do think that we're the first or second go-to for most of the projects that we're looking for. I think on the licensing side, kind of the same thing, which is as we increase our footprint, our ability to compete in that space really helps being able to get the most high-profile shows, but by doing that, by being more and more confident at earlier and earlier stages. Being able to license that content with much greater confidence, sometimes at pre-pilot, gives us the ability to find those efficiencies.
Ted, just to follow on that, stacking rights has become a real issue for U.S. studios, and they're now looking at your requirements for limiting stacking and also the global buying, meaning you don't want to buy things that don't have that global license attached to it. Is that making it harder for you to buy content from some of the big TV producers as you look out over the course of the next 12 months, whether it be the Foxes, the Warners, the CBSes, or is that a non-issue?
I think really the truth of it is that it doesn't make it harder because it actually makes it more attractive. As the studios kind of streamline their operations, I think they're looking for more streamlined ways of selling their programming efficiently. On the stacking rights, we're not standing in the way of a network withholding those rights. We're just saying we won't pay full freight if it's not fully exclusive. So if they want to withhold the right for stacking, they're welcome to do that. It's just there is a price tag to it. That's some portion of the $3 billion we're spending this year.
You are essentially limiting their downside, but you're also limiting the studio's upside if they agree to sell their content to you. Is that fair?
In what way?
Well, they don't have the ability to sell it based on the success here, if they're selling it to you, let's just say pre-release, they can't go out and sell it in other markets over time. If they basically limit the stacking, they obviously can't leverage all of their other platforms with those full in-season stackings. I mean
They can do it, Rich. They just can't do it for free.
Right.
Yeah.
A question for Reed. Reed, a couple of months ago, I think HBO talked about plans to launch this standalone streaming service sometime in 2015. Any thoughts you have on what kind of impact that could have on your business, and specifically, do you think that there's a probability that there would be a broad streaming solution that would come out at a price point lower than Netflix?
It's really hard to speculate on what they're going to do on pricing to the degree that they go really aggressive and match Netflix's price for HBO. It's extremely disruptive to their current ecosystems if the prices are higher than that. They've generally given the signal that they're going in softly in terms of not being too disruptive using the existing partnerships. That would tend to imply a little bit higher price point. In the Nordics, they did choose, which is the first place that they competed over-the-top, to be directly on top of us, about SEK 79 for pricing. We'll just wait and see. I think even if they were to match us in pricing, it's just going to be a lot of people subscribing to both. Think of over the years, last five years, with HBO and Showtime.
When Showtime has a great run with "Homeland" and "The Affair," it increases Showtime subscriptions. It doesn't decrease HBO. I think we'd see the same with us and HBO, which is if they do great work, people will additionally subscribe to them because that cost is pretty small per month. Ours is small per month relative to all their other entertainment options. It's definitely not a zero-sum situation.
I guess both Reed and David on the next question as it relates to DISH and Sling TV. MVPD integration in this country has been really a challenge for Netflix. I think you've had a lot more success signing deals outside of the United States. What does the DISH deal mean initially in terms of the willingness of others in the U.S.? I mean, will we ever see you on the X1 integrated into the platform? Then to the extent that DISH is actually creating subscribers, this is the part for David, curious how you're compensating DISH if they're able to actually grow your gross additions.
Well, see, I can answer both. We're certainly not going to talk about the financial details with DISH. To the degree, DISH has always been a maverick, doing some things first. To the degree that they enjoy great success, like Virgin in the U.K., with a platform, and it helps the Hopper get more popular because it's also an internet platform. I think it is likely that DISH's competitors would want to co-opt that benefit and integrate with us. Right now, everyone's in a watch and see. Let's see how DISH succeeds with the Hopper hardware, which is what has Netflix. That's independent of Sling TV. Those are two different things.
What do you think of Sling TV? A lot of people have downplayed it. What do you think of the offering and its impact on your business specifically?
I don't think we'll see any impact on our business. It's a great start. Charlie Ergen's been a great entrepreneur. I think he sees the future that it's internet-centric. It may not be the perfect offering today, but it's got, at $20 a month, very attractive pricing. He's been an incredible entrepreneur in terms of starting with something small like the early DISH and building it in to be the internet MVPD. It's great for him. It adds some competition in that market. I don't think it materially changes the desire to have Netflix with our unique and exclusive shows.
Reed, on the MVPD integrations in Europe, were any of those material enough to have caused some of the upside we saw in this tier guidance in the December quarter or in the guide for the March quarter?
They're deals that we work on for a long time. They were all built into the Q4 guidance.
Reed, you have not updated us on streaming metrics in a long time. I think Neil Hunt gave the last statistic almost a year ago in terms of where you are now on a monthly or quarterly global basis. Some color there, and then just tied to that, we got a lot of questions emailed in in terms of just split where it stands today in terms of devices. Given the rollout of better wireless networks, how big is non-in-home usage on tablets and smartphones, and is there any color you could provide on movies versus TV in terms of absolute amount or absolute volume of streaming?
Yeah, there's been no remarkable changes. TVs or shows watching is bigger than movies. That's been consistent. We've said personal devices, PC, tablet, phone, that varies by market, some sort of 30%-40% of viewing, and TV-based viewing being the large screen shared viewing being the majority of it. No particular change in those metrics. In terms of mobile networks, consumers are still, in most countries, quite conservative because of the data caps, typically two gigabytes or five gigabytes in terms of watching video on. We see a lot of tablet and smartphone usage, but almost always on Wi-Fi networks. They're careful about how they use the cellular networks because of the caps and the fear of overages.
Total hours?
Total hours continue to grow. We haven't hit any super sexy milestone that we've chosen to make an event about, which is when we tend to do those things. Both total hours, of course, that's going up. More importantly, median hours has continued to climb in every market as we make the programming better and better. That's the main thing that we track internally, and it's just very exciting to see as the devices get simpler to use, as the UI gets more personalized, as the content gets better, that we see it directly reflected in the number of median hours, and that is the closest correlator with retention and word of mouth, because if you're using Netflix a lot, you're much more likely to stay with us and to recommend it to your friends.
That must mean you're closing in on two hours per subscriber per day, if you've been growing consistently on a median basis.
Well, I'll leave that speculation to you, and when we get to great milestones. There's a fair amount of seasonality, so we might hit numbers like that in peak times, like holiday periods, but not necessarily sustain that over the whole year.
I'm guessing Rich will have a good take on it, whatever that is. Interesting anyway.
David, let me bring you back into the conversation. You talk about generating material global profits earlier than expected, you also talk about a billion-dollar debt raise. Square those comments a little bit, and then the timing of the debt raise, when you would expect that, and why you would choose debt versus equity.
Sure. Mark, I think in terms of profits earlier than expected, it's more that we have clear line of sight in terms of rolling out the rest of our international expansion. We mentioned that we'd have a couple of years of heavy investment. I think that's going to drive capital needs, which then leads into the conversation around the capital. We think right now is still a good time to secure long-term, low-cost capital in the debt market, and that's why we've chosen debt.
David
It's consistent with what we've done in the prior three years, actually. We've done a raise every year.
I think your points have been that the purpose for the capital raise is largely to fund international expansion. Just want the check that that's true. Secondly, there's a little commentary in here about expanding into China modestly. I'm not sure what a modest expansion into China is. Sounds like it could be expensive. Are there particular limits you're going to put on that?
It will be quite modest, and I can let others speak to that as well. Basically, the incremental cost to launch in the rest of the globe is smaller relative to the individual customized launches that we've done to date in these other territories. You'll see the level of investment for the countries that we've talked about and the countries we will talk about in 2015 be a little bit higher than the level of investment going forward for basically the countries that we haven't yet launched in. Back to your cash comment, it's really tough to separate the cash. When you have capital in a business and you use $1 on content and $1 to fund international expansion, it's really tough to sort of separate those things. Both of those things right now are requiring cash for Netflix.
The international mainly because it reduces $1 of profit that we would otherwise have. The content because we've chosen to produce more and more of our own content. That means we have to fund the production, which has slightly more upfront characteristics than a licensing model where we would pay a little bit more out over the life of the deal.
You're not in markets like Japan. You look at India, you look at South Korea. Those would seem like very expensive markets to enter from just a content buildup. What's the disconnect there?
Let's go back to the China. Then we'll hit that. Mark, on China, what we said in the letter is that we're exploring options. We need to get a license. That's not 100% clear that we'll be able to do that. We're figuring that out. What we said is that if we go, it'll be a modest investment because we won't have that much content. We're going to be very cautious and feel our way along through that process if we're able to get that license. To Rich's question, yes, there's many other high GDP markets, GDP per capita, like South Korea and Japan. Those are big. Out in, I think somewhere in the Midwest last month.
Just curious, are there any kind of key takeaways that we should be thinking about that you learned or that were discussed that would be meaningful to investors? I think the key thing is that everyone sees that internet TV is really becoming substantial. You saw this with CBS All Access, 15 years of shows, any episode, a really lean-forward move. You see this with ESPN both heavily investing in WatchESPN. If you think about it from an ESPN perspective, as long as people are subscribing, whether a third of the time they're on WatchESPN and two-thirds of the time on the linear channel or the reverse, it's all the same to them. They're being very forward-leaning and investing in WatchESPN, and by being in the DISH bundle, making sure that they stay accessible by every home in America.
Just across the board, you see this phenomena that we described a few years ago of channels becoming apps, people using them on their smartphone and smart TV just as easily and transparently. The fundamental thesis is getting validated. That's great. For us, it's both more competition and it's more consumers coming in the market speeding up because internet TV is becoming so mainstream.
Question for David on the streaming content obligations. Those rose to $9.5 billion in the quarter. What levels are you comfortable with? Should these continue to rise as the sub-base rises? Is there a natural level, what the appropriate range is for those?
There's no absolute number, but when I look at the streaming obligations in the table, and even the ones that are sort of not estimable, but you can put a range on those as well, a little bit wider. I would say that the ratio has been fairly consistent in terms of its scaling with our business. You should expect them to continue to grow, especially as we launch additional international territories. In the produced content side, the more we license content, the more that will grow in an obligation. The interesting thing about in the production world is when you produce content and you own it, because you have the discretion to cancel it at any time, it doesn't show up as a content obligation.
If you look at some of our peers and some of our suppliers in Hollywood, you don't have the same sort of accounting when it comes to an obligation, even though you may say that there's a high probability of finishing or producing a full budget on a particular project. I would say, I think in terms of our revenue and our revenue per obligation, I think it's been sort of trading in a tight band. It's been in a tight band along with our scale growth.
Sticking on financials, can we talk about interconnection for a little bit? You signed deals with four of the large companies over the last several months. Curious how those interconnection fees add up. Is this a number where it's now adding up to north of $10 million-plus a quarter? Related to that, maybe a question for Reed in terms of, do you expect the FCC policy on internet regulation to actually make the deals that you signed with ISPs actually invalid, meaning you won't have to pay for interconnection going forward?
That would be upside, Rich, that we would not expect that they would trump existing contracts. What's been great for Netflix is the general idea of the internet as a utility, open to all, not for discriminatory use, has really taken hold. Of course, the shift we've seen over the last year around perceptions on Title II is amazing to see in just 12 months. We appear to be on the edge of an acting Title II and generally codifying the idea that, at least in the U.S., the internet is a utility for broad social good and wide-open access. That, over time, if it happens, will significantly insulate us from any accelerating attacks for interconnection. I imagine we would likely live out the current deals, and that's what's in our plan.
Reed, if I could add, just on the financials, Rich, we don't talk about the specifics of a deal, but we continue to be very happy with the shift to managing our own CDN. The percentage of our expense that's spent on streaming delivery continues to be quite modest relative to content.
Mark and Rich, why don't we hit one more question each, and then we'll wrap up.
Let me throw one to Ted then. Ted, just give us an update on the Disney content. I know some Disney content will be streaming into that key Canadian market this year. Going forward, I think there's a very large library of Disney content that will be coming on. Just some color about how big that opportunity is or how much content that is and what kind of impact you think that could have in terms of filling out the palette or whatever of offerings to families on Netflix.
Yeah. Unique to any other studio, we're excited about the Pay 1 opportunity with Disney because those movies are not just movies. They're amazing family content that gets watched over and over again, forms great loyalty with our subscribers, and it's a real trust brand for parents as well. We've really been expanding our relationship with Disney, even in the Pay 1 window, which I have been fairly dismissive of with other studios, including coming on in Canada this year and then coming into the U.S. next. I think that's going to be a very long-term relationship. It's as global as you get in terms of content. We saw the success of "Frozen" this year all over the planet. It's very consistent with our desire to be more and more global with our programming.
Last question from us, although it'll be a two-part question. The first piece coming on the DVD front. Obviously, DVD still supplies a lot of profit, David, to your financials. Just curious, given the comments that Outerwall had today, that their DVD business seems to be falling pretty precipitously as they look into 2015. How do you think about the DVD business and the sustainability of those profits? Then just a final wrap question for Reed. You've been so vocal on the Comcast-Time Warner merger and the dangers it poses. Are you increasingly confident that this deal gets blocked?
Well, Rich, let me take your question first. On the DVD, I continue to think it's going to have a long tail. If you look, in 2013, we lost 1.2 million of our DVD subscribers. In 2014, we lost 1.1 million, so slightly less. The margin has held steady for two years if you look at the contribution margin for the DVD business. It's going to continue to decline. We don't have any illusions on that. We think that there's a lot of people for a lot of people in rural areas and other cinephiles where the DVD makes sense for them. At $8 a month, it's a pretty inexpensive add-on. We'll just continue to provide great service for those folks that really want it.
Rich, the key difference with Outerwall is Outerwall or Redbox is very new-release centric, so it's vulnerable to the pay-per-view substitution, whereas a broad selection renter like ourself on a stable business is much less sensitive to that. Yes, question on Comcast-Time Warner. We've been vocal on the issues that would be presented to U.S. society if there's one ISP that initially would be 40% of broadband households, and as DSL fades pretty quickly, would be over 50% of U.S. households. We think that's a tremendous amount of power in one company, so we think it'd be wise policy for the U.S. to block that merger. We've been consistent on that. Whether it happens or not, we don't really have any direct sense. All we can do is advocate for what we think is great policy and see what happens.
Do you agree with the FCC moving what is broadband definition up to 25 Mbps? Does that make sense to you?
Absolutely. Once you've got an Ultra HD video stream, that's 15 Mbps, just a single stream. You're going to want video conferencing, you're going to want online learning, you're going to want all kinds of different applications, monitoring of your home, these kinds of things on video. 25 Mbps is a kind of baseline for the next five years as opposed to the past five years. With that, let me thank everyone for joining us on this call. Thanks to Rich and Mark for conducting the interview. Thank you all.