Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Netflix 4th Quarter 2012 Earnings Q and A Session. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time. As a reminder, today's conference may be recorded.
It's now my pleasure to turn the call over to Ellie Mertz, Vice President of Finance and Investor Relations. Please go ahead.
Thank you, and good afternoon. Welcome to the Netflix Q4 2012 earnings Q and A session. I am joined here by Reed Hastings, CEO and David Wells, CFO. We announced our financial results for the Q4 at approximately 1 p. M.
Pacific Time today. The Shareholder Letter and the Q4 financial results and the webcast of this Q and A session are all available at the company's Investor Relations website atir.netflix.com. As is our standard practice, we will begin the call with questions received via e mail. Please e mail your questions to irnetflix.com. After e mail Q and A, we will also open up the phone lines for additional questions not covered by the e mail Q and A or the investor letter.
The dial in number is within our investor letter, so let me repeat it now. Please call 760-666 3613 if you would like to get in the queue. We may make forward looking statements during this call regarding the company's future performance. Actual results may differ materially from these statements due to risks and uncertainties related to the business. A detailed discussion of such risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including our annual report on Form 10 ks filed with the commission on February 10, 2012.
A rebroadcast of this Q and A session will be available at the Netflix website after 6 pm Pacific Time today. Now let's turn directly to questions. As is our standard practice, we've organized the questions by topics as we've received them this afternoon via email. First topic, questions on domestic streaming. To what extent would you attribute the growth in subscribers to mobile, particularly tablet adoption?
How much of usage is over mobile devices? Same question for Connected Television.
Both the rise of tablet phones and the rise of smart TVs are very helpful to us. And they're really the beginning of a trend around Internet connected ecosystems with devices. And certainly the more convenient those devices get, the more people will feel comfortable watching and enjoying content on a wide range of devices. Sunday including Google Glasses, Internet Watches, all kinds of scenarios over the next 5 years and as well as multi screen scenarios where you use your tablet or phone to choose content on the TV. So what we'll see over the next couple of years and we saw in this fall also was more and more consumer adoption of Internet connected screens, which are both tablets and smart TVs.
What's the percentage likelihood that you increase the price of your streaming plan over the next 12 months or even over the next 24 months?
We're happy at $7.99 and not speculating on the future.
You talked about improvements in both voluntary and involuntary retention. Can you give us some color on where churn levels are relative to historical numbers? Are you back to pre fall 2011 levels?
That was a really different business when it includes DVDs. I'm not going to focus on that comparative reference. But what we are doing is seeing nice improvement again relative to this last year when we've been on the straight streaming side. And we'll continue to look at that. The fundamental though is not to focus or we don't focus on churn because we really want to make it easy to quit.
I know that sounds strange, but we spend a lot of time so that if you leave you have a really good experience and that makes you much more likely to come back in. And we think that's the right way to build a long term growth in paid ads, but it does result in easy exit. And I would say that our rejoins continue to be a very strong channel for acquisition and that continues to be the case. We've seen that in Q3, Q4 all the way through the quarter and that's a function of that of people flowing in and out of the service and because we make it easy, they don't feel trapped by a contract and it's very easy for them to come back in the service when their lifestyle warrants signing up again.
How much confidence do you usually have at this point going into Q1 relative to other quarters given all the sub adds that come in early January from holiday devices?
It's marginally better than other quarters in terms of percentage of the quarter's numbers that have come in by the 20th, but it's not usually material.
All right, moving to questions about content. First, questions on the Disney deal. You made a bold and expensive move with your output deal with Disney. Presumably, the magnitude of the Disney deal will result in your devoting less content dollar resources elsewhere, even accounting for subscriber growth. What types of content are likely to be sacrificed as a result?
Well, the way Payone deals work is you pay per film. And so the flow in 20 16 that would hit in the second half of twenty sixteen are relatively small in total payments. And you don't really get a full load of the payments until 2018. So it's a long way off. We've got a lot of content to look at between now and then in terms of what generates the most viewing and satisfaction and a lot of flexibility to build the best service that we can by that point.
What changed the attractiveness of the Disney content, which last year only accounted for 2% of your streaming hours? Was it solely the ability to be exclusive? Was it the Lucasfilm acquisition?
It is pretty amazing that the Disney content when it was on our service Starz was only 2% and it just shows you how much incredible great content that we have that content as good as the Disney content could only be 2%. Going forward, in addition to the straight Disney content with the Disney Marvell content and the Lucasfilm, so it will be bigger than it would have otherwise, but the rest of our content is growing. The big thing that we're excited about with the Disney content once it eventually flows in is it's fully exclusive to Netflix. And as we've been talking about we're more and more interested in exclusive content. Yes.
I think it hits that point of differentiation that we've articulated before as part of our content strategy. And that exclusivity allows us to have that differentiation in the long term.
How are the terms and conditions of exclusive Payone deals such as the recent Disney deal similar to or different from typical content deals?
We don't typically discuss terms on individual deals. I would say that deals like the Disney deal and other output style deals tend to be more cash intensive upfront, but other than that are not remarkable anyway. And you pay per film based upon the box office performance.
Are there any material holes in your content library still in terms of studios or categories you feel you need to have?
I would say there's much more than holes. There's vast amounts of additional content that we want to acquire as we grow. And the virtuous cycle for us is to gain more subscribers and get more content, gain more subscribers, get more content. And what propels our growth is that continuing content. There's no specific hole there as we'd like to get more movies, we'd like to get more prior season television, we'd like to get more originals.
And in general, as we grow, we'll be able to deliver on that more and more for consumers.
Netflix described its library in terms of 3 groupings: movies, serialized TV and proprietary content. The first two buckets are extremely large compared to proprietary content. Should we expect a large slate of proprietary content that launches in the future? Does your hierarchy suggest that despite being small, the proprietary content value is on par with movies and serialized TV?
Well, it's early for us on the proprietary original content. We'll know a lot more maybe on the July call after we've launched House of Cards and after we launched Arrested. So we'll be able to comment a little more and at that point we'll make decisions about how much we want to invest in it and we want to increase the investment, keep it about the same, do less. We'll have a lot more now. And so we're going to take our time and for the next 6 months just focus on the current original.
And I'd say the bar on that, we've said this before but it's worth articulating again. The bar on the originals is that it performs in similar to other third party license content that is exclusive. If the originals are exclusive for us and they are, we would look to do that better inside. If we can't, then we wouldn't pursue that. There's the brand halo effects and the PR effects that we get from it and those are very, very attractive.
But that comes from the exclusivity as well.
Maybe some more questions on originals. This year you will have 4 new original series on Netflix plus Lily Hummer. What are your plans for 2014? Presumably you have some idea now given the long lead times on original programming. What percent of content cost do you envision for original programming next year?
Again, we haven't made the decisions for next year in terms of what percent of the budget will be original content. We're going to look at the results, look at the viewing, the overall press attention, subscriber acquisition trends, all of the factors before making those decisions.
How do you plan to market House of Cards? How does your approach to marketing the show differ from how traditional cable networks market their shows? Do you envision creating a section to highlight original programming within the Netflix service over time?
The huge benefit is that we don't have to advertise 8 p. M. On a Thursday night tune in. We get to let people know about the show and they can watch it any time at their leisure. And so that lets us be much more efficient in our marketing and much less focused on a specific date and time.
Mostly we're going to be able to generate tremendous demand through our service by targeting the specific online ads on the service, the content for the people who it would be relevant for. So we'll get tremendous viewing from our 33,000,000 global members. Then in addition, we're also generating a lot of attention in certain cities doing a highly concentrated large scale promotion to be able to see what the effects are to stimulate the creative community awareness and generally build a lot of buzz around those shows. So we're very much looking forward to that launch.
For a few of Netflix's upcoming original programs, please discuss the specific rights Netflix owns and the monetization strategies of the other rights holders. Which monetization channels, if any, does Netflix view as most complementary to its streaming business over time?
Well, I think that's something we'll learn over time. If you look at HBO, they experimented and have had great success with DVD as a channel for their content. They did some syndication, but then they pulled back on some of that. And I'm But The current originals mostly were our 1st window licensor. And for example, on House of Cards, Media Rights Capital owns the other rights and they'll be monetizing those downstream from us.
So we'll find different structures as we go forward. But primarily we're focused on monetization on our platform.
You said that Arrested Development could bump subscriber growth in Q2. Can you point to any good data that supports this view? Expressions of interest by Netflix subscribers, surveys that point to interest or anything like that, how would you compare interest in Arrested Development to interest in other originals queued up this year like House of Cards and Hemlock Grove?
Well, it's a great question. In the case of Hemlock Grove, it's a new property like House of Cards. And the same with Orange is the New Black. So that will take some time to develop for those shows. Arrested is unique because it's already got a big brand.
And so it's going to be more front loaded in its overall viewing and attention. In terms of hard data, it's very hard to predict what will happen in terms of membership in Q2. So I think what we'll do is we'll be cautious. It's not particularly built into our forecast. And then we'll see what happens in Q2.
And then from that basis we'll be able to project going forward. A
question on accounting for originals. Over what period of time are you amortizing the upfront cash spend on important originals this year, particularly Arrested Development and House of Cards?
Well, the accounting for originals is similar to or is consistent with the accounting for our full library, which means we amortize the straight line over the license period. I would say the question was asked about amortizing the cash. It's not the cash that gets amortized, it's the expense of that full title. And so when we have quarters like Q4 and we talked about Q1 being intensive for originals, We'll pay depending on the terms of the deal heavy upfront payments even upwards of 50%. And then that content will come into window later in the year.
So you'll see the cash come out in terms of the cash flow, but there's no offsetting expense. Some of it flows into prepaid content as you see, and you'll see that cash be left as we go through the year and the expense starts to catch up.
As you look at original Netflix content, what are your expectations for how it will perform in the U. S. And international markets?
Very strong.
How do you decide which original programming to invest in in stream? Do you look to reach certain segments of your sub base or best available programming or other factors?
Well, again, we're at very early stages. I think Ted has done a Ted Sarandos has done a great job of different types of content. Hemlock Grove and House of Cards are quite different. I think you'll be very pleased with Orange is the New Black. So and of course the rest of development will be a huge winner.
So I think it's just too early for us to have any great confidence. We're staying flexible, learning and we'll grow into original program step by step.
A few questions on competition. Do consumers need to choose between Netflix and Amazon? In the past, you've referred to HBO and Netflix along the lines of baseball and football. Do you feel that way about Amazon too? As Netflix and Amazon both have exclusive content and original content, will it make sense for consumers to have both rather than choose between them?
Do you think the 2 services will take on different identities and be the leading 2 leading digital cable networks in the future?
Well, some of this is already happening in the UK where LoveFilm, Sky TV Now and Netflix have nearly no overlapping content. And as the press tone is shifting in ways to be getting both or getting all 3, as they're different channels basically serving someone's total need. Of course not everybody has infinite budget When anybody's budget is tight, there's real competition for choosing us if you need to choose. But I do think that many people will choose to get multiple services likely compete with HBO. Today in the United States, Amazon Prime content has started to be mostly a subset of ours and is then going to add original content and Hulu has done the same.
And so I think over time there's a pretty good likelihood that we'll compete like we compete with HBO that is we'll all have different shows and all be competing for dollars and attention, but not have the same content.
Can you help us understand your methodology behind the top 200 title comparative analysis? Did you use ratings, actual viewings, etcetera?
We used actual viewing hours in Q4 on our Netflix service. So in the U. S, those would be for each title in there, not just a season but a title of an entire show, how many hours that was viewed basically during Q4. And that's the methodology behind that.
Moving to questions on international. On previous calls, Reed has stated his intention to continue to reinvest in international expansion once we get back to profitability. Can you update us on your current thinking on this topic?
I can let Reade speak or I can just reiterate what we said last quarter, which was there's 2 gating items or gating conditions. 1 is global profitability, which we're really pleased that we continue to demonstrate even with the Nordisk launch in Q4. And the second condition being that we're pleased with the path of our existing investments. So those two conditions still hold.
2 quarters ago, Reis spoke about raising the content spend in the U. K. Do you have a sense where the expanded offerings in the UK have impacted subscriber growth or churn in any meaningful way?
Yes, absolutely. We've continued right from inception and frankly in all of our territories in Canada, Latin America and the different nations in Europe to expand the content. And expanding the content has definitely increased viewing, decreases churn, makes the service better. So we're very eager and ambitious to get more and more content on all of the services, including the UK.
Has the competitive environment in the UK evolved over time? In the UK, are you seeing different levels of net adds, churn, etcetera, given a potentially more competitive environment?
The only real change in the UK locums in there from our launch at the same price that they've always been at has been Sky's on TV now, which launched in the fall. So that's increased. There is active marketing going on between us. And as far as we can tell, those services are doing well also. It comes back to us, it may not end up as a 0 sum game.
We want to get the biggest piece of the pie, but it may be that people subscribe to multiple of the services.
Can you tell us if the payment changes made in Latin America had a material impact on sub growth in Q4 or will it help the Q1 number? Helped a
little bit in Q4. It will help a little bit more in Q1 and we've still got progress to go. I'd say it was an incremental improvement.
What penetration of sub levels do you need in any given country in say Europe or Latin America to reach breakeven? Roughly what is the time to achieving that math?
It will depend by market. In some markets we'll get there relatively quickly, others will take longer. And there's no precise level of penetration. It depends, for example, in Latin America, we'll end up at breakeven at lower overall household penetrations because the Internet is at lower penetration. So I would say each market is unique in this way.
In the past you said you believe Netflix can grow its domestic sub base 2x to 3x out of HBO long term. What are your expectations in the various international markets that you have entered?
Well, let's see, our hopes would be that we should get to similar house Internet or broadband household penetration levels as we can in the U. S. But until until we actually prove that that's possible, we're a little cautious on forecasting it. So in principle, when you look at Internet usage or YouTube usage or television, paid television and free television, it's pretty ubiquitous across all these societies. So the notion that over 10 or 20 years, Internet TV is as strong around the world as it is in the U.
S. Is pretty sound.
Can you achieve long term international contribution margins equivalent to the U. S. Without the same amount of scale in any single region?
No, I think we would need the same amount of the contribution margin is a factor of the scale. So I think we would need to get to that scale. It's scale and competition. I would always just add in competition. So those two things are the primary determinants of long term margin.
You expect more modest quarter over quarter improvements in international losses beyond Q1. Is that because of lower sub ad expectations or an increase in spending relative to sub growth?
A little bit of both.
To a question on the DVD business. You appear to be marketing DVD subscriptions to streaming only subscribers again. We're noticing more e mail promotions, offering a 3 month trial to the DVD program. We really want to push people back to DVDs. Isn't it a bit confusing to consumers given your intense focus on streaming being the future of media consumption?
I would say this is David here. I would say it was a program that we did around the holidays and into January. I think you'll see us use it sporadically. I wouldn't describe it as a large program. It was incrementally positive to our DVD subscription.
And we faced a lot of criticism 12 to 18 months ago that we weren't doing enough in terms of monetizing some of the sales search opportunities on the DVD, on the website and so forth. And I think we've cleaned a lot of that up and the e mail program or campaign that you were talking about is an evidence of us doing a little bit. We AB test a lot of this and usually when we do something, it's going to be an incremental positive.
So a question on Open Connect. Could Super HD and 3 d streaming theoretically be extended to ISPs without Open Connect without significant engineering investments? Asked another way, is Open Connect a prerequisite for technical reasons or more for strategic reasons?
It's a mix of both. I think what companies do with new features like Super HD is they focus on newer platforms, whether that's Siri only available on an iPhone 5, say, or something like that. And it both gets people to adopt the new platform and allows you from an engineering side to concentrate on a simpler use case. And being able to support super HD and 3 d is demanding. And Open Connect is free to all ISPs.
So we don't anticipate much of a problem. And I think what we'll find is by doing that, we can be more efficient not going through middle men.
A question on streaming delivery costs. Did Open Connect drive delivery costs down in Q1 or should it in Q4? Or was it better pricing from suppliers?
The delivery cost, I'm not sure you could read into that as a result. I would say that our Open Connect program has investments that are front loaded. So to the extent that we're rolling out our Open Connect program, there's a little bit of expenses that are loaded into Q4 and into 2013, depending upon the pace of our rollout and that those should moderate going forward. I think the question is in reference to the letter we said that the U. S.
Contribution margin better because of it's just some delayed expenses that will show up relative to planning in Q1 than Q4. You for the clarification. Yes, some timing around expenses for Q4. But in general, delivery is something that relatively small percentage of our total cost. It works quite well.
So it's relatively inconsequential.
A question on the social experience. Please discuss Netflix's experience with social media integration in international markets. Could you provide some common examples of how Netflix uses social media in international markets? How do you expect social integration to impact your U. S.
Business?
It will be a nice thing for us. I don't think it's going to be huge. It hasn't been huge for us internationally. It's very segmented. There's a section of a group within each country that loves social and they're really into it on Netflix And of course over time those ratios will shift.
But for now all of our social work really caters to a specific typically younger but very social centric demographic. So it's a good investment. It's making good progress. We're thankful the VPDA passed the change to it and we'll continue to make progress on this firm.
Now questions on the financials. How should we be thinking about 2013 in terms of profitability and margin similar to 2012 as a heavy investment year or year will we start seeing leverage in the model? If so, how much?
Well, we should see leverage in the model. We haven't made decisions in the back half of the year on international expansion, so obviously that will matter as well. And we'll probably have 7,000,000 reasons not to give full year guidance right here. So we'll avoid doing that this year.
We might also make the point that we saw considerable leverage in the model in 2012 in our domestic streaming segment where we saw 700 basis points of margin expansion.
Yes, we
can be confident that it won't be as big as that. We don't.
As profits overall are somewhat exceeding guidance, do you think you might increase investments in marketing, content and or additional country rollouts in the near to medium term?
No, that's not directly affecting us. As we outlined in the letter, we're feeling good about those plans.
You talked about the goal of 100 basis points of contribution margin expansion sequentially in domestic streaming, but you don't indicate how far out that goal extends. Can you talk about what your thinking is related to long term I. E. Multiple years out domestic streaming contribution margin?
It will be a function of competition and how much of the market, the total addressable market that we can collect. So for right now, we're focused on the target of expanding that routinely by growing faster basically in our content, but expanding our content expense.
What is the size of the off balance sheet content liability?
So I think the question usually I get on this is related to the contractual obligations table. The streaming obligations were $5,000,000,000 as of ninethirty, so as of the end of Q3. That corresponds to a 5.6 $1,000,000,000 number as of the end of twelvethirty one. Dollars 2,500,000,000 of that is on the balance sheet. So $3,100,000,000 is not on the balance sheet.
Do you expect to be free cash flow positive for the full year?
We don't provide full year guidance on that.
Can you give a sense of how much money you plan to raise in the debt offering? Did you consider using stock? Would the potential new debt financing be straight debt or could it be convertible debt? When would it
occur? So no on stock, no on convert. I think the plans that we put in there are still sort of an opportunity and exploration base. And it's really based on the 20 plus year lows that we see in the debt market. It's a good time to lock in very low cost long term capital.
So we'd be remiss in not looking at that opportunity.
Will additional financing be needed if you decide to open new international markets in late 2013 or early 2014? No. Your marketing costs and domestic streaming have fallen 24% year over year, yet you've been able to grow your top line significantly. How sustainable is your Q4 marketing spend? And how do you think you're gaining efficiencies in marketing?
Very sustainable on the Q4 marketing spend. And the second part of that? I want efficiency. The main efficiency comes because most marketing is our members telling their friends about Netflix. It's not the ads that we pay for.
And as we have more and more members and as they are happier and happier with the service, then that benefits the growth and then you don't need as much paid marketing. I would say also we put in the letter about we're expanding our content expense and that has benefits in terms of getting people excited about the site, retaining better, all of that is a quasi marketing expense. Is the rest of development a marketing expense or a content expense?
Will the company break out cost of subscription versus fulfillment expense for the quarter?
Not likely. Fulfillment has grown to be a pretty relatively small portion of our cost of revenues as our BBB business continues to scale down. It's a small portion of cost of revenue.
Great. That's the end of our e mail questions. Now I'll turn it back over to the operator to take live call and questions.
Our first question comes from the line of Mark Mahaney with RBC. Please go ahead. Your line is now open. Hey, great. Thanks.
And congrats on
the quarter. I don't think I've said that on an earnings call in 5 years. And Reed, I know you don't run the business near term, but congrats on the quarter anyway. In terms of rebuilding the brand, Reed, you talked a year ago, year and a half ago and said it would be a multi year process in terms of rebuilding the brand. As you think about and survey your customer base now, do you think you've rebuilt the brand hit that you do you think you've recovered brand hit that you took in the wake of the controversies?
No, not entirely, Mark. There's still an echo and a bruise. And so we still are extremely thoughtful and careful about what we're trying to do because it wouldn't take much to have the issue flare up again or for us to lose trust. So you might say we're on probation at this point, so we're out of jail. But we've still got, as we had initially talked about, a 3 year timeframe.
We've still got a year and a half of probation.
And then one follow-up question. In terms of the content requirements or likes, the ones of your subscriber base, have you seen a noticeable change in the satisfaction level of your subscribers with current content? Or do you still see a there's always going to be gap, but do you think that that gap kind of narrowed a little bit over the course of the last 3 to 6 months?
Yes. That would be mostly what drives the improvement in voluntary retention is that satisfaction with the content. In addition, it's satisfaction with the user experience, how quick and easy it is to choose, how well the personalization works, how well the screening works. So that all comes together in that feeling of satisfaction. So, Mark, I would say that the other contributor to that is people when 2 to 3 years ago when they first experienced the streaming offering had expectations of a DVD full content library.
I would say those people are starting to be a little bit more aware of what's available in an Internet channel and an Internet network offering like we have. So the expectations gap might be narrowing as well.
Thank you, David. Thank you. Our next question comes from the line of Doug Anmuth with JPMorgan. Please go ahead. Your line is now open.
Great. Thanks for taking the questions. Just wanted to ask about content costs, sort of the outlook for 2013, if you could give us some sense of how you're thinking about the increase here and perhaps in relation to what you did from 2011 to 2012? And then just secondly, can you give us more detail on how you improved that involuntary retention? You mentioned processing payments and recovering members better.
So if you could give us some more color there.
Sure, Doug. In terms of content costs, we continue to expand our content library. So we expect that to continue to increase. It's going to increase slower than revenue. So from that, you can infer that the year over year increase for 2013 will be less than the increase that we saw in 2012.
And then the second piece of that question was around how we improved the involuntary retention numbers and that was through looking at a number of optimizations in terms of how we handle folks that go on payment hold.
Thank you. Our next question comes from Youssef Squali of Cantor Fitzgerald. Please go ahead. Your line is open.
Thank you very much. Hi, Reed and David. Just a couple of questions to follow-up. Reed, you spoke about offering more personalization on the site. And if my memory serves me, I think last time you talked about it several quarters ago, and I think you talked about maybe offering personalization at least of queues by year end.
So one, wanted to see what the holdup there was. And second, what other ways can you improve personalization on the site? And then I have a follow-up. Youssef, we're still in testing on the feature that sometimes called profiles where you set up an explicit view, say, view, your kids, your spouse and then each person gets their own area. And we're trying to find models that give great benefits to consumers but are also very simple.
And so that's where we're involved in a lot of testing. And when we get that to a great state, then we'll roll it out to everyone. Is that still imminent kind of launch or has the date on that been put back full? It's not imminent. We're still in testing mode.
We think we've got in something like that you don't want to roll it out and then change it a lot. So you want to do all the tuning in test mode. So sometime over the year I'm sure we'll launch it assuming we find a model that works really well with our testing, but it's not imminent. Okay, great. And then just lastly, as you integrate with Facebook for more sharing or social personalization, I was wondering if you'd have any interest in participating in Facebook's gifts program, which is something I'm sure you're aware of that they launched not too long ago.
And they have other retailers like iTunes, etcetera. Is there anything that would preclude you from wanting to participate or being on that program? No. There's nothing that would preclude us. Is there interest on your end?
I should know more about it as a Facebook Board member, but it's very new. And so I'll take your hint that it's a good thing and I'll go spend some time on it. Okay. Thanks a lot. Congrats.
Thank you. Our next question comes from Scott Devitt with Morgan Stanley. Please go ahead. Your line is open.
Hi, thanks. Reed, now that the U. S. Business has gotten back to this level of strong growth, I was just wondering if you could revisit that U. S.
Market opportunity, how you're thinking about it, that $60,000,000 to $90,000,000 figure and the points of friction that you're facing from here to grow that U. S. Sub base to a much larger level? And then secondly, for David, in the 1Q guide, I think you noted that 2Q, you're not specifically attributing any subs to Arrested Development. But is that also the same thing for House of Cards?
Is there no specific attribution for House of Cards in 1Q? And are you planning any specific TV spend for either of those two shows? Thanks.
Scott, think about it in terms of the content layers. So we're $27,000,000 domestic now. So the question is do we have good enough content to say get to 40,000,000? And then with that incremental content budget, can we improve the content such that with that incrementally better service, we can get to $50,000,000 And then similarly, we've got more money we can spend on more content. So that's one big growth vector.
And second is the overall change to Internet TV. It's not just us that's benefiting from this. If you look at Hulu's numbers over last year, they doubled from 1,500,000 to 3,000,000 subscribers. So people around the world are interested in Internet television because you can click, watch, pause, control, choose. It's just a better paradigm.
And so as that tailwind continues to develop, that's very helpful. And then finally, it's what happens in the consumer electronics space. It was only 6 or 7 years ago that the iPhone came out. We've had tremendous right now on iPhone 5. So if you think about 6 or 8 years from now, by extension will be the iPhone 10.
And how incredible will that be for not only viewing video, but maybe controlling video around all of your house and choosing and how immersive and all of that helps Internet video services like our own. So those are the 3 big vectors, the content growth as we grow, the general trend towards Internet TV and the consumer electronics ecosystem. And then Scott on your second set of questions on House of Cards, we think that it's going to be a pretty small benefit for Q1. We talked about how overall it's a generally small share of ours. Really happy about the quality and the fanfare that we're getting with the show and there'll be some publicity but overall pretty small benefit we think to subscriber addition.
And then TV spend for House of Cards, there'll be some media spend, likely very little TV that focused again on sort of influencers in big markets. And would it be fair to say, David, that it's a very small impact of housing cards that's modeled into our guidance forecast. And since we have no data to base it on, that's the conservative and correct approach. But some of us are optimistic that it may in fact be substantial, but we really don't know and we don't want to count on it until it happens. I would say that's fair to render.
Great, great. Thank you.
Thank you. Our next question comes from Tanal Lohi with S&P Capital IQ. Please go ahead. Your line is open. Hi, thank you
so much. So I guess this question is for David. As I think about how you manage your working capital and swings that resulted from the content licensing payments for originals. I'm just kind of wondering if there's perhaps a better parameter that can aid kind of reduce the swing with free cash flow, not necessarily quarter to quarter, but as you think about some of the levers that you might have, for example, perhaps deferred revenues and some other items. I'm wondering if this is the best way to think about that, just kind of managing it to the P and L expense as opposed to something that kind of gives you a little bit more control, granted that the originals are the highest swing factors?
Any thoughts on that would be helpful.
Well, I think that the only not quite clear on your question, but if we looked into alternate methods in terms of joint sensors and other vehicles to reduce that cash consumption up front might be the only available method to us. And that we prefer the simplicity and we may get there sometime down the road. But in terms of the present course, overall the content spent on originals is a relatively small part. It's outsized in terms of our cash because it's so lumpy up in the 1st couple of quarters.
And just a follow-up on that, on how you think about managing the risk of your original content in terms of showing that you actually collaborate with 3rd party producers versus shows that you actually own outright? And how does that factor into your calculations of cost per viewing hours in terms of your commitment to either kinds of shows? Thank you.
It's Reed here. The good news is any one show isn't an ongoing commitment. So it's a relatively fixed bound. And it might be that at some point we produce a show that's not very good. But what that really means is we only get a little bit of viewing on it as opposed to a lot of viewing.
And when you think about the size of any single original in the size of our total multi $1,000,000,000 per year content budget, it's not a huge risk.
Thank you.
Thank you. Our next question comes from the line of John Blackledge with Cowen and Company. Please go ahead. Your line is open.
Thanks. Two questions. The first on streaming content spend. Given the current level of streaming content spend after several years of large step ups, Is there a normalized longer term rate of growth or a range of growth that we should be considering or will we potentially see lumpiness on a year in, year out basis dependent on available content? And then for David, as we think about a potential debt raise, is there a certain level of cash on the balance sheet that you're comfortable with?
Thank you.
In terms of the lumpiness, I presume there will be some quarters where it's a little bit lumpy where we sign a big deal. But generally any big deal we would know about several quarters in advance. So we would have that visibility to build in and to let everybody know and then return to the kind of margin expansion that we're targeting. And we're feeling our way along as we grow in the market and creating new service And that's why we're focused on the 100 basis points a quarter versus some specific operating model because we want to get the operating model to be better and better and better. And to do that, we have to really feel our way along and make sure that it's consistent with increasing viewing and with really good and declining or improving voluntary retention.
I'll turn it over to David on the cash. And John on the cash, as long as the costs are low, more cash is better. But I would say this is again about the opportunity presented by the debt market and the ability to get really low cost long term capital. And for us to preserve the flexibility of if we see massive success with originals to preserve the flexibility to expand that program and to develop more down the road. So I don't think there's a magic number.
This is about sort of long term planning for the business. That's
great. Thanks so much. Thank you, sir. Our next question comes from the line of Karl Kejem with Sanford Bernstein. Please go ahead.
Thank you. I have
2 questions, 1 on content, 1 on the market potential. First on content, When you lost Starz, you said that it accounted for a small portion of viewership time, enhanced its loss, had little impact on customer acquisition churn, etcetera, suggesting that no specific content deal has material impact on the customer metrics. If you can lose any specific content deal with limited impact on the metrics, how do we think about the positive impact of content deals such as business or time owners, where presumably you are paying a premium, for example, for exclusivity? Or even how do you think about the investment in original content? On the market potential, if you grow your content offer as you described a few minutes ago and succeed in getting 50,000,000 or 60,000,000 households in the U.
S, how do you think the cable companies would do would change their broadband pricing levels or structure? Thank you.
Sure, Carlos. That's a good question, which is why do we talk so much about the increases in content about propelling our growth but when we lose content we say it doesn't really matter. And I think the inside is your part about any specific piece of content. I think if we lost enough content, that would definitely decrease viewing. And similarly, when we increase content, we have to increase it by a lot to make a difference.
Adding just one movie or something like that or one show isn't going to make a huge difference. The general view we have is sometimes the content additions are so small, 1% of viewing that we're not going to see a big difference, but that will accrete. And if we do a lot of that, that will help. And then second on terms of if we get to $50,000,000 or $60,000,000 how does the relations with cable networks change? I think as long as we're building great audiences for them, even though if you look at what we've done for Breaking Bad in terms of building a bigger audience for debuting on AMC and if you look at Mad Men, that's a great win win.
We're incredibly good at the prior season. They've got the current season and they get bigger and bigger audiences. And then second, if it's off air like ABC's loss, then I think it's pure incremental money for them, the fact that we're able to monetize it well. So we don't see a huge conflict there in that licensing dynamic.
Do you think there is a conflict potentially with the cable companies like Comcast, the Piedmont Cable and Cox? If you've increased your subscriber levels and using their pipes to just meet the bids for video? I mean, could they change the pricing of cable broadband assets?
The cable broadband is very profitable for them. And the more that people want to do high definition Skype and high definition Netflix, it's inevitable that there's going to be new high speed packages that are more successful for those ISPs. And so they've got an incredibly profitable great business doing data and that's great for them. It doesn't conflict with us. In fact, we like high definition Skype are a critical application to help them drive more adoption of the higher end packages.
And in that way we work really well with them.
Thank you.
Thank you. Our next question comes from Tony Robles with Janney. Please go ahead. Your line is open.
Hi. Do you guys believe that Amazon was in their bidding for the Disney content? And what's your appetite for chasing down Sony Pay 1?
Tony, we don't know on Disney, Amazon and Sony Pay 1. Our appetites just like it was for Disney. It's strong and we're interested and we'll see how it works out. There's no specific piece of content that we must have and it'll just be a bidding negotiation.
Perfect. Thank you.
Thank you. Our next question comes from Nate Chen with Bank of America. Please go ahead. Your line is open.
Yes. Thank you. So if you look at your net sub adds and then estimate some gross sub add that you had coming in for the quarter, In domestic streaming, you said in the past that 30% of those or a third roughly that you touched within the last year in our returns. Has that number changed and could you think longer than a year, how much of your market the total market have you touched at this point do you believe over the course of your business?
It all depends on, Nate, on how you count an entity. You count a household where you have 2 roommates are and they try both under separate e mail. Lots of people have multiple e mail addresses and several of them are willing to enter multiple credit cards to get multiple free trials. So there's no clean notion of that. We could tell you how many e mail addresses have we touched.
But mapping that into people and households is pretty tricky.
Makes sense. Thank you.
Yes. And Matt, on your first question, it stayed roughly about the same 10ths of percent. Okay.
Thank you, sir. Our next question comes from Daniel Ernst with Huttig's. Please go ahead. Your line is open.
Yes, good evening. Thanks for taking my call. Three questions, if I might. First, kind of big picture on how you're looking at the business and growth. Profitability has been reasonably above expectations the last couple of quarters and guidance for the coming quarter and historically you guys have attempted to manage perhaps not making too much profits and always are willing to invest in growth.
And how you're thinking about that in terms of new market rollouts or acquiring new content to really continue to separate yourselves from competition's color on investing, prop expectations versus growth investment? And then secondly, in a related comment, back in the day, 8, 9 years ago, we used to get market by market updates. You're at X% penetration in San Francisco and we've got the profitability in the next number of months. And can you give us some sort of directional color like that on international markets in Europe and maybe update on Latin America there? And then 3rd, sort of a viewership question, I know people ask about this before, you haven't really given us a lot of color, but what kind of is the mix of viewing between connected devices to the TV, the Xbox series and Apple TVs and DVD players and TVs that have Netflix built in versus tablets and any computers?
And how does that look domestic versus international, where perhaps some of those devices are less connected to TVs in Europe or Latin America, so far on how that mix and usage is? Thanks.
Daniel, you started it off very nicely about talking about our growth above expectations last year, but I think we have us confused with a different company since last year was difficult on that front. But in general, we're pioneering this new service, Internet TV as our other firms. And from a macro level, there's a lot of great growth vectors because the Internet makes certain user experiences much more enjoyable at lower cost and that's what's propelling our growth and we are very excited about the growth. In terms of penetration, in the DVD days, we were operating on the San Francisco Bay Area for several years with local delivery before we were doing the rest of the country. So that's why we use that as the comp.
We don't really have an equivalent each. The U. S. Is reasonably uniform in terms of DVD viewing. Each nation is quite different and you wouldn't want to say every nation is going to be like Canada.
And so there's no useful proxying in that way. And then finally, your question was on viewership. And some nations are more smart TV centric and some are more PS3 centric and Xbox centric. But overall, you see a lot of similar trends which are tablets are growing somewhat in the absolute and somewhat at the replacement of laptops. Smart TVs are selling, people want to use them.
Netflix is the most important application on a smart TV. And then all of the individual devices like an Apple TV and Roku are doing well. So the whole Internet getting to every screen is just a big secular story that's happening and benefiting us.
Great. Thanks. And just to clarify, we were talking about the last couple of quarters being profits above expectations and your guidance there for next quarter?
Yes, Daniel, let me take a stab at that in your Part A. I don't we haven't in the past, Netflix has been very good about thinking about that next incremental $1,000,000 or $5,000,000 investment. Is it better in content, is it better in marketing, is it better in improving our interface and our product, we continue to do that. We're never perfect in sort of finding out that optimal frontier point, but we still continue to think like that in terms of that additional investment, whether it's better placed in an existing market, in a new market, in our product or in our content offering in domestic or in Amerisource.
Great. Thank you. That's all the questions we have time for. Reed, we'd like to offer some closing remarks.
Youssef, if you're still on, we are on Facebook gift, and I'm sure it's a huge opportunity. Thank you all for visiting with us in the conference, and we look forward to seeing you.
Thank you. Again, ladies and gentlemen, this does conclude today's program. Thank you