Good afternoon,
and welcome to the Netflix Q2 2019 Earnings Interview. I'm Spencer Wong, VP of IR and Corporate Development. Joining me today are CEO, Reed Hastings CFO, Spence Newman Chief Content Officer, Ted Sarandos and Chief Product Officer, Greg Peters. Our interviewer this quarter is Mike Morris from Guggenheim. As a reminder, we'll be making forward looking statements and actual results may vary.
With that, let me turn it over to Mike for his first question.
Thank you, Spencer. Good afternoon. Let's jump right into the results and the member variance from guidance in particular. But what changed during the quarter versus the outlook that you provided that made such a significant impact this quarter? And you did mention the content being perhaps a factor.
I think that's really something we haven't focused on in the past in terms of driving the cyclicality. So maybe if you could talk about those things.
When we're forecasting, Mike, in the beginning of the quarter, we make our best estimate. And as you can see over the past 3 years, sometimes we're forecast high, sometimes we forecast low. This is one where we forecasted high. There was no one thing. And if I think about 3 years ago, we were also light.
And we never really were confident of the explanation. Then we were $2,000,000,000 in quarterly revenue. Now we're going $5,000,000,000 And so it's easy to over interpret the quarter membership ads, which are a bit noisy. So for the most part, we're just executing forward and trying to do the best forecast we can. Do you want to add anything to that, Spence?
Yes. Thanks, Fried. Maybe I'd just add the fact that when we think about those paid net add forecasts, it's really about the marginal growth, Mike, on a subscriber base that's over 150,000,000 members. So we're talking about plus or minus 1%, 2%, 3% in growth rates on subscribers on an annual basis that are growing over 20%. So if we look at the trailing 12 months, we grew our member base by over 27,000,000 members.
If you take that forward to where we think we'll be at the end of Q3, we think we'll be on a trailing 12 month basis over 28,000,000 members. So we're really playing for the sustained increase in growth in our membership over time, and there'll be some quarter by quarter choppiness along the way based on things like seasonality and content slate and so forth. Can you provide a
little more detail perhaps on the gross ad versus the churn dynamic in the quarter? And clearly, there's the pricing dynamic I want to get to as well, but maybe we can just back up and look at gross ads versus churn and how that resulted in the net.
Yes, sure. I mean, generally, when we looked at it, the slowdown in subscriber growth was across all of our regions. So when you talk about our kind of top of funnel or gross adds, we saw that slow down across the board, which indicates to us some level of seasonality and kind of the overall, as we say, the kind of timing of the content slate. And also, frankly, maybe a little bit more pull forward of our subscriber growth from Q2 to Q1 because we had such a strong Q1 with 9,700,000 paid net adds. But we also did see in regions where we increased prices, we did see some elevated churn rates and lower retention.
So it was a combination of those two things. We think the primary story was around seasonality and timing and nature of our content slate, but pricing played a factor. Now the good news in all of that, as you saw, Mike, I think in the letter is that in the 1st couple of weeks of Q3, that growth has reaccelerated again. We're seeing both that top of funnel growth in acquisitions. We're also seeing improvement in those churn rates and retention back down towards those pre price change levels.
So overall, encouraged with the trends. And with regard to that pricing piece, too, it's worth kind of reminding ourselves and you that it's all that's all very revenue accretive. So while there may be some short term slowdown in subscriber growth because of pricing, that increased revenue is very good for our business and ultimately for our members because we reinvest the bulk of that back into great content and great product experience for our members.
Can we talk a little bit about that pricing cycle and where we are right now? So, 2 things, I guess, specifically. In the U. S, by June, had the entire membership base seen that price increase such that there wouldn't be a lagging impact in the September quarter. And then internationally, obviously, it's much broader.
Can you highlight any particular markets? Anything you can help us size the portion of your member base that is processing through those pricing increases?
Greg, do you want to take that or you want me to take?
I'm happy to do that. So I mean, in the U. S. Situation, we're through all those notifications. Obviously, in the international perspective, we've got different markets in different places.
But I would say just in terms of helping you size that, I mean, we built obviously in that into our forecast for Q3. So those effects we've already tried to account for and categorize in that forecast.
Okay, great. And then Spence, one other question with respect to the letter and the outlook. It's the 2nd consecutive quarter you've come ahead in operating income relative to your guide. You're maintaining the same full year guidance. I know that you've referenced the marketing, but help us there with, again, maybe why the timing.
From your perspective, forecasting hasn't been as clear given that it feels that you would know when certain marketing was coming through?
Well, it's marketing, we haven't, and Ted should chime in too, but we have some discretion as to when we choose to support titles. And so we're really, when you look at the back half content slate that we have, we're very excited about whether Stranger Things 3 already launching, but then shows like Casa de Papel and Crown and big movies in the 4th quarter and money sorry, I already mentioned money, sorry. But there's just there's a lot of content to support. So I think there was just really discretion of the team to move some and shift some of that marketing spend until later to the latter half of the year.
Okay. So with some of these pressing topics covered a bit, I mean, Reed, usually we'll start with an overview question. And so I guess, we're halfway through the year now. This dynamic perhaps aside, any change to your view of the business strategically overall? And I guess embedded in that is touching on that question of your confidence about the growth outlook going forward and why an investor shouldn't look at this quarter and say perhaps the business is approaching maturity more quickly than we anticipated?
Yes. I mean, if you look over the past 12 years that we've been streaming, in the beginning, there was Hulu and Amazon and YouTube and Netflix, and we've all been growing at tremendous rates over the last 12 years. And now it's really catching on in a big way around the world, and we're having a lot of new competitors enter over the next year. And I think our position is excellent. We're building amazing capacity for content.
Our product's never been in better shape and our rate of investment is extremely high. So if investors believe in Internet television, which I think is an easy one to get there, then our position in that market is very strong. And all of the key things are coming our way in terms of, again, stronger content and a stronger service.
And Mike, if I could just add on your topic of maturation, I would just also point out that revenue growth did accelerate by 400 basis points in Q2 versus Q1. If you look at our guidance as well for Q3, I think you'll see that trend continue as well. So financially, I think that's actually a sign that things are picking up or continue to grow very steadily.
Great. Thank you for that.
I'd also just add too on similar in the same vein, is on a show by show or film by film basis, we're also seeing hitting new heights in terms of viewer penetration and audience reach as well.
Okay, great. Let's expand the discussion a little bit. Greg, over the past year plus, we've talked about some of the partnerships that Netflix has struck with traditional video and wireless providers. I understand each can be different. There can be different accounting treatments.
But perhaps can you give us an overview right now where we are on partnerships, perhaps domestically in particular? How they're impacting the business? Did they have any impact during the quarter, of course? But just in general, what do we look like in terms of those impacting and where we might go from here?
Sure. So there's a long history of these partnerships starting back with sort of the simple device integrations, back to the Xbox and Sony PlayStation. But the latest incarnation is we sort of added more capability to each partnership from just simple device integrations and being able to access the experience, the sort of payment integration and things like that is this bundling that we are doing with PTV operators, with mobile operators. And to characterize where we are, we're still fairly early in that process, I would say, from a global perspective. But the bundles that we are doing are a nice incremental accelerant to our acquisition, especially into a user population that may not be as tech forward as the folks that sign up with us directly.
They may not have a smart TV connected to the Internet in their home. They may not have an adapter product like a Roku or an Amazon Fire TV, but they do have a set top box from their pay TV operator. And if we can put the Netflix application in a nice seamless integration into that set top box, We can then include the actual subscription to Netflix as part of their pay TV offering as a bundle, then it makes it super simple for those folks to be able to get the same kind of experience that our subscribers who sign up with us directly do and get the same benefits. So we're going to continue to expand those. We've got tons of opportunity, I'd say, globally around the world to add more and more partnerships.
So we're still at fairly early stages there. But also our perspective is that we anticipate that that bundle acquisition channel is a nice supplemental incremental component, but a minority component of our overall subscriber acquisition process.
Okay. Let's turn a little internationally as well, Ted. Prior to the results today, data that we had seen indicated some strength in particular markets. It seems content driven strength in France and Germany, in particular in Europe, Japan, South Korea and Asia. Curious if you could characterize any particular markets that I realize you mentioned the relative weakness to guide was across the board, but any particular markets seeing more of a tailwind right now, particularly a content driven tailwind?
Well, one that we'll be looking for starting this week is going to be La Casa de Papel that Spence just mentioned. This is our largest non English show that we shoot out of Spain that plays throughout the world at a very high level. We also have Alite and Chiquetz de Cabre from Spain that are enormously popular shows and new seasons coming in the quarter. And Sacred Games from India, which was a big driver for us in its first season, dropping a new season this quarter as well. And in the past 3 months, with the release out of Germany of how to sell drugs online, Rain the Rain season 2 from Denmark and Quicksand from Sweden, what's been amazing is they've been deeply relevant in the home country, traveled the region very, very well and have found global audiences.
So the 3 shows I just mentioned from Germany, Denmark and Sweden have 12,000,000 to 15,000,000 global watchers. So we're seeing some real locally, regionally and globally relevant content coming from all over the world.
Great. You mentioned India, always a topic we like to dig a bit more into because of the size of the market, of course. So I guess for Teddy and for Greg also, in this market in particular, as we approach the 2nd season of Sacred Games, a bit of a milestone, where are we on the content offering? I think you've referenced some other markets where you can start with an original and get some traction, but you really need a certain amount of bulk to offer there. So where are we in the content offering in India?
I also know you mentioned or I've seen reference to 5 other shows, particular series or projects that were greenlit. And then Greg, perhaps tied in with the question about product pricing. You made a reference in the letter to some new pricing. Can you talk a little bit more about both the product and pricing in India in particular?
Before we get into pricing, Rick, the only thing I'd add is that our we announced 5 new originals for India. The one we're also really excited about later on this year is Baba Bali, which is our first step into a really large scale Indian original film. It's based on a film that was hugely popular a year ago, and
this is
a series prequel sequel model that we think is going to be incredibly popular in India. And we've been seeing steady nice steady increases in engagement with our Indian viewers that we think we can keep building on. Growth in that country is a marathon. So we're in it for the long haul, and we're seeing nice steady progress.
So as we're expanding that content offering and seeing that engagement grow, we think that there's an opportunity then to be able to broaden service. And so more people can enjoy that increasingly relevant content offering. So that's clearly the motivator behind adding this mobile tier offering, which we think it's going to be a lower price point and in a market where the typical pay TV package is under $5 we think we need to have a lower price offering to improve the accessibility, but also one that complements the existing tiering structure that we have. So that's the primary motivator for that move. So we can broaden the audience that can love that content, enjoy the content that Ted's team is making.
That's great because like when we launched Sacred Games season 2, we have a bigger audience for it. That means we can create more social buzz and more excitement about that show. So we're doing that. We're also working on the partnerships we have in the market because we think there's specific opportunities to improve accessibility via those partnerships as well.
Great. And Reid, broader question. How do you view your potential subscriber base globally? I think a lot of us use the sort of broadband, connected broadband marketplace. But how do you see it?
I would imagine you see it as larger than that. And historically, you've given us the 60,000,000 to 90,000,000 member outlook for the U. S. Would you be willing to put some parameters on what you think the global opportunity could be? Or why wouldn't you?
Well, we do wonder in the fullness of time, can we be as big as YouTube? YouTube is 7 times larger than us roughly in viewing hours and a phenomenal service. Of course, it's free. So the real question is, can we produce enough content to people are willing to pay for? If you look at benchmarks, it's about 700,000,000 households that pay for television outside of China.
So that would be kind of the equivalent of the U. S. 100,000,000. So that's one established market. Now, do we have enough content in each of those countries?
Most of that is local content that gets consumed. But the Internet is capable of some very large customer bases, as you, I'm sure, well know. So we just take it year by year and try to have our net adds continue to grow. We still think our net adds this year will be larger than last year. We'll keep pushing on that.
And what we want to do is just grow the net adds every year, and then the future takes care of itself. Great.
I want to talk about a couple of broader strategic topics here. In the past, you've clearly stated that you view your competition for consumers' time pretty broadly, sleep, video games, etcetera. The financial Presto loves this concept of streaming wars between Netflix and a number of existing and new platforms. So do you think that streaming wars is a fair characterization of what the future holds for Netflix and for video entertainment?
Yes. I mean, high level, it is. Certainly, all of Ted's world is very competitive. It's never been a better world for talent. They get to bid themselves off between us, Disney, Amazon, etcetera.
So there's a real battle for who will pay for content around the world. But it's not a zero sum competition. I think everybody gets that. People will subscribe to multiple shows. At Wager, most Netflix employees are HBO subscribers.
We love the content they do. And that spurs us on to want to be even better. So it's a great competition that helps grow the industry. And the advantage of having something catchy like the streaming wars is it draws more attention. And because of that, people, consumers shift more quickly from linear TV to the streaming TV.
Great. Greg, over the past 12 months, you've spent the company spent approximately $1,500,000,000 on technology. I have a couple of specific questions. First, can you help us understand sort of the scalable part of that spend versus the incremental part of that spend? And maybe to the extent you can quantify grade, to the extent you could perhaps talk about the types of things that would fit into one of those 2 buckets, that would be great.
And I think also a question that we get is really how your technology spend can be a competitive advantage in this competition for subscribers. So is there anything you can point to from the consumer perspective where you really feel like it's whether we see it or we just enjoy it, that separates the Netflix platform from the competition there.
Yes, there's a lot there. So let me try and take it piecewise. I would say the majority of that spend, we would say, is a fixed cost investment, which returns increasing benefits at scale. So as we grow our business, we get higher leverage off that fixed cost investment. There's a small portion of that, that I would say is sort of incremental to how we scale that you can think of that as either on the delivery cost side, we seek to invest on the content delivery side to make that more efficient.
So that's a fixed cost. But then we obviously have certain elements of that cost, which just scales as we grow the business as we deliver more streams, right? But a couple of examples on this. So you can see the benefits from a consumer perspective, just to pick a few. So one is when we think about sort of our encode efficiency, and this is how we actually take the moving pictures that our creators produce and then reduce them into a digital form so that we can actually deliver them to a variety of different clients, a variety of different devices around the world in a wide, wide range of network conditions, back to like gigabit plus constantly reliable all the way to super flaky networks that we see in markets, let's say, in a mobile environment.
And so we try and make that encoding process so good that pretty much we're maximizing the capability that we have, the connection that we have to any given consumer in that wide range of environments at any point in time. So obviously, that's the consumer benefit is realizing just a good quality picture experience and more engagement, more compelling immersiveness in the content. So that would be an example of that kind of fixed cost return.
And Greg, about how many AV tests do you guys have running currently?
So I would say in a year, we'll run, let's say, 400 is a good benchmark. And these are situations where we're we have theory, a hypothesis where how do we present a better experience which is more compelling to our users, which gives them a better experience, more engagement And we'll test it out. And then based on how the users actually use the service, we'll determine if that hypothesis was correct or not. And obviously, the ones that work that are a better experience will roll out largely to our whole universe typically of users around the world.
Great. Another place you didn't quite mention was the user interface itself. We do get questions about discovery and particularly with all the content that's being invested in. There's a survey that I just read about from Nielsen. 2 thirds of streaming users know what they want to watch when they go to the service, but another third look and they spend 8 to 10 minutes according to the survey looking for something to watch.
So that's my question for you. Does that seem right based on anything you've seen? But also, is that a good thing or a bad thing? And where is the interface from your perspective to making that great?
Sure. I mean, we obviously track those numbers. We have our own metrics that we use around how our members engage with the service, how much of
the time they spend in
the discovery process, etcetera. So we have our own view on that. And I think the Nielsen numbers are they're a good sound bite, but don't reflect the typical experience. And I would say generally, I think we're doing a pretty good job as evidenced by sort of our growth and engagement and general growth in subscribers. Now having said that, we're bringing a tremendous number of titles to the service and many titles which people don't know, they haven't heard it before.
So we have an opportunity to continually improve and get better and better in how we present the right titles to the right audience in a way which is meaningful to them, which explains to them why the show is relevant to them and gets them excited about watching that. And so a lot of those 400 call it AB tests that we run-in a year are around trying to figure out how do we do a better job that and we have a healthy roadmap of good ideas about how to make that better and better and we're excited about that. And we think that, that is a competitive advantage. If we do a good job there, we can deliver a better service experience that unlocks the value of our content library in a more effective way.
Great, great. Okay. So I want to talk about some key content related items, and I think we know well publicized topics that I want to get to. But first, Ted, can we just talk about your current strategic point of view on investing? And I'm thinking about allocation of resources across a couple of vectors, global versus local market focused content, films versus series, and I think Netflix branded versus licensed.
Just if you could tell us sort of from a high level where you stand on how you're splitting your resources there?
Well, the one of those 3 that cut across all of them is the original branded content versus license, which is producing the kind of programming that is locally relevant and globally important. And I think we've seen shows like Stranger Things right now that plays almost completely globally, performing off the charts in every country in the world. We saw similarly last quarter with Umbrella Academy, a show that is an incredibly global show. So there's plenty of content that is global and there's a lot of content that's very, very specifically local and we're balancing constantly between those 2. And every once in a while, you get something out of the like La Casa de Papel from Spain that also becomes a global phenomenon that has nothing to do with what we've seen for since the beginning of film and television that almost all content that travels the world is in English from America.
And we're seeing those dynamics change pretty rapidly. But at the same time, it's a very large audience and about most of the English speaking content travels. So we're constantly doing those trade offs between the two. The overarching strategy that we're continuing to drive toward is over 6 years ago, we got into original programming, betting that the license program would be more and more difficult to come by and that maybe the sources of content to license for will be under different levels of strain. And that has paid off, we think.
We think it's been very important to the business to continue pushing down that road. So the more international, more global, more original film. We also have a large investment coming up in animation that we'll start to see some of the fruits from early next year. So we're we think we're betting in all the areas of content that our consumers love.
And just a follow-up. Film has been something where clearly we've seen more volume and more focus, at least on a relative basis. Can you talk about why film is incrementally important for the platform overall relative to the series? And is it fair to say that more effort has gone there because it certainly feels like it from our perspective?
I would say more effort than in the past couple of years, and I'd say more successful effort than in the last couple of years. So that's what I've been most excited about. When you see a film like Murder Mystery hit an audience as large as it has, you start thinking we really aren't benchmarking against our ability to license Payone movies. We're benchmarking against the consumer perception of what movie they want to see on Friday night. So that competition is for very large scale films, for very intimate indie films and everything in between.
And I think the team has done an incredible job this year in punching those films out into the zeitgeist, becoming those real talkable moments like Bird Box, like Murder Mystery. We're thinking Q4 with Irishman and 6 Underground, that these are the kind of films that people just think about when they want to watch a movie and they're not when they want to watch a pay TV movie.
Great. So you mentioned this, Ted, and I'm happy to ask you and open it up more broadly. But really, big question about the high profile content coming off the service over the course of the next year or so. I think the first question is about impact, and you addressed it a bit in the letter. But when we have The Office, we have Friends, we have the Disney branded content in particular coming off the platform.
So again, you addressed it a bit. I'd love to hear any expansion on it. One is just how much of the viewing consumption does this make up? Either person by person, I think there could be differences between the amount of viewing and the number of members that are viewing it, for one thing. There's also a domestic and international dynamic.
And then also just the sort of historical precedent, you have had content like Family Guy, X Files, things like that that has come off. Help us with the precedent to how we should think about this.
Since we started streaming 12 years ago, the consistent dynamic is that content comes and goes. The licenses come on, they expire, they get competitive, they go somewhere else. That's been true. This is the kind of second round with the Pay 1 Disney films. Remember back in the day, we used to license them through Starz and had them on Netflix and it was a big swing off, along with films from Sony at the same time.
So we've seen the entire output from Fox. We've seen the entire Nickelodeon Kids output come and go on the site. And we grow through that by, we believe, by making these early investments in original programming and getting our consumer and our members much more attuned to the expectation that we're going to create their next favorite show, not that we're going to be the place where you can get anything every time. And we think there's more value in that proposition than there would be in the kind of low price aggregator.
Mike, the only thing I might add to that is just, as Ted said, we've been planning for this for a long time. But when you look at our we don't have any over concentration in any single studio or any single show. We talked about it in the letter, any single show, even though most viewed shows are single digit per low single digit percentages of viewing. And there's going to be as content rolls off the service and when and if it rolls off the service, it's going to be over time. If you look out 3, 4, 5 years from now, that second run license content, there's still a very meaningful portion of what's on the service today that will still be on the service 4 or 5 years from today.
So we're just going to continue to focus on our strategy of developing more and more original programming. And obviously, as Ted said, if there's 2nd run license programming that's available, then that's still part of the business. Understood.
Before we talk about the allocation of budget there, the international versus domestic dynamic for some of that specific high profile content that's coming off, is the consumption of it and the availability of it consistent on a global basis? Or is this primarily a domestic phenomenon? How should we think about that?
It's primarily domestic now. I guess, by way of example, we just recently added Big Bang Theory to a lot of our international territories. We've never had it available to our in the U. S. So I think it's a international it's more of a domestic driven initiative today that in success, we believe it will be an international one too.
Okay. And then, of course, you're spending money on this content. So it's not like it's just leaving. You have resources being freed up, if you will. Absolutely.
When we talk about those, the availability of product, if there's one thing to take a sort of iconic piece of content off the shelf and not have to have it recreated, When we think about redeploying that money and expanding your budget even further for originals, are there constraints on whether it be talent, any types of resources available? Or do you think that there's ample opportunity to go out and redeploy that?
We definitely think there's ample opportunity, particularly across film and television. Like I said, a couple of years ago, we're not investing in animation at all. And today, we're investing very aggressively. I also think that the emergence of the next global storyteller being from anywhere in the world certainly opens up that opportunity, and we're becoming much more seasoned producers all over the world to do that.
Okay, great. Now you are investing more in your own capabilities, of course. And Greg, I think that one thing that we don't talk about much is the technology side of the studio and production. Is there an opportunity for Netflix as a technology company in addition to being a media company to take advantage of some opportunities to be a more efficient studio, a better studio in terms of what you're working with Ted on.
Yes. So if you think about the number of titles that we are producing and the strength that we have in technology and analytics, we do think that there's an opportunity back to the discussion we just had around making a fixed cost investment, either in terms of efficiency benefits or outcome benefits, just the quality of the dollars that get to the screen that impact the user across the range of titles that we are producing. Now I would say it's early days here, so we're trying to we're placing a bunch of bets and we'll see sort of how those bets play out. But to give you a sense of make it a little bit less abstract and more concrete, when you think about after show or a movie has been made, you make a trailer to promote that. We use those on service, we use those off service, right?
And typically, the first step in that process is someone goes through and they look at all of the scenes in that show, for example, and they inventory like what are the characters, what's happening there. And that sort of provides us index so that they can actually take that material and then from that use that index to assemble in the creative process what's a compelling trailer. Well, we can increasingly use automation as a technology investment to basically do that indexing process, so that our trailer creators can really focus their time and energy on the creative process, taking the results of that automated process and putting together something which is super compelling, tells the story of what the show is in an authentic way and makes it more attractive to users. That's just one example of the kind of investments that we are making that we think have that kind of returning leverage against scale. I would
just add that being an efficient producer is a very good thing to do, obviously. But being an efficient distributor to being an efficient marketer is P and L changing. So those are the way to think about. We're working on all three of those things at the
same time. Great. I want to move a little bit to the reporting and the granular reporting of data that you referenced on the last call. One of the places we're seeing it more clearly is in the U. K.
With the top ten list. So my two questions are, number 1, can you share any results from that U. K. Top ten list, number 1. And number 2, what can we as consumers or members expect going forward?
And then I have one follow-up with respect to what it means for the talent, of course.
Well, the one thing we are we said this in the last call as well, that we are being much more transparent with the creators and increasingly with the public in terms of what's being viewed on Netflix, mostly because I think people use a lot of different inputs to figure out what they want to see. And popularity is definitely one of them. And we're trying to figure out how to balance out popularity against all the other personalization tools to give people that opportunity that if they want to see what everyone else is watching in their country, in their city, in their town, that we could present that to them in a way that helps them make better choices. But in general, I think we're still testing the best application of that. It's still very much in active testing mode.
Yes. And I just want to comment, I think we feel like there's a great way to enable that personalization, but enable popularity signaling for the users that want. It's just basically looking at the folks that use that popularity as a factor in the decision making they take around what to watch next and making sure that those popularity signals are available and very present for those users. And for users who don't seem to want that, then we can sort of make those less present.
And then thirdly, as an example of a very granular piece of data that we shared recently was in the 1st 4 days of Stranger Things 3, more than 18,000,000 people watched the entire season. And why share that number? Because the very next follow on to that was, Wow, I'm one of those 18. I want to tell my friends about it. Or, Oh my God, I want to be one of those 18.
Or are you one of those 18? So it carries a lot of excitement in the fan base when you can give them some data to
chew on. So from a public perspective or from a member perspective, should we expect more consistency in that type of data? Or is it going to be one offs on selected items that you feel are valuable?
Yes, I think we'll be increasingly transparent with producers and then and over time, more and more. I really like that it's important for us to help condition the market to understand what the viewing data is. So it's not being compared apples to oranges against things that are not similar. And right now, if we start publishing tomorrow, we'd be the only streaming service doing it.
Right, right. So the value of this data to your content partners, content creators, as you create more of these large budget films, you have actors or other talent that historically perhaps were compensated on box office performance. How are you approaching that when you want to make these big budget films and you want to incentivize talent? And maybe the flip side to that is perhaps you have a little protection if a film doesn't do as well. In the traditional model, is there a way that this data starts giving you both the incentive and the protection?
Yes. I think what we're trying to do is, it's a very new model, but particularly for box office friendly talent to want to make their next big film in Netflix. So we have to figure out a model that in success, how would they be compensated. The fact that it's guaranteed, there's some discount applied for that. And the fact that it's paid out over a quicker period, there will be a discount applied for that.
But ultimately, we want the economics to be pretty neutral or at least or similar to what they would be if they had a big hit film in the theaters. And that's what we negotiate film by film talent with actor by actor.
Great. I'll open this up to anyone, Reed, perhaps. Looking at the product placement or rather product partnerships for Stranger Things, certainly very high profile, a lot of buzz, very broad. In the letter, you referenced it as being more about building the product itself versus monetizing. Does it become a monetizable part of the business at some point?
Or put differently, expand a bit on the benefit of doing that and how that might be broadened to other properties?
Well, we're monetizing it today in more membership growth. The focus is get more people excited about Stranger Things. So they join Netflix, they tell their friends about it. So this year, we'll add about $5,000,000,000 of incremental subscription revenue, which is almost all gross margin, and that's faster than any entertainment company has grown in the history of the world. So what we want to do is keep that engine going, keep that subscriber engine going and not get distracted with alternative revenue sources, which just don't add up when you're growing $5,000,000,000 a year.
So the core focus is create all these merchandising opportunities, tie ins, touch points, so that you feel the Stranger Things energy so that more people join. So together as we do monetize all that, it's just we're monetizing it through our giant engine rather than through little sidecar vehicles.
Mike, I think we're talking
about You should think about, particularly in the case of Stranger Things 3, you should think about all those product partnerships as a character in the film, regarding the show. Remember the show is set in 1985 and it's set in the heart of when the big summer blockbuster movies were jammed with product placement. And it was really a creative choice when they talked about pitching that season out through more than almost 2 years ago. Mike, we have
time for one last question, please.
Okay, great. Usually, we like to do a big picture, but this is one very specific financial question, but we get a lot, and it's really about the margin potential of the business over time. I think it ties together a lot of these different things that we just talked about. But Spence, we've had the chance to hear your opinion a bit. I'd love to hear you expand on it.
Because Netflix is a single revenue stream product, you were very clear in the letter that advertising is not part of your future despite what we read in the press. Can Netflix ever achieve the type of margins that we've seen historically out of cable networks, beat and HBO, which is a unique single revenue model, whether or another network that was a dual revenue stream? Or are we inherently going to be sub historical average margins for Netflix on a global basis?
I mean, you take it or, Yuri, I can take it. You got to do it. Okay. Look, I think we've demonstrated over the last few years that we're focused on building a very healthy long term business model and growing those margins roughly 300 basis points for the last few years to a target of 13% this year. When we go forward when we look forward in terms of the margin
is to
is to be a multiple of our current size. So that is a network with a relative scale for a premium entertainment network that really hasn't been seen before for those comparables that you mentioned in terms of those historical margins. So that works in our favor. And when we also think about the revenue per any individual subscriber and whether that's advantage with a dual revenue stream or a single revenue stream. And our calculus now for building a global network is that we're best served to focus on that single revenue stream, winning those moments of truth with a great member experience and then continuing to price occasionally against that in a great value proposition when we start with great content, great experience and then offer it at a reasonable price.
We think we can do that in a way that obviously continues to scale margins in a very healthy way. We're not going to provide specific guidance, but when you look at those comparables, there are some things that work in our favor and some things that don't. So scale is in our favor. We think the subscription model is a terrific model for us. So certainly, we believe that there's going to be more margin accretion over time.
And again, I'm going to kind of leave it at that, but you can assume that we had a long way to go.
And Michael, if you don't want to end on something that dry, I could say 2 things really quickly. One would be that to congratulate HBO on an incredible record breaking year for Emmy nominations. They continue to be the gold standard that we chase, and we're really thrilled for them. And also to the end of this month, on July 26, we're going to wrap up our 7th season, 7th and final season of Orange is the New Black. And I wanted to thank Jynji Cohen for her incredible vision that helped really drive this whole idea of Internet television to new heights.
And the show wraps up on a really incredibly emotional high, and we hope the fans love it.