Welcome to the Netflix Q1 2016 earnings call. I'm David Wells, CFO. I'm joined today by Reed Hastings, CEO, and Ted Sarandos, Chief Content Officer. Interviewing us today will once again be Benjamin Swinburne from Morgan Stanley and Peter Kafka from Recode. Just a warning before we begin that we will be making forward-looking statements. Actual results may vary. I think Ben, you had the first question, over to you.
Sure. Thank you. Reed, maybe you can start out by just reflecting on the quarterly results you guys just delivered relative to your expectations, and maybe you could start out in the new markets you launched at the beginning of the year and how those performed relative to your expectations.
Sure. We were incredibly excited to grow to over 81 million subscribers. It's an enormous quarter for us that way. Some of it was from our expansion around the world. It's 130 countries, there's quite a bit of variety. Remember that most of those countries we haven't yet seen the full potential of because we're only in English and only with international credit cards. Over the next couple of years, as we further localize, we'll be able to see more opportunity. By going so broad, we've increased our rate of learning, we're really excited about the approach and looking forward to the rest of the year.
How did you feel the U.S. markets behaved this quarter versus your expectations? You had noted in the letter a lot of strength from the originals that came in ahead of expectations. I'm guessing that's on gross connects, how did the originals perform, even relative to what I'm sure were your fairly bullish expectations in the U.S. market?
The U.S. market, we did about $2.25 million net adds, which is nearly identical not only to last year, but to the year before. What you see is this continued growth, and we're thrilled to keep that growth steady at between 5 million and 6 million net additions. The content just keeps improving, and that keeps the word of mouth growing. We're very excited about that formula and what we saw in Q1.
Reed, you guys have been watching Amazon for a long time. You compete with them, at least on content, for quite some time. 4 years ago, you predicted they'd come out with a standalone service priced under yours. They announced that yesterday. What's your view of them now, in particular with the announcement they made yesterday? Do you think they're trying to compete head-to-head with you for subscriber dollars, or are they trying to underscore the value of Prime overall?
Hulu is doing some great work. Amazon, HBO, Showtime. There are so many competitors, and everyone is working hard to build the best content. We're seeing growth in the overall internet TV market. Of course, that's displacing linear TV, and it's natural that everybody's coming in as they realize that the future is internet TV. In terms of our shows, we're very excited about what we're doing. Not only are we expanding the number of Original Series we're doing, but we're also expanding into Original Movies. Again, this is all part of the natural evolution from linear TV to internet TV.
Amazon has been talking with programmers for a while about adding linear channels. You're looking at a scenario where they might have an offering that's similar to yours for the on-demand stuff, the mix of Originals and older movies and TV shows, plus current content live. What does that look like to you in terms of the prospects of competing against that head-to-head?
We're very focused on global competition. Obviously, around the world, it's very fast-growing for us. We're coming towards 50/50 international-domestic revenue. We're focused on content that we can have around the world, which is why we're investing in original movies, original series, so that we can have that content, and also producing around the world, like our French series, "Marseille," or Spanish in "Narcos." That's very different from carrying other people's single-nation networks. That's just a very different business. It's not one we focus on a lot. We know what we want to be, which is a great global producer and distributor of content, and other people will do other things, and that's fine. They may be very successful.
Let me throw a question out for David and/or Ted about thinking about the second quarter guidance internationally. There's a lot to chew on there. The number you laid out is probably below where most people were expecting. I wonder if you could talk, David, about how you thought through putting the second quarter guide together around seasonality, some of the comp issues you talked about in the letter, and whether we're seeing a more earlier than expected level of seasonality in some of these markets that are still one or two years old. Ted, there's a narrative out of Europe in particular that the incumbents are sort of teaming up against you from a content perspective, and you've got a lot of stuff coming down the pike on originals.
You can talk about your relationship with suppliers overseas since that's probably an area people have spent less time thinking through.
Sure. I'll let David kick it off there and go first.
Ben, in terms of thinking about the guide, just a reminder that we put in the letter that absent the strong performance that we saw last year from a very recently launched Australia-New Zealand market, our guide would have been up. I think you haven't yet seen sort of a normalized pattern of growth from us in terms of a year-over-year growth expectation across our international markets because we've been layering on new markets as we go. I think from our perspective, we were super happy with the results of Q1, and we wanted in Q2 that to continue, and it is. We're mindful of the fact that we've got these large blooms of launches last year and then in Q1 this year with the rest-of-world markets of the Netflix global launch that are going to continue forward because they're addressing pent-up demand.
For us, we're focused on continued growth in those markets, and that's what we're seeing. We're focused on continued improvement from an economic sense of reducing those losses. This year you're seeing us continue to invest, the U.S. is growing. Overall operating profit is improving as we go and into next year.
Can I just say, the reaction from the broadcasters across Europe is not different than it's been anywhere else. There's always uncertainty when we come to the new market, what role we're going to play, how complementary we're going to be versus competitive. I think everyone just likes to weigh all their options in terms of their competitive strength. We're buying a lot of Pan-European rights as part of our global acquisitions, which I think probably makes them a bit nervous too, while they're trying to figure out what their next moves will be. Again, I don't think it's that unusual. Even here in the U.S., where three of our largest suppliers teamed up to create Hulu with probably much of the same motivation.
Just as a follow-up, I don't think we mentioned the VPN changes in the letter, that obviously has happened. Is that impacting at all the second quarter guidance at all?
No. All that change was in the first quarter. It's a very small but quite vocal minority. It's really inconsequential to us, as you could see in the Q1 results.
The only thing I'd add to that, Ben, is we were able to grow in the first quarter. We had a very strong U.S. growth. At the same time, we had a very robust Netflix global launch. I think it validates the fact that we're seeing new demand for Netflix in those markets.
Sure.
This is for Reed. You keep getting asked this, I want to keep asking because the question keeps coming up. Any interest in live sports in any capacity?
Any interest in what?
Live sports.
Live sports. Ted, I'll let you handle that question. It worked so well for us last time we knew.
Exactly. There is no interest in live sports currently.
Currently. What about live in general? There's a lot of interest, Twitter, YouTube, Facebook in particular, in the idea of broadcasting live video over the Internet. You guys have tweaked your model a little bit, or will be tweaking a bit with Chelsea Handler, where you're going to move away from the dumping out all the stuff in one go and sort of staggering it. If you don't plan to do live now, why not consider it down the pike?
Just to correct you, we have never dumped anything. We have given it a proper platform with all of the great content that it deserves.
A full release.
Chelsea is near live in that we're going to be putting it up to our subscribers just a couple of hours after it's recorded live in front of an audience. There's not a technological reason we wouldn't want to go to live, but you should think about our brand proposition is very much about on-demand. To the extent that watching on-demand is better than watching live, we bring a ton of value to it. Other people doing live, I think it's great. It's about the further expansion of internet television to include live. We don't have to do everything to be part of that expansion.
Rather than invest in things like live sports, we're investing in things like "The Crown," which is just an epic production, and maybe you could talk a little bit about that.
Well, it's being shot right now in the U.K. We've previewed some footage of it to the European press last week. They just loved it. It's a massive cast, a massive production that will tell the life of Queen Elizabeth, starring Claire Foy as the Queen, and we'll follow her life through her relationships with the prime ministers all the way through to current times. It's those kind of things that we think are massively global, that we can produce on a larger scale than anybody else, that we really think we can win the day on.
Thanks.
David, coming back to the second quarter guidance again, on the U.S. market, why did you decide to delay or spread the un-grandfathering through the remainder of the year? You mentioned you don't expect much of an impact, you've decided to sort of spread it out, you could just walk us through what you've learned in your testing so far and the thought process around that.
Well, I think we've always been a testing company, perhaps there should have been an expectation that this would be a gradual thing in terms of layering that out. We've got a number of markets that are coming off un-grandfathering, not just the U.S., and some of those are timed three to four months as we go. I think it's just about messaging it. It was important to us to make sure that subscribers sort of knew that this was happening and to put it in front of them, that's what we're going to do. We want to do right by the consumer and do right by Netflix as we go. I think we're just taking our time to do that.
Ted, what are you seeing in terms of the efficiency of your spend as you continue to build on originals? I'm curious, you've had more data points around film results, and you'll have more coming up. How are the films performing relative to your expectations and relative maybe to the spending on TV series?
The efficiencies are a little hard to match because you've got a couple of hours of viewing versus 10 to 13 hours of viewing on a series. Relative to how we license other movies, we've been pretty happy with the direction that it's going. We have a few films under our belt. What I'm really looking at is how broadly people engage with them, how do they play around the world? All those data points have been really positive. As we keep going, I think that content can be as efficient as a series relative to other films. We're still learning as we go, though.
Thank you.
Can you guys talk about your M&A strategy? Are you looking at Paramount, which may be partly for sale? What about Starz, which is sort of unofficially for sale? If you don't want to comment on those in particular, what are you thinking about as you consider large acquisitions?
It's been 15 years we've been public, and 20 existing, and we've done no M&A. I think that probably speaks for itself.
As you guys push into the studio film business, making your own movie, does it make sense to at least do a smaller acquisition that would help you get some of those competencies in-house?
Well, Peter, what you're seeing not just on the films, but also on several of our series, where Netflix is increasingly the studio and the network on those shows. We are building that efficiency in-house. "The Ranch" that just premiered a few weeks ago is a Netflix-produced show, and we'll be doing a lot more of those coming up.
You can build that without buying it?
You're building it versus buying it.
Yeah. We'll just hire the people that we want and build it in. That could, in principle, be a constraint on our rate of growth, but Ted's been able to attract an incredible team in L.A. When you look at the growth in our originals, you can see that we can deliver on that on this organic hiring basis, which, of course, is much stronger for the long term than if you tried to juice it with M&A.
Thanks.
Reed, can you talk a little bit about how investors and shareholders should look at various opportunities internationally? For example, Brazil's a market that maybe at first blush wouldn't appear to be ripe for Netflix given low pay TV penetration, lower household income, lower broadband speeds. You've described that as a rocket ship. You've done really well there. Maybe other more developed markets in Europe have been slower. What are the characteristics and things that are outside of Netflix's control that drive success, and what are the things you're doing that you're doing maybe didn't do a year ago to make sure you capture the opportunity?
One of the major things I think is e-commerce and payment systems to the degree that there's a convenient way to pay for airline tickets, for example, online. That's really helpful. We're continuing to work with all the different ISPs, phone billing solutions, other things, and we'll grow as the payment infrastructure or the e-commerce infrastructure grows. When you think about it in the long term, everybody around the world is going to be watching internet video, and we want to be well-positioned so as all of these countries evolve towards internet video, that we grow with them. In some cases, that'll be 10 years, 15 years. In other cases, it'll be in the next two or three years. It's a long-term investment, and country by country, it's worked out extremely well for us. That's why we're so invested in international expansion.
We're very confident that in the long term, everybody's going to be watching TV shows and movies over the internet, and we hope to be one of the leading brands for that around the world.
let me just ask you. Oh, go ahead, David.
The only thing I would add to that, too, I think Reed would say is, you can't anticipate everything, I think five years ago when we were first launching the markets, we thought maybe we could anticipate most things. Every time we've launched, there's been one or two things that we haven't anticipated. What we have gotten good at as a company is fast learning and fast improvement. I think that gives us some confidence as well that as things come up, we'll be able to address them quickly.
Remember when you look at Facebook and YouTube, which are ad-supported, viewing and consumption is generally 80% international, 20% domestic. We've got a lot of international growth to go before we can aspire to that point.
Let me just pick up on a question Peter asked earlier that sort of talks about where Amazon's taking the bundle and take it from a perspective of incumbent MVPDs. You saw, I'm sure, Reed, that Dish built another Sling or is building another Sling offer, sort of a low price point IP-delivered bundle of networks. DirecTV is going to have three cheaper OTT launches later this year. You're starting to see these things proliferate more. Does that change your competitive position as you think about this big pricing umbrella getting smaller over the next year plus and becoming more IP?
No, those are all single-nation solutions. We're really focused on global content and expanding globally. I don't see really that much nexus between them. Again, as we said in the letter, when you think about your own experience of what do you do some night if you're not watching Netflix? Once in a while, it's cable television. Once in a while, it's video gaming. It's browsing Facebook, killing time on the web generally. There's so much out there. Our only inhibitor in our growth is how great is our service. Can we make it so there's never buffering, so it always starts up instantly, so the recommendations are incredible, and the content is exciting? If we can do all that, we'll continue to grow globally, even though HBO or Dish or others are also growing. Their growth doesn't take away from us.
Thank you.
Reed, can you explain just for the record why you guys went ahead and reduced the quality of streams on certain wireless carriers and how that's different than the complaints you lodged against people like Comcast in the last couple of years?
Sure. Mobile generally has small data caps and very expensive per gigabyte charges, like $10 to $20 per gigabyte supplemental. We've wanted to save data for our users by using very tight and small encodes, especially when it's being watched on a four or five-inch screen. What we'll be adding going forward is an option so consumer can set they want to do extreme data saving, moderate data saving, or no data saving at all. We'll evolve to let the users just do it. The advantage of doing it for people in the past was to avoid those data plan overages that are pretty unique to mobile.
That option you're describing where you can opt in to what quality you want, is that a reaction to the stories that came out in the last few weeks?
No, we've added lots of options over time to allow more customization. If you look, we've had one on the wired side. We just hadn't implemented it yet or rolled it out on the mobile side. It's always been planned.
Another regulatory question, or I guess FCC question. The open set-top box proposal that President Obama's endorsed, if that goes through, what sort of changes or options does that open up for you?
For us, the open set-top is the Roku or the Apple TV or the smart TV. It's a basic internet device that runs apps, that's what we think the future is that kind of broad openness. We don't really follow very closely the intricacies of the cable set-top industry in the U.S. as opposed to these great global platforms that are IP-centric, like a Samsung Smart TV.
It's not meaningful to you if it goes through?
I don't think so.
Thanks.
Ted, I want to ask you a little bit about your relationship with your major suppliers. You, I'm sure, hear the rhetoric as we do growing out of Hollywood. Maybe start with Disney. How is that relationship today? They've obviously come under some pressure around ESPN and cord shaving, but should we expect that you may be able to expand your Marvel TV relationship in particular? I'd love to hear any sense for how "Daredevil" Season 2 is performing and performed relative to the first season where that audience built.
Sure. These have always been relatively complex relationships where you are both supplier and sometimes competitor. In the case of Disney, they're a major supplier, and they're a producing partner. They produce our Marvel Defender series. We just kicked off our fifth season of production on the show. It's a very lucrative piece of business for Disney, obviously, and a great partnership in that way, and there's no way to kind of isolate the two sets of businesses completely. While they're a great producing partner, they're a great licensing supplier, and we're always trying to figure out ways that we don't bump into one another competitively, but sometimes it's inevitable. "Daredevil" Season 2 was fantastic. The critics loved it.
The viewing numbers have really grown, we've added an enormous number of people to "Daredevil" Season 1, both because of the excitement around Season 2 and that we're in additional territories now that didn't have the opportunity to see the show in the first go-around. It's been a real success, we're really excited to be in business with them. All of our suppliers either produce for us or license to us and probably compete with us on some level, we're just always trying to navigate those waters, very similar to the way networks deal with one another and produce for one another.
Do the changes you're seeing out there impact the timing with which you may get to your 50/50 split of sort of original spending and acquired? You threw out in the letter 5% of your spending, I think today is on films. How would you fit film spending inside of that 50/50 mix long term?
Well, right now, we're trying to complement our film selection between aggressively ramping up our global originals with films that people want to see everywhere in the world. Plus, licensing, we're an opportunistic. We've been doing pickups of films at film festivals, particularly ones that have broader commercial appeal, like next month we have a film called "The Fundamentals of Caring" with Paul Rudd that I think fans are going to really love when we launch that around the world. Then regionally, we're also doing some opportunistic licensing. As you know, we pick up the Disney Pay One output later this year. Just in this quarter, we'll have the "Minions," we'll have "Goosebumps," we'll have "Hotel Transylvania 2," and we'll have the film that won the Academy Award for Best Picture, "Spotlight," exclusively on Netflix in the U.S.
It'll be hard to comp against those kind of numbers as we're ramping up films because we still have a great selection of other films as well. We're going to keep pushing on. There's no mandate or no initiative to how quickly we want to get there. In success, we just want to keep pushing it forward.
Later this week, we'll be releasing the first trailer for "The Do-Over," Adam Sandler's next film for us. The trailer's incredible. I think you're going to find that this is a movie that really delivers for the Adam Sandler fans extended.
That will be available globally as well, Nate.
Reed, maybe Ted. If I get on a plane, I can download all of Amazon's original content, some of their studio stuff they've licensed, and take it with me for offline viewing. YouTube Red lets me do that. Why not offer that for some or all of your content?
We should keep an open mind on this. We've been so focused on click and watch and the beauty and simplicity of streaming. As we expand around the world where we see an uneven set of networks, it's something we should keep an open mind about.
This one's a little more future off in the distance, but how long do you imagine before some combination of VR, AR, 360, any of the stuff you see people experimenting with on Facebook, YouTube, becomes relevant to what you do?
I think it's mostly going to be an intense gaming format for a couple of years due to the price of the consoles. Think of it like the PlayStation 5 or the Xbox Two or something. Its heritage to console gaming will be a lot of that market. Everybody hopes that it matures into something that's lower cost and more ubiquitous. I don't think it'll have a direct effect on us in the next couple of years because I think the center point for VR will be other sorts of things than watching a TV show in a VR headset. I don't think that'll be very popular.
Thanks.
David, turning to some of the financials. You gave some color for the year around contribution losses internationally. I think looking for something around $370 million for the year now, which is less than at least you had articulated and we had thought previously. What's driving that improvement? It sounds like that's a focus for you as you head into next year. Maybe you could spend a little bit of time talking about what's moving the international losses lower and how that may trend into 2017.
It's nothing more than growing revenue faster than your content spend. I think it's just the fact that we've got multiple markets now that are improving year-on-year in terms of growth and economics, and you stack them together, and you've got a picture where collectively, they're covering any of the new markets that we could have launched this year and then next year or the year after. Depending on the size of that market, they could be covering them all. I think we're giving ourselves a little bit of flexibility because the more of an opportunity we see, the more we may put back into the business in terms of additional investments in content. We feel like today that we can do all of that and still grow operating profit, which is why we continue to make the statements about meaningful operating profit next year.
We feel like we can do both. I don't think internally there isn't a different plan, perhaps versus expectations. People felt like there might be higher losses internationally, but it's been fairly consistent, I'd say, over the last three to six months.
Do you want to talk about the weakening of the U.S. dollar and how that affects us?
Sure. We did highlight this in the letter. You live by the currency, die by the currency in terms of the fluctuations. Last year, we had a lot of headwinds, especially on the international revenue line. We had to explain sort of why our international average subscription price was flat in certain quarters when it still was growing. This year, we're seeing the reverse of that with the weakening of the U.S. dollar, at least in the first part of the year here, where our international contribution margin is benefiting from that. We did highlight that for you in the letter. Thanks for pointing that out.
David, as a follow-up, you're doing more and more global deals. Could you just remind us how you're allocating licensing costs and whether that's having an impact on the sort of quarterly movements in margin? You guys guided to, I think, a sequential margin step down in the U.S. How much is the allocation sort of issues or allocation thought process impacting those moves?
Part of that, the U.S. P&L or the U.S. contribution margin, we've said this before, I'll reiterate it, is definitely benefiting from the fact that we're launching more international markets. The cost of that global original that Ted talks about is being spread by more markets. There's some relief to the U.S. P&L. In terms of the allocation mechanism, it's really by media market value. In the early days, we were doing it by broadband households. That was overcharging certain markets where if you had a very knowledgeable, experienced media buyer in the market, they would say, "Well, there's no way that anyone would pay for this particular title at this amount in the market." We refine that to sort of a media market value that's validated by some third-party survey information.
I would say, in general, it gets vetted by our own buying team internally as to what would be paid for that particular title in the market.
The margin being tight in Q2 is really related to the large amount of content and associated marketing for launching those content that we're very fortunate to have. Thank you.
You guys are moving people towards a $10 a month price point in the U.S. For the folks who have the $12 plan, what are they using that for? Are they using it to get high def, or are they using it for four streams? What's the usage pattern for those customers?
Ultra high-def 4K is becoming quite popular. We're the leading source of ultra high-def content now. Ultra high-def televisions are for sale at Best Buy and Costco. We're seeing that ecosystem development, and if you pay $1,000 or $2,000 for a 4K TV, it's pretty natural to bump your Netflix to the $12 plan in the U.S. and about equal internationally to be able to get access to that 4K streams and see what your TV can really do.
That's the majority of the people who are paying you $12 are using it for the ultra high-def?
That's right. The video quality is really the big driver. Similarly, our standard-def plan, which is DVD quality, is great for people, $7.99, and so that's a really strong option too. We're not trying to bias people. We're trying to help them make a choice that they feel great about and that they'll stay with. Think of us as really investing at both ends, the $7.99, $9.99, and $11.99.
You spell out in your letter that the price hikes that are coming this month, next month, that you'll be staggering them throughout the year. It's not all going to happen in one fell swoop. Is that a change in plan, or was that always the direction you were going?
That's always what we thought. It's just it's a little bit cautious, but it won't hurt. We don't particularly need the revenue in the short term, it's fine to just spread it out.
Thanks.
David, just coming back a couple more on the numbers. The contractual obligations were up to, I think, $12.3 billion at the end of the quarter, which was a bit of a jump from the end of last year. Is that the Disney Pay One deal kicking in or any other color you'd add as to why that number inflated a bit?
It's really the Netflix global launch. You got to think about it as we're adding more content now for the rest of the world. It's our newer markets. As we add more content, those markets are growing in content spend more quickly than some of our more established markets. You combine those, and I think what you'll find is if you take that obligations number over our average membership for the quarter, it's still in that band of about $150, $160. It really has only popped up this quarter because of that new launch, basically, of Netflix global.
Remember, on Disney, we have Pay-One today in Canada, then we'll be adding it this fall in the U.S.
Right. Just on the cash flow outlook, should we still be thinking about a billion-dollar burn this year and any color for next year? When might Netflix generate substantial free cash flow?
No change on the outlook on either this year or next year. I would say a billion is a pretty good guide for both this year and next year. Really, on free cash flow positive, it really depends on the size of the business. It depends on how much more we'll continue to grow the content, which does depend on the size of the business. On that one, I will turn the question around and say, how big will we be? Then I'll tell you when we'll be free cash flow positive.
Well, it's how big we'll be, then how crazy does Ted go on these productions? What we found is that these really big productions, like "The Crown," are just terrific for us in global brand building. So we're very excited about being able to deploy the cash to create shows like that and like "The Get Down" that's coming this fall also.
Yeah, you should think about it that those big productions play much more like a big blockbuster film in the fact that not only do they get more watching in the U.S., they travel much better, too. You see in all these non-English-speaking territories, these series perform very well.
Well, Reed, I was going to ask you, because I think you were quoted in The Guardian talking about or predicting spectacular budgets for a TV series. Are your comments just now reflecting that expectation? Does that suggest any reduction in the return on spending that Ted's doing?
No, it suggests an increase in return on spending, if anything. That is, when you spend on the big items, they go much, much further than a whole lot of substitutable content. We're interested in both spectacular content and spectacular membership growth.
What we found is that people globally love high-production, quality content.
It's why U.S. content has traveled the world historically so well, because of the production value that you're seeing. When you see things like next month, we'll have our fourth season of "Orange Is the New Black," that was a surprise to most people in that it didn't have any of the established movie star talent that some of our other shows have, but it built up just on the quality of Jenji's storytelling, and then the spectacular cast and the ability to get to know them better, and that as we enter its fourth season now, it's got tens of millions of fans around the world that can't wait for that show.
Sometimes you can get that built-in excitement with somebody who brings their own draw and their own star power, like a Will Smith movie or a Brad Pitt movie that comes out, or Naomi Watts starring in a TV series for Netflix, or Drew Barrymore starring in a TV series for Netflix. This is a way that people can more quickly get to know some of our newer IP.
Orange is only 60 days away on June 17th.
June 17th.
Does that bigger, better, supersize it attitude, is that going to apply to feature films that you'd like to release theatrically? Could you do a Star Wars-sized production, or does the pushback from the traditional cinema distributors prevent you from really going whole hog on a movie like that?
You should look at our original films as similar to a slate of studio films. That's Fox did have Star Wars last year, they also had Brooklyn, a lot of things in between, that's what we're looking at, too. Whether or not a movie at the Star Wars level makes sense yet, we'll see. We're ramping up. You saw recently we announced that we're doing the next Will Smith movie called Bright with David Ayer directing, which is a big-budget summer movie. In fact, it'll be David and Will as soon as they come off of Suicide Squad. That's their next film. It will premiere on Netflix in 2017, included in your subscription cost. While we're all debating around big-ticket day-and-date pay-per-view, we will be debuting that movie on Netflix included in your subscription costs all over the world.
You're not going to the tentpole strategy the big studios have gone to yet, where you're doing a handful of very large productions. You want a range of them.
A range of productions, correct. That's right.
You mentioned the day-and-date debate. You've seen the directors come out and say, "We like the idea of playing with the window," what's it called? Whatever they think of the Screening Room product. Does that mean anything to you? Is that something you guys could participate in?
No, like I said, we wouldn't mind having our films available on that product, to the extent that people want to see it. Our focus is on movie lovers and movie fans and trying to get them the content that they want at reasonable prices and in great windows. For us, being able to produce our own films gives us more control over those windows and the quality of the films themselves. Screening Room to me would be a great way to get content in front of consumers if they're willing to pay for it.
Thanks.
Reed, you've talked historically about a 60 to 90 million subscriber opportunity in the U.S., and I'm just wondering, as you sit here today, if you can update us on your expectations long term in the U.S. market. Is there anything that you think needs to happen that isn't happening today to get you there? For example, whether MVPD, set-top distribution, broad distribution in the U.S. from, say, a new Charter or a Comcast would really help accelerate the growth in the United States.
It helps a little bit. We're integrated with Suddenlink in the U.S., which is about 1 million subscribers. Of course, in Europe, we're integrated in many platforms. Think of it as the fundamental draw of Internet TV. You can get it on a smart TV, you can get it on an Apple TV. There's a lot of ways around it where we don't have that distribution on cable, but it's one more platform, and all platforms are good. It's not something we need to, say, get to 60 to 90. We're continuing to see just that steady growth. To have 2.25 million net additions in the U.S. in Q1, basically the same as the prior two years, it just felt great. We're really excited about what the new content as it builds is able to do for us.
Ted, one of the things we hear from particularly investors in Europe is just that there's a limit to how far U.S. exports can get you. I don't know whether you agree or disagree with that, but I'm just wondering if you think, particularly in markets like Europe and France, who might have, let's say, unique content tastes, that you need to go more local with your spending in those markets than maybe some of the earlier international markets, for example.
I do think that what's popular in a market is much more a reflection on what's been available to that market over long periods of time. What we've been really encouraged by is just how international our Netflix original series have been. You take a non-English speaking territory, you spoke about Brazil earlier. Not only is it non-English speaking, it's a non-Spanish speaking Latin American territory. In the last 30 days, eight of the top 10 most watched things in Brazil have been Netflix original series. These shows play very well throughout Europe as well. That being said, we think it's worth it to complement the selection by focusing on some local productions in those territories throughout Europe and throughout Latin America.
Reed mentioned, but on May 5th, we'll launch "Marseille," which is our first French language show filmed in France, starring Gérard Depardieu. We're also filming Netflix original series in Spain, in Brazil, in Italy. We are definitely investing in local language content, particularly in those markets that have shown some desire for more local programming, but as a complement to our global offering.
David, does that mean by default those markets may be lower margin than the U.S. market long term?
No, I don't think that's what Ted's saying. I don't think you can equate the two. Even when we're looking for a local original like Marseille, we're considering the economics of that production based on the total French diaspora. Not just people in France, but people outside of France that are interested in French language content. I don't think you can necessarily equate those two, and we preference the content when we're developing those local originals for things that have potential demand outside of the original market that it's produced in.
Our Japanese original, "Hibana," for example, we're launching this quarter, and that will be available globally. Think of all that content. We're developing it locally, distributing it globally, and connecting the world through that. We think that's a very powerful formulation that will help us grow for many years ahead.
The Marseille example, Gérard Depardieu is the biggest star in France and one of the biggest stars in the world, and we have about 2 million people in the U.S. who watch French language television regularly on Netflix. That's where we're talking about the scale that we could bring to a production like that for France and Europe, but really for the world.
Thank you.
Ted, what's your biggest non-English speaking audience in the U.S.? You said France is 2 million.
Probably Hispanic. I imagine it would be Hispanic.
Makes sense. Reed, were you surprised that HBO has said they had about 800,000 subs after about six months ago and sort of head to head with you as a standalone product?
A little bit. I think it's a great product. I use it all the time. I think for many other people, they probably just subscribe to HBO on cable, and they're used to that.
You thought the number would be higher than 800?
Yeah. The thing I like about the HBO Now is it's just easier to use. You can use it on the mobile. You can use it on many different internet platforms. I'm pretty internet-centric, so apparently I'm not as typical of the audience. They're continuing to do great work, and what that does is just reinforce to the consumers how great this new internet thing is for TV, and it just sets the drumbeat. I hope they continue to have more and more success.
Ted, there's more money coming into the market for programming, HBO, Showtime, Starz, you guys, Amazon. Crackle is getting into it. Verizon's spending a lot of money.
CBS All Access. I've got a list. That's just in the U.S.
Does that number continue to get bigger in perpetuity, or does it retract at some point and people say, "All right, we've sort of overdone it and we're going to pull back on spend?
It's hard to tell. People talk about the growing content spend, but what we're able to do is find the shows and get the shows that we want, and we do have to pay a lot for them. Coming back to the phrase earlier, they're really spectacular what we're doing. I think when you see "Orange," when you see "The Get Down," when you see "The Crown," you know why we're investing what we do.
Thanks, Peter. I think it's a debate around how to best monetize your content. If you believe you can over the long haul best monetize your content with your own app, then you'll go that path. If you believe you can best monetize it by licensing it to Netflix, you'll go that path.
Thanks, Reed. What's been the feedback initially from members around your price points in the rest of world markets you launched in January? Obviously, relatively expensive versus existing sort of pay TV or entertainment options. Any thought about changing your sort of global price point approach in those markets?
We really haven't seen price be much of an issue. Today, we're serving English language speaking elites around in these countries. In the model that what we're doing in targeting the high end, the price is fine. We'll see over the coming years as we expand, and we may need some flexibility eventually, but nothing in the short term.
Why don't we do the last two questions here?
I was just going to quickly follow up on that topic. I'll hand it back to Peter for the last one. David, you guys are working on more local language offerings, better payment processes, other kind of operational improvements in those rest of world markets. What's the timing there? Should we be thinking about that through the remainder of this year, or is it a longer-term timeframe?
It's kind of both. You'll see some this year. Really, it's about the next two to three years in terms of improvement. We've only just started skimming these markets. We'll be looking at them opportunity by opportunity. You'll see some this year. You'll see some continued into next year and even into 2018, I think. We have a big opportunity in front of us, as Reed pointed out. Many of our internet peers have a dramatically larger business outside of the U.S. versus inside the U.S., we're pretty excited about that opportunity.
I think one of the really exciting parts about being in all these countries is being able to discover the next great storyteller for the world. Because we're more focused on thinking about India, where we weren't thinking about that at all a couple of years ago, we acquired this great film called Brahman Naman at Sundance this year that will be premiering around the world in June. It really is a discovery of a great Indian director named Q, who I think everyone's going to be talking about over the next few years. Having that kind of global sensibility increasingly is going to help the programming for everybody, not just the subscribers in those countries.
In a movie like "Brahman Naman," it's in English, so it's accessible to many people. YouTube has over 50 languages. We only have about 20. That scales for you roughly how far we've got to go.
Thank you.
You guys are moving into more and more kids content. Does it make sense for you to eventually own the IP yourself instead of licensing it through Disney or DreamWorks so you can create ancillary revenue streams?
We do a lot of both. The consumer products addition to those projects relative to the content value itself is pretty small, but we can look to optimize that stuff down the road. In Q2, we're launching nine seasons of original kids content, including a new season of "All Hail King Julien," which is nominated for a Daytime Emmy. This year, we have 33 Daytime Emmy nominations for our kids' content across seven of our different shows. We're really focused on building up the quality of that programming that's exclusive and original to Netflix.
See a Ted Sarandos land or a Reed Hastings land at some point?
We were going to nominate as Kafka Land.
Yeah. All right.
To wrap up here, I want to thank Peter Kafka, who's been with us these last few calls and is retiring from this side job. Thank you for your involvement in this. To all the investors, thank you for your support. We had just a great quarter with 6.5 million net adds, over 81 million subscribers. We cannot wait to break through 100 million subscribers sometime next year. It's going to be a big celebration. We're looking forward to it. Thank you very much.
Thanks.