Schaefer, Director of Investor Relations. Welcome to this live video interview for our 2013 second quarter earnings results. We may make forward-looking statements during today's interview, and results may differ from those statements. I'd like to turn it over to Reed Hastings, our CEO.
Thanks, Erin. We focused on efficient and effective investor communication for a long time. We work through our shareholder letter, our long-term view. In terms of the Q&A, we've always admired the fireside chat format at investor conferences at being the most dynamic and interesting. This is our attempt to bring that value to the broad online public. We're on our webcams, on our laptops, and on YouTube, so I hope the quality is acceptable. We'll look forward to any suggestions from you afterwards. With me today from Beverly Hills is Ted Sarandos, our Chief Content Officer.
Thanks, Reed, glad to be here today.
Thanks, Ted, also with me is David Wells, our CFO.
Thanks, Reed. I think at this point, we'll start the questions. I'm going to turn it over to our first interviewer, Rich Greenfield from BTIG.
Actually, I think we're going to have Julia start off. Julia, why don't you kick off?
Thanks so much, Julia Boorstin here from CNBC. I just wanted to say that Rich and I have been emailed and tweeted a wide range of questions from a range of institutional investors, individual shareholders, sell-side analysts, and also other companies in the media industry. Now, because there was a lot of overlap in the questions, we are not going to be attributing individual questions, but rather trying to compile them all and get through as many as possible. We were emailed a very wide range and a lot of questions. We're going to get right to it. The first question is about the format of the call. Reed, this question is for you. You alluded to it a little bit, but there has been a lot of criticism about your decision to format the call this way.
How do you address concerns that it actually minimizes the ability of investors to communicate directly with you?
Well, I think we should process that after the interview. Let's see if it's productive and useful for our investors and see what they think.
Rich. Reed, why did you not reach the top end of your domestic sub-guidance? We've talked about where you've seen the success of your original programming, you've been Emmy-nominated, you've gotten a lot of free marketing in the quarter. Yet you did not get up to the top end of your sub-guidance. Could you give us a sense of why that didn't happen?
Yeah. When we do our forecasting in the beginning of the quarter, when we know all of the factors going into that, we try to set the range so that we come in in the middle of the range as we did. We're really happy with the progress in the business. We're happy that net adds were higher than a year ago in our domestic business and much higher out in the international business. We're feeling quite good about the business.
You alluded to the impact of Arrested Development in the quarter. You didn't actually specify how much it had. Could you give us a sense of how many of your subscribers came from adding that programming?
When we look at original content, whether it's "House of Cards" or "Arrested Development," we're just in the very early innings of this. We're figuring out how to promote them and what the ongoing value is. What we see is, if we do it right, these will turn into real franchises. That is, "House of Cards" season 2, "Orange" season 2, season 3, season 4, will be just tremendous assets for the company. "Arrested" was a unique look forward because it already had a developed brand and we were bringing out season 4. What we did see was a little rise in gross additions, which translated to net additions, more than the weekly pattern would have suggested. It was not particularly, it was enough to move our net adds higher than last year, but it was not tremendously significant in the short term.
In general, remember that people subscribe and retain with us for a variety of content, not just a single show. They might come, that "Arrested Development" was the excuse to join, but then they start watching all of our other great content. Think of it as just part of the content mix. I don't know, Ted, do you want to add to that at all?
I would just point out that with every series that we've launched, both the viewing audience and the total hours viewed has grown sequentially with every series that we've launched. Remember we launched from kind of ground zero with the first, both in the concept and in the show itself, and then continued to grow it and grow it. I agree with Reed, these are going to have very long-term implications and that we imagine, and we've been saying from the beginning that they'd have subtle impact on subscribers over time because you're realizing it with things like brand halo and reductions in churn that happen subtly and over time.
You chose to single out "Arrested Development". Does that mean "Arrested Development" is responsible for, say, 15% of the subscriber growth this quarter? Can you give us any number to actually quantify what you indicated in the letter?
I believe we just pointed out because it breaks the seasonal pattern in a way that can be attributed more directly to that.
Julia, when a subscriber or a new member joins, they don't say it's because of "Arrested". There's a whole wide variety of reasons. "Arrested," again, is unique because we're starting with a already created brand. The general case, with "Hemlock," with "Orange," with "House of Cards," is for us to be the first season and debut. Think of "Arrested" as an unusual, nice opportunity, but the general case for Netflix original programming is more like "House of Cards," "Hemlock," and "Orange".
Does that indicate that you expect to see an uptick for "House of Cards" second season, for example?
Yeah, I think we would probably see a little bump there in our numbers. That would make sense. Hopefully by the time we get to season three, four, or five, if we're fortunate enough to get there, then we turn it into a Harry Potter-esque global massive phenomena, "When's the next season coming?" Then we certainly would. Again, we've only made some progress on that. We got to see and we got to make season two as great as season one.
I'd even point out that even the most iconic TV brands like "The Sopranos" and "Seinfeld" took several years before they became brands.
If I could just add to the comments, this is David. We've said consistently, I've said consistently, that it'll take several shows for folks to be engaged in "Arrested Development" and other types of our originals. It's not going to be one show. If you think about whether you join HBO or Showtime because of one or two shows, "Game of Thrones" is the only example where people have thrown out that it is a single show. Otherwise, it's multiple shows. It'll take us a while for our originals to get there.
Moving on to some more questions about the most recent quarterly report. Your investor letter indicates that Q4 margins will decline dramatically despite the fact that you project margins to improve 400 basis points for the whole year. Is this the beginning of a problematic trend in the fourth quarter?
I don't think that we put in the letter any implication that our margins would decline. What we're talking about is our progression, our expansion of margin, and the fact that over the last six quarters, we've actually over-delivered on our target of about 100 basis points a quarter. Content deals are lumpy, and it's hard to predict that and also plan to that gradual expansion. There are quarters where we're going to be over, there'll be quarters we're under, but on average, we'll deliver about 400 basis points a year as long as we're able to continue to grow at the rates that we've seen.
Adding up the math, the fourth quarter is going to show a decline in margins. I guess my question is, how much of that is due to an increase in additional content spending compared to an anticipation that you're going to have to accelerate the amortization of the originals in the fourth quarter?
Julia, for the fourth quarter, we're targeting a little over 400 basis points over the fourth quarter a year ago. That doesn't imply a reduction and certainly not a dramatic reduction in margin. There's just a math error in the question.
Reed, just to be clear, we got a lot of investor questions who thought the 400 was 400 for the full year, not 400 in the fourth quarter. They were looking at your outperformance in the first three quarters and assuming that meant a very large falloff in Q4 to stick to the 400 for the full year.
I see. Well, that's where a good Q&A session like this is useful. Let us disambiguate that. We're looking at it quarter-over-quarter. Our target for the fourth quarter this year is 400 basis points ahead of the fourth quarter last year.
that 400 is not for the full year, just to clarify, because there was a lot of confusion among the analyst questions and investor questions.
Correct. Apparently, we accidentally created that misunderstanding with the per year, but meaning quarterly, year-over-year.
Got it. Thank you. Rich?
When you look at originals, you've called out a couple of them in terms of House of Cards and Arrested Development. You've got a bunch of those still sitting around in the pipeline, and now you've got Orange Is the New Black. When you look at the Q3 guidance for subscribers, is there a benefit from originals? Because you seem very excited about Orange Is the New Black. How do we think about that?
Ted, why don't you take this one?
Sure. Rich, like I mentioned, I think that we've had this compounding positive effect. They're subtle effects, but they are compounding, meaning that when we launched "Orange Is the New Black," surprisingly, it drew as big a first seven-day viewing as any of the other Netflix Originals and actually had been growing every time, which would have to lead you to believe that people are taking more confidence with the idea of Netflix Originals, which is creating some excitement for upcoming seasons as well, and upcoming new series as well. The brand is starting to mean something to viewers already, even though we only started doing this in February. That's what we're enthusiastic about.
Now, obviously, Netflix is proud of its Emmy nominations. Why don't you tell us how many people watched those shows that were nominated?
We've said publicly, well, continue to say publicly, that we're not releasing viewing numbers. Our actual ratings would be apples and oranges comparison to what happens on a network. We view the weight of the viewing over a very long period of time. I will tell you, though, that you should look at our renewal of a show to a second season as a very positive sign. Because if we're renewing shows that people aren't watching in big numbers, then we're creating a huge opportunity cost in our content spend. In other words, we won't have money to spend on things that people watch. These shows are performing really well for us.
They're hitting our numbers with remarkable precision in terms of what we forecasted, enough so that we had confidence to renew "Orange Is the New Black" based on our viewing models even a few days before we launched the show.
Final question on Q1. This is for David specifically. There's a footnote one that talks to a restatement of your contribution margins related to an SG&A shift. Could you explain why that was made and what happened?
Sure. That's related to our global spending on marketing overhead, so people. It's really marketing folks. They are working on projects, branding projects that are for the Netflix brand, a brand across the globe. They're not working on things that are specific to a particular territory or operating segment. We felt like we wanted to treat them like we do our other content folks that are making our content deals, and we treat them as a global cost. Those costs were moved down from the marketing line, which was a cost of revenue down into a G&A line.
Now just moving on to actual questions in categories. We're going to try to break these up into big topic categories. The investor letter starts off by talking about a saturation based on competition. I wonder, since Reed, you've talked about this $60 million-$90 million potential for Netflix, why are you even talking about saturation given where Netflix is today?
Well, I think we never know when and how saturation will hit. What we're trying to be clear on is there's a couple different forces. One is that our content is getting better, our service is getting better, and the other is that the larger we get, of course, the harder it is to grow, and also the longer time goes by, the better competitors are. Those are the opposing forces.
Given those forces, we're extremely excited to have our net adds be at the same level as last year, because that implies that there's no near-term saturation.
Are you still comfortable with the 60 million-90 million ultimate market potential?
We are. We're feeling very good about that because what happens is, by the time we get to 40 and 50, we get the content better and the service better. It's not 60 or 90 for the current service, it's 60 or 90 for the future service that's much improved with maybe a lot more originals and just incredible streaming.
Many investors have shared a concern that virtually everyone in your potential market has already tried Netflix at least once. You have very few actually new customers. What is your level of churn?
What we really focus on is the net adds. Because someone's tried Netflix before, they're probably more interested in trying us again as the content gets better, as the streaming gets better, as the playback software and the devices gets better. There's lots of people who tried us, and then they'll try us again to see if we meet their future needs. We're feeling very comfortable about that.
I understand you stopped reporting churn. Can you tell us anything about the churn and what that might reveal about future growth?
I can tell you that as the CEO of Netflix, I focus myself. I don't even look at the churn numbers, essentially. I'm looking at net adds all the time because you get various trade-offs. Really what we care about is total growth. It's bringing the world in line with how management looks at it, which is in terms of net additions, which we do check every week, every day.
And-
And if you-
Go ahead.
Go ahead.
No, go ahead.
If consumers are now watching over 90 minutes of Netflix a day, why is that household churning? What else do you need to do if you're already at 90 minutes of household viewing per subscriber in the U.S.?
Let's see, that household that's watching 90 minutes a day probably isn't canceling, but that's an average. Think of it as a bell curve of usage. The people at the lighter end that are not using Netflix much, they're more prone to cancel it than someone who's watching a lot. We're constantly just trying to make the service better, which is what we've been doing over the last five years.
We've received a number of questions and concerns about your free cash flow. Over the last few quarters, you've had a disparity between net income and free cash flow, suggesting that you're really making an investment in your streaming library content. The question then is, what is the duration of the content that you're investing in, and when should we expect it to run through the income statement?
I'll probably take this one. This is David. We've been very clear and very transparent about the fact that our content investments are going to run ahead of our P&L expense and weigh on our free cash flow. We're pleased this quarter to actually flip to positive. Likely, we'll continue to make investments in originals and other content that will continue to weigh on our free cash flow. We're very comfortable with where we are today. We think that the viewing that follows from those content investments, our accounting has to follow from that viewing. That to the extent that the industry is set up, that more of the money is paid up front in order to fund production, that's something that we can only affect a little bit.
We have to be competitive buyers in the industry, we have to meet those payment terms, a lot of these deals are more cash up front-loaded.
Well, certainly. Some investors we've spoken to calculate disparity between net income and free cash flow at over $2 per share. Will we see that pressure EPS?
I'm not sure about the $2 per share. What we said is that our free cash flow runs ahead of our P&L expense about 20%. The ratio of cash out to P&L expense can run 20% above that P&L, that's typically holding, even with some of our more cash up front Netflix Originals deals. You'll see some of that start to unwind as we get older a lot of the deals start to mature down the road. While we're expanding content, you should expect, investors should expect that to continue to weigh on our free cash flow.
David, when you look at the original programming, the amount of spend versus the amortization, your website spends a lot of detail going into how that's amortized. What is the actual cash outlay? You talked about it being higher. How should we think about how the cash for these Netflix Originals and even some of your new deals like DreamWorks, how does that actually flow into your actual cash position as we think about your balance sheet?
They're a little bit different. Generally, we make payment partially upon delivery, and then another section, it depends on the deal, and we don't talk about deal specifics, but illustratively, it can be 18 months, it can be three years. It depends on the license period. Again, it really depends on the delivery of that content and when it comes in. For output-style deals, that really depends on the size of the box office card that we're paying. Again, it depends on the content as it comes through. We've been fairly conservative, I'd say, in terms of preparing for this. We raised debt earlier in the year. We restructured some debt. We feel pretty good about our cash position.
We put in our long-term letter, depending on the expansion of Originals, we may need more capital down the road, right now we're fine.
Rich, I'd say, too, that we've been able to get very favorable cash terms from our suppliers on most of our deals, I'd say that the more high profile the programming is, the more likely it is Original and exclusive, the cash outlay is accelerated versus some of the very deep catalog that pays out very smoothly over several quarters.
When do you drive more subscribers at a lower price or generate a higher profit margin at a higher price? Basically, why is $7.99 the right price?
I would say $7.99 is pretty close to the right price. I don't think we could be certain that at $6.99 or $8.99 it would be a little bit better or a little bit worse. Once you've picked a price, there's a tremendous value in consumer stability, we're growing very strongly at the current price, we feel great about that situation.
There's an overwhelming number of questions from investors and other analysts of, are you going to be forced to raise price because you literally can't afford your content commitments? Either you need to raise equity or you need to raise the price of your service.
Well, if you look over the past three years, we've raised the contribution margin in the United States business from sub 10% to over 20%. I think there's plenty of evidence that we can grow revenue faster than we're growing content costs.
A specific question that was asked by a number of people is, given the negative operating cash flow trends, obviously, cash flow is positive this quarter, but given those trends and the high cost for original content and also exclusive content, what is the probability that you'd either be forced to raise debt or subscription prices in the next 12 months?
Well, let's see. Let's separate the two factors. One is domestic, where we're hugely profitable and growing very well. The other is international, where we're growing extremely strongly. Revenue was up 155% over a year ago. It has negative P&L. We're in investment mode. So we've got the strong U.S. business supporting the investment in international. In terms of the likelihood of raising debt or prices, we don't have anything more to add to that than what we said, which is we're very comfortable where we are in the $7.99 price point, and we're growing very strongly. In terms of debt, it'd be pretty unlikely in the next 12 months.
I guess looking beyond the next 12 months, over the next couple of years, many investors and analysts we meet with have said they believe you will need to execute a stock sale to pay for your content obligations. What is your outlook in terms of your plans for potentially a secondary stock offering in the next three to four years?
This is far off to speculate on. At this point, what we can say is what we've said.
Would a price increase be a way to avoid a capital raise?
We're very comfortable with our $7.99 price point and with the growth that it generates.
Shorts believe that your stock is exceedingly expensive. When you look at the valuation of where you are now, how do you get comfortable with the growth potential of your stock from these levels?
Well, I think management's probably not the greatest judge of their own stock price. We try not to comment specifically on that. We try to provide lots of information to investors, there's a natural process through that of the price getting set. What we focus on is how to grow the subscriber base, how to expand internationally, how to improve the content, and those are all the things that we're focusing on.
For investors who've been on a roller coaster ride with Netflix over the past two years, what would you say to tell them or reassure them that what happened two years ago is not going to happen again?
Stocks go up and down. Our stock's been so volatile. A year ago, we were at $80. Now we're over $200. Five years ago, we were at $30. We went public at $7.50. The general trend is quite positive, but there are a lot of ups and downs, and it's been a very volatile stock because we're growing so aggressively. We're choosing a business strategy which has us put essentially all of our domestic profits into international expansion. We think that's the right move, but it definitely takes a strong stomach on the part of investors.
Reed, really following up on that international point, what is the strategy? Do you want to essentially grab as much market share over the next five years as you can without regard to profitability? Or do you think you're actually going to start showing meaningful international profitability before going into too many more markets?
No, our strategy is the same as we put in the long-term letter, which is we're investing substantially all domestic profits in international expansion. We think that's very smart. If you look at our international growth, it's tremendous. We think there's a huge opportunity around the internet in international markets, we're investing for the long term in that, I think we've been very clear on that for almost three years now.
Yes, the only thing I'd add to that, Rich, is that we have demonstrated good progression in terms of operating losses, reductions in international. We're 25% down year-over-year, we're very pleased, as Reed said, with the growth in those international markets. It's more about the progression of our existing markets and the path we're on than it is about an overall line.
If I could also add, too, that the success we're seeing with our original programming, we're seeing throughout our international markets as well. That proportionally to our sub base, our subs overseas are excited about these shows at roughly the same level as they are in the U.S.
Shifting gears over to your licensed content spending, with two of the last three DreamWorks Animation films disappointing at the box office, underperforming DreamWorks Animation's average, do you have an out of the big deal that you announced with DreamWorks Animation?
I'm sorry, Julia, are you talking about the series deal or the film output?
The series deal and the film. The larger deal.
Look, I'm very comfortable with DreamWorks' performance at the box office. Even this weekend, yes, "Turbo" opened a little soft, but it came out with CinemaScore ratings of A with very good word of mouth, likely to continue to expand the box office. "The Croods" was a nice little hit, actually, at the end of the day for DreamWorks. There's a rate card that regulates the fee for those films relative to their box office performance. We're thrilled with DreamWorks and the performance of their films and the quality of their films, and they translate to very high viewing on Netflix, even in movies that don't perform as well at the box office.
The fact that "Turbo" has been such a box office disappointment, especially compared to all of the other DreamWorks Animation movies, doesn't that diminish the value of that DreamWorks Animation content on your platform? You've said that it would be a game changer, that this additional content is a game changer. Doesn't this diminish that?
Julia, if it does, it's reflected in the rate card. The rate card adjusts up and down with the performance of the films. As far as the series deal is concerned, these are very iconic characters that tend to last a long time, way beyond opening weekend performance. Our series will launch post the DVD release of these films, so they get a whole second wave of marketing ahead of them, too.
And-
Sorry, go ahead, Rich.
I was going to say, Ted, when you buy content, do you see a point where you're going to be buying globally versus having to buy in the U.S., buying in the U.K., in every single market? When can you scale buy globally?
Increasingly, all of our original deals we're doing globally. We have been doing all of our kind of independent non-studio deals globally, and we're doing much more multi-territory licensing as well. Sometimes global plays out to our favor, and sometimes you don't really achieve the scale of it. Right now we're kind of trying to wade through that and see where we can pick up global efficiencies.
Can you give us an example of one where you see the benefit?
Rich, even when we're global, for example, in Asia where we're not currently, we'll generally sell off the rights there. Even when you talk about global, if we're not exploiting it globally, it's really multi-regional.
Correct.
Quickly before we move on to original programming spending, can you tell us how many subscribers quit Netflix after you chose not to renew "Dora the Explorer" and the other Viacom content?
You saw it in the net adds. We grew.
Moving on to the original programming spending, Netflix and Reed often draws a comparison to HBO. Unlike HBO, Netflix does not own the content, so it doesn't profit from licensing it to other outlets. It also doesn't have exclusive rights. For instance, "House of Cards" you can buy elsewhere, though Netflix does have the streaming rights. How do you justify reinforcing this parallel to HBO when HBO does have a different business model?
Julia, most of the original programming originates in this way, which is you kind of want to hedge your bets a little bit on building the confidence and building out before you build out the infrastructure. You step in and do more licensing deals, which is how Showtime does most of their deals, which is how HBO did in their earliest days, how AMC did in their earliest expansions. This is not unusual at all, and the more confidence we build, the more likely we are to take a full ownership stake and to build out more infrastructure around it.
Does that mean?
Have you started to build that infrastructure, that is?
Well, we are managing a broader set of rights today than we used to, for sure.
Does that mean you?
Julia, sorry, it's Reed here. Think of it as a broad expansion, which is HBO has a lot of licensed content, for example, all the movies. It's only the originals and only some of the originals that they own. It's natural for us to grow into that over the next couple of years. It's part of a long-term view.
Do you have specific plans to move into full ownership in the near term?
Absolutely. It's something we're looking at, there's so many gradations between what full ownership is in every territory. Think of it as, over time, we'll do more and more of that and the content will be more and more exclusive to Netflix. While we were getting started, it was really smart for us to work with Media Rights Capital and Lionsgate and others to be able to leverage their skills and competencies.
Rich?
Reed, do you think that you have a structural advantage in creating original programming versus your peers, whether that's the releasing pattern, whether it's the data, or whether it's the fact that you're commercial-free?
Well, we have some advantage in creating it, I think the biggest advantage we have is in matching with the content and distributing it, essentially monetizing the content. You can see that with the breadth of our success. One view of our 4 for 4 in our starting, or 5 for 5 if you include "Lilyhammer," is Ted's God's gift to programming. I think that's probably true. The second part of it is also that we've got this online performance matching where the content is selectively promoted to each subscriber appropriately, and that helps tremendously. It's not really important for us to tease apart which is more true. We want both excellent programming and we want to do amazing promotion, and we get stronger from that without worrying too much about which side is contributing more or less.
You do see that Ted has an Emmy next to him in the frame, he's got a little story for you in that.
Yes. The Emmy we brought along today I think is a great example of Netflix, which we strive to be excellent as both a technology company and an entertainment company. Fitting to that, this Emmy was actually awarded to Netflix on the technology side last year for the advancement of television. So actually the first Emmy came from the tech side of Netflix.
I guess I don't understand, how do you define a hit? You said Ted's 5 for 5, Reed. How do you know Ted's 5 for 5?
Well, the easy one is a hit is something we want to renew, and the five for five is we want to renew because the economics for us are good.
A question about your content cost. Oh, just to follow up on that, how do you know you want to renew it? Is it the percentage of your subscribers who are watching? Is it the subscriber bump?
Julie-
Just some insight into how you know that you want to renew.
Relative to how else we would've spent the money, relative to spending it on licensed content. Did we get an increase in viewership? Did we get an increase in kind of some of the intangibles like brand halo, publicity, and to bring the brand more in focus with our consumers. Relative to how else we would've spent the money on other programming, we think it was a big hit. By the way, without giving ratings numbers, I would tell you every one of these shows are drawing TV-size audiences. You know that "House of Cards" is a hit because when you walk into Starbucks, people are talking about it.
You know when the show is being spoofed at the White House Correspondents' Dinner and 3,000 people are laughing at the slightest references to the show, you know that people are watching it and you know people are talking about it. Without the precision of a number, you know that these shows are a hit, too.
Okay. Well, we're going to keep on asking for a number.
Okay, fair enough.
Someday, Ted, you will give one to me.
Fair enough.
A question about content cost. Seemingly every network, cable and broadcast, and all of these new digital channels are all spending aggressively on original programming. Doesn't that threaten to drive your content costs spiraling higher? What kind of a threat is that to your margins?
How would it drive them higher?
If there's so many people competing for content.
For-
There are new buyers for content. You have Amazon.
Well, license. We have our license content.
Licensing content. Yeah.
Well, with so many people producing original programming, it creates a lot of competition in the market for licensed programming in the season after model. In terms of competing for original programming, I'm much more comfortable, to Richard's earlier question, around some of our structural advantages about not having to have a lot of performance pressure on a show in its first week, which actually drives the ability for consumers to find the show over time before we have to pull the plug on it, the way many other broadcasters are forced to in linear television.
To raise a question about competition, you have Amazon, which is investing $1 billion in licensing content. You have Hulu, which has got $750 million from its parent companies to spend on content. The influx of all of this cash for content, both licensed and original, doesn't that threaten to push up prices?
Yeah, maybe. I can tell you that in the more exclusive deals that we've been negotiating, the one thing that's nice about that is you get to know what the walkaway prices are. I can tell you in every one of those cases, we've been comfortable at the prices we've walked away from and comfortable at the level of the pricing that our competitors are paying for that content. Yeah, there's definitely some competition in the marketplace, which does raise the prices, which is good for the producers and eventually good for consumers, too.
I'll add to that it's great for content owners and it's great for creators that there's this renaissance, particularly in serialized TV. On one hand, it's tough on us that Amazon and Hulu and others are bidding. There's so many great stories to be told that it's exciting. If the prices are going to go up, then we, as one of the major scale players, have a big advantage. It's good for the creators, it's acceptable for us, and we're seeing this total renaissance in television. Unfortunately, I have to tell you we're down to about two minutes left. I did set this up as a 30-minute view. If it's very successful and investors like it, we'll try to do a longer session next time. Let me hand it back to you for the closing two minutes.
Well, I hate to say we've emailed so many questions by investors and analysts. I wish we had a little bit more time, but I'm going to ask a quick question about competition. You mentioned Amazon and Hulu, both of them are stepping up their investment spending. What kind of threat do they pose to you in the next, I would say starting in 2014, once we start seeing the impact of that?
We don't really know. We always take them very seriously. They're very successful. If you look at Showtime and HBO, when Showtime does great work, it doesn't take away from HBO. We think that Hulu and Amazon will do great originals and will grow the whole internet TV market. What controls our destiny is do we do great programming? Do we have a great user interface? Do we have incredible streaming? We really just focus on maximizing that opportunity by making our service the best it can be.
Reed, you talked about incredible streaming quality, the issue really is most of your viewing occurs on fixed line connections because that's where the quality of the experience is good, and wireless isn't that good. Do you think that over the next few years, we're going to see a sea change in the wireless industry? SoftBank's Masayoshi Son is putting a tremendous amount of capital just buying Sprint. Do you think you're going to see a big shift in your business towards wireless over the next few years?
Think of it like tablets. As tablets have come about, they've been a growing proportion of our viewing, and that helps the ecosystem. Better and cheaper connectivity, more competition for broadband, that's all very positive. These are gradual multi-year effects. 5 or 10 years from now, consumers will have incredible devices, incredible broadband at low prices, that's very favorable in the long term, I don't think it's a short-term catalyst.
Is tablets even 5% of your viewing today?
We don't disclose the specifics.
Reed, a question about the business that you started off with, DVDs. Many investors have pointed out that you seem to be allowing your DVD business to atrophy. Do you plan to shut down that legacy DVD business?
No, we've got over 7 million members who love the service. It's got incredible selection. Every movie and TV show ever made. It's got a great part of the value equation for over 7 million members, and that'll go on for a very long time.
Reed, one last content question.
Last question. Go ahead.
One last content question, because we got it from a lot of people. You've gone into original TV series. A lot of people are asking, would you go into the movie business and create movies? Would you create talk shows in the evening, like a Jay Leno type show? Would you do a news program like the evening news that people could watch for 24 hours on the subscription service? What other content makes sense for Netflix?
Well, Richard, in the letter, we mentioned that we are going to expand in the coming months into original stand-up comedy specials and documentaries that'll premiere on Netflix and be exclusive to Netflix. There's no reason we wouldn't do some of those other things that you've listed, including movies, if we could bring to it something like we did with the original series, kind of change the distribution model in the favor of the consumers with things like launching the whole season at one time and things that give us advantages over other forms of distribution.
If you look at HBO and Showtime, they also do quite a bit of sports programming and live sports. They're basically in the membership happiness business.
Right.
We don't anticipate getting that far from our core brand, but it's a very flexible relationship where we can have lots of types of content over the next five or 10 years if it makes our subscribers happy. We're fundamentally in the membership happiness business as opposed to in the TV show business. We do have a lot of flexibility. In the short term, we're focused on learning this craft bit by bit and having our current shows be wildly successful.
Can you tell us how many more originals you plan to launch over the next two years and how much you plan to spend on them?
Not precisely, we can say we're continuing to expand that, it's a great wrap-up question. I want to thank all our investors for participating in this. We look forward to your feedback on the format, we'll try to just keep on improving it to make it efficient and effective for all of you. Thank you very much.
Thanks.