Welcome to the Netflix Q3 2015 earnings call. I'm David Wells, CFO. Joining me today from the company is Reed Hastings, our CEO, and Ted Sarandos, our Chief Content Officer. Interviewing us today will be Peter Kafka of Recode and Mark Mahaney of RBC. Today, we will be making forward-looking statements, so actual results may vary. I think I'm turning it over to you, Mark, for our first question.
Great. Thanks, David. First question has to do with the domestic streaming market for Netflix. Sub numbers for the second September quarter in a row came in light. You talked about involuntary churn. Could you give a little bit more color around the source of that sub-add weakness? Is this a temporary problem? Just delay concerns that it could be due to greater increased competitive pressure or due to kickback, pushback against some of the recently disclosed price increases.
Sure, I can take this one, Mark. I would say that in terms of additions, they were pretty strong through the quarter in terms of flat being flat year-over-year. In net additions, they were down year-over-year, and that we explained and attributed to our involuntary churn or payments-related churn. We think partially that was due to the transition to the chip cards, which is still ongoing, and we've reflected that trend going forward into Q4 in our guidance. We don't think, though, that it really affects our addressable market size of 60-90 million. I would say last year, we had a little bit of concern at the same time when we overforecasted Q3, and we ended up in Q4 delivering up to six million subscribers for that year. We've done about five to six million for the last four years.
I would say our thesis on the addressable market isn't really changed. In terms of the involuntary churn, we've been improving that. It's better year-on-year, but it is impacted at our levels, even on a small basis, 10, 20 basis points.
Next Q3, Mark, you can be sure that we're definitely going to have low guidance in July, so we think it's just the summer part.
Okay. Reed, if you've added 6 million subs, net subs for the last 4 years in the U.S., at some point, you can't sustain that. Your level as you look forward to next year and what kind of keeps you in that 5 million-6 million range. Just address issues like your confidence that you can get that the marketplace will accept the price increases. Is it that we should expect a greater amount of original content coming out to help keep that sub-add level, that 5 million-6 million? Just address how the consistency of that growth going forwards.
When we look at the last couple of years where we've been, last 4 years, we've been about 6 million net adds in the U.S., and then an accelerating number of new members internationally. Restricting the comments to the U.S., it's fundamentally that internet TV is better than linear TV. The consumers can watch when they want, on what device they want, and the content has just gotten better and better. The fundamental confidence about the large scale is because on-demand is a better experience than linear, and the entire market is going to move from linear to on-demand internet television over the next 10-20 years. In terms of the specific, when we look at the shows that we have coming out next year, that gives us a lot of confidence. We have the Disney Pay-1 deal coming in the U.S. in the third quarter.
Third? Fourth quarter next year?
Fourth of next year.
Fourth quarter next year. We got just tremendous content coming in. Sure, there's a lot of competitors, but there always have been. We've competed against cable and satellite, we've competed against YouTube and all kinds of pay-per-view and DVD. There's a lot of ways to consume entertainment. Despite all of those, Netflix keeps growing because we keep improving. That's why we feel good about next year, both domestic and especially international.
Just a narrow point, Mark, on the pricing. We changed the price in the U.S. last Q2. Q3 came in less than expected, we delivered in Q4 subsequently Q1, Q2 of this year with a higher price. I don't think you can ascribe that to a price for the U.S. in terms of growth.
Hey, guys, I want to ask an international question, first, can you just go back and explain a little bit more about the involuntary churn and what it was with the credit cards that caused people to be unable to pay? I've got the same account number. What happens when my card type changes that prevents me from paying, and what didn't you see that happened in Q3?
Well, Peter, this is David. It's not consistently the case that people don't have the same account number, some issuers are going to replace that number when they issue that. For us, as a recurring merchant, where we really want to reduce the friction of renewal and reduce the friction of having any sort of interaction where you have to update your payment method and present an opportunity not to do that, it just means that there's more noise introduced into that, and we think it's a contributor. Like I said, it's likely multifactor. There may be other things going on here, but certainly, the transition to the chip cards is not helping, and that has to be a factor in it. We're only partially the way through, so the U.S. issuers are going to continue that in Q4.
They were supposed to be done in October, they're not. They're about a third of the way through, so we'll continue to see that in the U.S. as we go along.
Gross additions were above forecast, right?
Correct.
Our initial forecast. That's why we are attributing it to the misforecast, which is quite modest because this is the most accurate forecast we've ever had on an overall basis to this slight change relative to our forecast in the involuntary churn.
Right.
You said the international numbers came in where you expected, but you didn't provide any color on sort of which territories are doing better or worse than others. Are there surprises by territory? Did something do particularly well or particularly underperform?
They're all doing really well, but some are bigger than others. For competitive reasons, we don't give per-country color. We're continuing to learn in every market and improving every market. Every market is growing. Some are doing better than others, which you would expect, and that's up to us to manage to get the total portfolio to be as fast-growing as they are.
It's Mark again. Reed, let me ask you one question, and then Ted, a question to you. Reed, I know on the last earnings call, I think you cautioned people not to get too robust in the Japan launch, and then also argued or made the comment that Brazil was like a rocket ship. At least could you just update maybe a little commentary on those two markets? Our survey work indicated that Brazil was, in fact, a rocket ship. Is that continuing? In Japan, should we continue to be mellow in terms of or modest in terms of the ramp-up there?
It's clearly undisciplined of my no commentary on countries. If I said it was a rocket ship, that has continued. Brazil, what we're seeing is this, with a tough economy, a value-based product like Netflix that's very inexpensive, is really appreciated. Even though there's tight economic times currently, that has not held back our growth. We were definitely pleased with the content and with the offering that we have. Maybe, Ted, you can talk a little about the Japanese content offering.
Yeah. I'd say even back to Brazil, one of the great upsides in this was our global original series, "Narcos," the star of "Narcos" and the director and creator of "Narcos" are both Brazilian superstars. Brazil has received "Narcos" particularly well as it's been well-received around the world. In Japan, I think what's been really great too is the local acceptance of our global originals. We're seeing them perform as a percentage of watching about the same as they are in other territories, which again, defies conventional wisdom that Japan is primarily a local territory. We hedged a little bit too and had some local Netflix original content in Japan, including a show called "Terrace House" that's doing particularly well too. It's I think been a great success in being able to make shows for the globe and extend to places as diverse as Brazil and Japan.
Narcos" is really just such an incredible story because it's two-thirds in Spanish, and yet was a huge success for us around the world including France and Norway. It really speaks a lot to our ability to connect the world to do amazing shows around the world that are great stories for everyone.
Great stories travel. Pete.
Ted, on the original content launches as you're thinking about next year, can you help us think about whether the original content launches as a whole are going to be as impactful, less impactful, or more so than what we're seeing in 2015?
I can tell you that I would say as impactful. I don't know if there'll be more or less, but certainly as we continue to expand into second, third, and fourth seasons of our original shows, what you see there is the franchise value grows dramatically. As this initiative is aging, the desire to see the new seasons builds up more and more excitement. We're not waiting for next year for that. We have an amazing launch schedule for Q4. In the Marvel "Defenders" series, we're bringing out the second show, "Jessica Jones" in Q4 as an example, which I think is going to spark a lot more interest in the entire "Daredevil" run and the next ones coming up after that.
When we talked about the $5 billion content budget for next year, you said for sure it was going to have more impact.
On licensed content, there's a lot of chatter about some of the studios, networks pulling back from stuff they're licensing to you folks. You guys addressed that in your shareholder letter. You said some content providers may choose to license to you, some may not. Have you seen evidence that people are actively steering content away from Netflix in particular?
No. I think the media business is absolutely in flux. As Reed said, you've had this growing move away from linear and towards on-demand, both watching and spending. The future of how the networks and studios deal with Netflix and Hulu and Amazon Prime Instant Video is certainly going to determine their future. There's a lot of caution. You see how volatile the market can be just with a turn of a phrase last quarter. I think what's happening is that you're hearing a lot of chatter, but you see in our earnings letter, we detailed some major global television deals we've signed across the board with our suppliers. You should keep in mind that those particular deals are big rocks to move with our suppliers. Buying and selling global television is a brand-new behavior to the industry.
What we're seeing is more chatter, roughly business as usual. Of course, some caution. Caution that's been around since we've been licensing streaming content.
In general, Peter, the caution, it's SVOD-wide. When you think about new content on Hulu is even more of a cord cutter's dream than Netflix is because it's got the new network shows day after. You really want to read it. A lot of the concern is about SVOD generally.
Yes
Which is to be understood.
Hulu is owned by three of the major networks. James Murdoch at Fox said that he'll be working with you differently. A show like "Empire," the biggest show last year, is going to Hulu, not to Netflix. Are you seeing any of the Hulu studios in particular steer content away from you and towards Hulu?
We're buying show by show, so what happens is happening on the show level, not the supplier level. As Reed said, it's particularly puzzling that considering that it's much more disruptive to give commercial-free options the day after broadcast than it is the year after broadcast.
It doesn't address the strategic issue that is supposedly causing the anger or the backlash or the choice.
Accelerating cord cutting, in that case.
Yeah.
The thing to tease out here is, let's say the "Empire" creators, they get paid based upon how the show monetizes. The studio's under an obligation to monetize that as fully as they can. Hulu can outbid us as they did on "Empire," and that's fair game. They can't win it at half the bid because then the participants don't get paid the right amount.
I think participants are well in tune with that as well.
It's Mark. Let me ask two questions. One on the Epix deal and one on some background to the price increase you just announced. On the Epix deal, maybe Ted, could you comment on this? The decision to not renew it, could you just explain that? Was that due to the economics that you thought were going to be part of the deal really didn't come through for you? The cost per viewing hour was too high? Was it that there's a broader movement at Netflix away from feature films? Were there too many restrictions on a renewal? Just, Ted, explain to us why that deal didn't get renewed.
Sure. Some of our core initiatives around our content are around exclusivity and accelerating windows and giving consumers access to content earlier and earlier. The pay TV window has been particularly out of step with consumer desire to watch content when they want it. Exclusivity, obviously, when we entered into our agreement with Epix, we were kind of de facto exclusive. Since then, they dramatically expanded their cable distribution, which is great for them. They did a deal with Amazon. They were about to do a deal with Hulu when our deal was coming up for renewal.
What we said was that if we were going to do a non-exclusive deal for Epix that would put the content on Netflix several months after paid television and completely non-exclusive, it wasn't a very strategic investment and therefore would be very small relative to what we had been paying. We agreed that our strategic initiative and theirs were diverging, and that we just went our separate ways. We do a great deal of business with Lionsgate. We're continuing to expand our business with Paramount and MGM around the world. This isn't a studio problem. It just really was the Epix product was less and less in tune with what we're doing at Netflix around exclusivity and windows acceleration.
While the movies on Epix are quite good, we found that there's more awareness on the original side. What we're hoping for over this next two years as we launch some really incredible movies that are highly original and premiere on Netflix as well as in the movie theater simultaneously, that we can do better putting the money into those kind of spectacles, that we create more consumer desire and awareness through that vehicle than through this additional Pay-1 licensing.
I think some of the economics match the success of original series programming, which is for the cost of production, you have full exclusivity and global rights in perpetuity versus a very narrow window a year after it's released in the theater in one territory. A $1 billion of output spending versus a $1 billion in original spending may turn out to be the right strategy.
A follow-up question on the price increase. This is the second $1 price increase, I think, in about a 15-month, 18-month timeframe. How do you think about pricing going forward? Is this now the Netflix norm about once a year, a $1 price increase? I think long-term, you believe you've got a lot of ARPU power. Is there any change in thinking about whether that's due to tiering as opposed to just straight out price increases?
Mark, Netflix is $7.99 for our standard def offering. It was $7.99 last year. It was $7.99 two years ago, three years ago. Yes, it is due to the tiering, what we're trying to do is spread out the tiers so that now we've got the $7.99 standard def, the $9.99 high definition, and the $11.99 ultra-high definition. Think of it as related to putting in a good tiering mechanism as opposed to anything else. Really, Netflix is highly available, and standard def is DVD quality. It's not bad quality at all. That's $7.99 for DVD quality, unlimited streaming video. It's an incredible value.
Just to follow up on that, does that mean that we should expect those three price points to stay the same for the next three to five years? Do you have the tiering that you want right now?
We're not making any prognostications about the future on the pricing. It is related to the value. The more that we have incredible value, the more that we have amazing originals, then over time, we're going to be able to ask consumers for more to be able to invest more. That's been the rhythm we've been on as we did the tiering and introduced that. If you look at how much broader and bigger our content is now than two years ago, I think we've really delivered on that promise.
I think it's worth saying that consumers have acknowledged that. I think with the combination of grandfathering and the content additions that we've been able to make in terms of the reactions, I think people are acknowledging that there's real value being delivered through the service.
On the original content side, for a couple of years, you guys have been making your own shows, and you've never acknowledged that any show was less than successful. You never had to take a write-down. As you start spending more on original content, and as you make bigger individual bets on things like movies, at what point do you think you'll be able to tell or investors should be able to expect to hear from you about the performance of individual shows, movies, or any other kind of content bet?
Peter, you should keep in mind that as our slate of original programming grows, the diversity, the size, the scope, the scale of those shows is different. When we say a show is successful, it's because relative to the investment, it's successful. Relative to how else we would have spent that money on licensing something else, does this creation, did it attract the audience that it was built for? The range of budgets is very broad. The range of audiences that we expect to bring to it are very broad. That's why we've been right so far in terms of predicting the size of the audience for these shows. Not that they all.
You haven't made any mistakes in your.
Not that they will reach 30 million subscribers.
You haven't made any mistakes in your projections on your original content to date for the last two years?
Well, we've not had content write-downs, to your point.
Yeah.
Basically, what we're saying is that we're investing according to the size of the show, when we've been wrong, there's been more upside than we had forecasted. We had gone into our original programming very conservative in terms of our modeling relative to licensing and have found that it's been much more impactful.
Peter, probably the best way to externally tell is do we take on additional seasons of a show?
Right.
Some shows have been so successful that we're moving on to season 4s. One show, "Hemlock Grove," is great for what it was, Season 3 was the final season. You could say, well, therefore that was less successful, that's true. So far, we haven't had any show that's performed so weakly in Season 1 that we haven't taken it to Season 2. I'm sure there will be such a show eventually, that's probably the best indicator that you or an investor could use on it didn't really work for us, is we didn't do more of it.
In that case, even you'd say it was relative to an eight-season show, it was less successful, but in its own economics, were quite successful.
Yeah.
Right. Go ahead.
Recently, Amazon just moved to block the sales of Apple and Google streaming devices, their competitive products. Given your dependence on Amazon's AWS, are you rethinking that relationship? Can you rethink that relationship?
AWS has been a great supplier to us. They've demonstrated again and again strong market leadership, strong attentiveness to our accounts. With Amazon retail, we've had up and down issues. For a couple of years, we couldn't buy ads on IMDb, things like that, and that never spilled over to AWS. Now we have a really good relationship with Amazon retail also. The important point to your question is they manage those separately, and we're very committed to AWS and are comfortable with that commitment.
Thanks.
Let me switch back over to the international markets. I think the overall sub numbers came in higher than expected, and the guidance was a little bit higher than the Street at least expected. But the mix of free subs was a little bit higher than I think most people had expected. Do you have a decent read as to whether those free subs are converting like you've seen in other markets? Any particular reason that there's extra risk here because those subs may not convert as well?
No.
You should see those consistent.
Yes.
Yes.
There's no change in trend there, Mark. In the fourth quarter, I think your international revenue forecast implies a trailing off in ARPU or pretty sharp sequential drop in ARPU. Is there a particular reason behind that? Are you-
Yes
specific price points in some of the newer markets that you're launching?
No, it's the strong dollar, Mark. There's a bit of a headwind there because of the strong dollar.
Okay.
On the content side, HBO, one of your big competitors, is moving into news. A lot of that's supposedly aimed at millennials, theoretically your customers as well. Is that something you guys would contemplate at all? Similar question for sports. You guys have repeatedly said you're not interested in sports. Are you willing to sort of concede that maybe you would be a little interested at some point down the road?
Well, look, on the news side, I think we definitely are being more adventurous in terms of the genres that we're going into. We're getting ready to launch Chelsea Handler's talk show early next year. That's our first move into talk. Kind of aimed at the same kind of thing, more of a weekly talk show, where most of our things have been very long shelf life movies and television series. I think it's a very similar migration, or certainly exploration. In sports, I think we're in the same place, which is there's a lot of irrational bidders for sports. We're not anxious to become another one.
To translate that, it sounds like you're saying you're not likely to move into sports, but news you're already interested in and may increase that appetite.
Yeah. Look, we're interested in being able to improve the viewing experience of whatever kind of content people are watching. I think in sports on demand is not as exciting as sports live. I think everything else that we're doing that kind of frees the viewers from the linear schedule in ways that they enjoy and more enjoy the programming, that we could bring some value to that.
Yeah.
Ted, you're leaving the lead there for innovation, right? You're giving yourself a little bit of room-
Yeah, exactly
for innovating in it.
Well, let's be clear on that room. What's the likelihood that we compete directly with Vice in the next two years?
Probably high.
Okay.
There you go. Amazon, Roku, Google, I'm missing somebody, Apple, all introduced new boxes, new streaming boxes in the last few weeks. Are you seeing more usage and more growth from sort of dumb TVs with smart boxes, or are you seeing more usage and growth from connected TVs that have the stuff baked in?
They're both growing. They compete with each other. Those categories are growing. It's only really the game consoles that are not growing as fast for secular reasons. Early on, they were the only high-connected devices attached to the TV, and now they're facing competition and share from smart TVs and from these attached devices.
All right. Thanks.
David, a balance sheet question for you. I think in the letter, you talk about looking to raise additional capital next year. Do you think next year will be the last year in which you'll need to do that as you think about the plans for the next three to five years? Any additional color on what kind of capital or how you would raise that capital next year?
Well, it was largely unknown, right? I mean, you're asking me three or four years out. I would say, given our plans to expand content and given the fact that we're on pace to use about $1 billion this year and no indications that that would shrink next year, we wanted to give some headway or some insight into the fact that we may be back in the market next year. We've done debt on a regular sort of cadence of about once a year. There's no change from that. There's still some uncertainty in terms of the pipeline, how much we would need exactly next year. I would say safe indications are that we would be back in the market in the next 12-18 months.
In a success scenario where Ted's able to invest the originals as well in the future as he has in the past, we would hope to be back because we want to be funding these incredible creative productions around the world. In a success scenario, we would do a bunch more over the next five, 10 years.
In terms of contribution margins, maybe again, David, for you, I think you reiterated your goal of getting to 40% contribution margins in the U.S. by 2020. Of those European countries and some of the, again, Canada, some of the earlier countries that you launched in, could you just talk about what the contribution margin has been like in those markets? Has it been similar to what you did in the U.S. over the last three years?
Well, similar to the comment that we don't give specific market commentary for competitive reasons, but we have said, I'll reiterate, that there's nothing structural that means we can't get to equal or better margins outside the U.S. that we've seen in the U.S. We gave you a data point on Canada that that had reached U.S. margin about 18 months ago. We gave you a point on that. There's no reason that we couldn't do better. Largely, it's determined competitively within that country or that region in terms of how well we'll do on the profit side.
Recently, you guys agreed to sell subscriptions to iPhone users via iOS in-app purchases. For years you didn't do that. Are you paying the same 30% tax that everyone else pays when someone gets an in-app subscription through Apple? Why make that change now after years of not doing that?
It's a great opportunity to expand. Historically, we've only been on the Apple TV and not on the iPhone, and we don't comment specifically on the business terms, so I can't directly answer your question. We're really excited about the potential, especially as we go global over the next year and a half, to be able to serve all of the iPhone customers around the world. Some higher motivation on our side to get access to that incredible iPhone customer base around the world.
Is there a way we're going to see it if that does generate a lot of new subscriptions? Will we see the impact of that on your financials? Will those come in at significantly lower monthly revenue numbers?
No, the revenue is the same. You would see an increase in COGS to do with the fees to Apple. That's where it would show up. It's essentially the gross revenue, the $7.99 or $9.99 that shows for us.
Got it. I'm curious what you guys think of the new streaming offerings from Verizon and Comcast, both what you think of them as actual content and what you think of the notion of broadband providers that you need to work with now competing with you with subscription or streaming services.
We're really big on everybody has got to get into streaming. It's been our main message for several years that what is known as channels is going to become apps, and that all of these providers need to have great apps on a phone, on a tablet, on a TV. It's completely consistent with all of that. What we see is if we have great content, then consumers watch our service and enjoy it and tell their friends about it, and it kind of doesn't matter that there's also a great sports game on, or there's also shows on Verizon or on Comcast. Part of the reason that we may seem a little blasé is that it really hasn't affected us. What has affected us is when we have a great show like "Narcos" that just takes the world by storm.
That's what we're focused on, how do we have more incredible shows?
Do you think the products that Verizon and Comcast just launched are great products?
It's early in the market. They're great companies. They will work on that, but I'm not going to critique them. They're in, they're trying, and that's a great thing. Of course, you've seen PlayStation Vue, you've seen the Sling TV product. People are really innovating, which is great for consumers, and not every product when it first comes out is great, and they'll all continue to work on them.
They're certainly better iterations than their prior versions, so they are getting better.
Our first streaming offering was pretty ugly. Ted, we got a couple of series of emails about whether "Star Wars" is going to be available, all the films on Netflix next year. What's the answer?
They're all subject to negotiation. It's up to Disney how they want to manage access to those assets before, during, or after the release of "Star Wars VII." It's certainly an ongoing discussion.
Assuming "Star Wars" launches theatrically this year, it would not come to Netflix as part of the.
No, it would be the last title in the Disney output going to Starz.
It wouldn't come to Netflix.
Yeah, correct.
Okay.
Okay. There was a new user interface launched on the site about four months ago in the hope that that would kind of improve user retention, satisfaction levels. Four months in, any takeaways?
Super happy with it, we're generating new improvements already, improvements there, improvements on mobile, improvements on the TV. Think of the product group as just an amazing learning organization. It's always pushing the bounds, it's steady improvement on all of those fronts, Mark. It's the aggregate of that which has us have so many viewing hours and so much customer satisfaction that we've been working at all of these improvements over the last seven years on streaming.
It's been very flattered in terms of being imitated across the world.
You guys changed your amortization schedule for your licensed content, just like you had for your originals. You said it's because you're seeing more viewing in the first month. What does that mean? Does that mean people are less interested in the stuff than you thought over time, or they're more interested than you thought originally? What does that sort of tell us about viewing behavior?
Presumably, Peter, you're referring to the amortization change or the change in accounting estimate. No, it doesn't. You can't conclude that, nor should you conclude that from the change. What we're saying is there's more viewing in the first month, not necessarily less viewing over the lifetime. It's just moved up a little bit. It could be that we've added so much good content over the last few years that you have to make a good choice, right? You've got 20 good choices you're choosing. It could be that the merchandising system is concentrating a little bit of that when something comes in. Regardless, we try to be accurate in our accounting, and we follow the trends regularly on a quarterly basis. In this past quarter, we noted some content that was trending up, so we accelerated the amortization on that.
We wanted to be up front, even though it's relatively small, if you look at it in comparison to the overall U.S. content spend, it's relatively small.
Peter, let me give you a little example that'll help on this one. Suppose we pay $1 million for a title for a four-year license, and we think it's going to do 1 million hours of viewing. The title's just incredibly popular, and instead it does 10 million hours. Many of those hours are in the first month, as opposed to spread over the four years. We would accelerate the amortization of that $1 million. Even though the whole thing is doing much better than we ever thought, its relative proportion over time is more upfront. That's why we would front-load that $1 million.
Is this generally what's happening? These things are over-performing, or is there a mix where they're sometimes they're performing less well than you thought?
It's not about the total performance that gets us to change the amortization. It's the relative performance over time. If it performs a lot in the beginning relative to how it does at the end, that's what gets us to accelerate. Your earlier question about write-downs is what's missing. You're not quite getting that. Let's see. If a title underperformed our estimate but was very backloaded, the right accounting would be to shift it out further as opposed to pull it up. You're thinking of it in a write-up and write-down sense, and that's not actually how it works. The schedule is based upon how it does over time, relative to the license period. Did that example help?
Yeah, no. In both cases, you're saying, "Look, we have these things for so long that it always works out." That's why I was asking about the write-down part. You've never once reached a point where you've missed entirely.
No
You found something that no one wants over any amount of time?
Yeah, let me take that, Peter, because I think there's been a couple of questions on that. We certainly license things that perform less well than we expected sometimes, right? There's a portfolio of content that we're licensing. We don't always get it right. In the case of something that doesn't perform as well as we expected, we're not a producer that has ultimate revenues, like a production studio that has to write that down based on a lower expectation of revenue. We have something available on our service, so we're in broadcaster accounting. In broadcasters, if we're deriving revenue over the life of that license period over the service, it doesn't result in a write-down. It just may be an opportunity cost that we can't license something better down the road.
Look, a good recent real-world example is "Longmire." We just released the original fourth season of "Longmire." Season one, two, and three, which we've licensed for several years on Netflix. We're at the tail end of their life, actually exploded when "Longmire" season four launched. It's very unique to the behavior. Nothing actually performs like everything else. We are trying to do is make sure the amort matches the viewing patterns.
It's a good lead-in to remind everyone that these are dynamic, right? That's why we look at it every quarter.
Right.
Things change. We see when something gets released, like "Longmire" or we release a third season, the first season of that particular title may see a bump. It's something that we're constantly looking at.
Where it's ambiguous, we would tend to want to amortize it more quickly. That's advantageous to us.
Right.
It has to be justified by the actual viewing patterns.
Thank you.
On the global rights deals, Ted, just the big picture, as you see yourself, is the company able to negotiate more and more of these content deals on a global rights basis?
Yeah, definitely been the drive of myself and my team all year, trying to move the sellers into a more of a global mode. Remember, they're mostly situated as regional sellers of content. Sometimes the rights are fragmented in their ownership, but in the cases of the deals we did this past quarter, they were controlled by one entity, and typically sold by multiple regions, and we corralled the deals into the corporate offices, and we're able to license the world on those titles. Titles that we think will have great global appeal. I think the growth, the opportunities, the challenges of Netflix are all global, so that having a lot of regional discussions around the world isn't that efficient. It turns out the tastes are rather global too. It's actually really well lined up.
Ted or Reed, when you think about the mix in international markets of local versus global content, any general change in your thinking on what the optimal mix is? Do you find that you're constantly toggling depending on the market that you're in?
Yeah, it's interesting. Like I said, every time we launch in a new market, we know more in that first 24 hours of viewing than we did from one year of research. In terms of the move, I think we went in expecting Japan to be much more local than it turned out to be. It's more local than other territories, but not as local as conventional wisdom would have had. It actually moves with the global desire for some of these large shows, so that the local tastes are usually determined by what you have access to. If we're growing the access to great content around the world, people are migrating to that kind of viewing.
That's why we're able to do local language originals, our own global originals, and then licensed content, not just from Hollywood to the world, but from the world to the rest of the world.
Another international question. Can you guys give us any update on China, either in terms of what you're thinking about in terms of timing or what your approach is going to be to a really regulated market there when you do show up?
We can tell you we're still learning a lot. Nothing really specific or helpful, except that we're still in the early stages.
In your letter, you guys mentioned getting a new pay TV window for a specific movie, "The Big Short." Are you negotiating those deals now on one-off deals for individual movies, or are you doing these for whole slates?
There were conversations direct with producers. A lot of times, if you can get to the rights before they get fragmented, that's when you can do those deals. They tend to be more curated title by title in that way.
Great. Thanks. Hey, Reed. I think I'll just ask one last question directly to you. When you think about the biggest challenges that you think Netflix faces over the next several years, three to five years, what do you think they are? What do you focus most of your time on?
Well, I would say the biggest challenges are being the service that people want, really filling out more movies and more TV shows. We're working so hard to have these great original productions. If we could have 10 more "Oranges" and five more "Narcos," I know I'm putting a lot of pressure on Ted, that would be really transformative, especially opening up the "Narcos." We've got an example because it was filmed in Bogota, Colombia. The main company doing it was a French company, it's a very international production.
Brazilian cast.
Brazilian cast. We have an incredible production, "Marseille," which I'll give a little plug for, that's in filming now, and I think it'll be a really great crossover around the world, kind of crime drama, family, politics. The more we do these around the world, obviously that's great in the local market in terms of establishing our bona fides and reputation with customers. It's also great because it's something new. It's something fresh. As long as we're continuing to push the bounds on things like our original movies or international productions, then the consumers are really embracing.
I'll follow up, sorry. David, help us think through, I guess one of the things I'm sensing very strongly is just increasing appetite, enthusiasm for original content. From a P&L perspective, that $5 billion next year in content spend, theoretically, if that was 25% original content versus 15% or 10%, the impact of that on margins if you mix shift more and more towards original content, is that accretive to margins?
Well, the good news for me as a forecaster is it does take Ted a little bit of time to actually produce these shows. We get a little bit of lead time in terms of some visibility into the production. Our targets of 40% US margin already encapsulate this shift towards originals over time. I think Reed made some earlier comments about a long-term shift that could be upwards of 50% of originals, we still anticipate being able to meet our margin targets and also shift towards originals. It's going to bring more amortization in, we think we can do both.
I'll use the word expansion. Think of it as our licensed content is growing, our original content is growing faster. There is a mix shift, I don't want that to get misunderstood as a reduction in licensed spending. We're still expanding spending on licensed content.
Remember, between original films, original cartoons, animated shows for kids, our original scripted series, we're releasing more original titles in Q4 than we released in our entire second year of original programming. It is accelerating rather quickly, and you're seeing it.
Reed, you said for a while now, the future of TV is apps, and now Tim Cook is saying the same thing. It's now the conventional wisdom. Do you think individual viewers, consumers want to sort of pick and choose their own apps, their own shows? It's sort of an à la carte world. Do you think there's a role for someone to sort of bundle all this stuff back together?
Well, that'll be a really interesting question over the next couple of years. We're going to work really hard to expand our movies and TV shows so quickly in such a compelling way that lots of the viewing for movies and TV shows is through Netflix, which is sort of what makes us want to focus so much on that area. I could imagine future bundles emerging once there's a whole bunch of apps. You go through this industry change now, the next probably three, five, 10 years, where there's a lot of discrete offerings. Everybody's improving their brand value. Then you get to a maturing phase of the market, and then there's some consolidation, which could be acquisitions, it could be other things, or it could be bundles.
The next couple of years, when you have this new phase of the market, I think everyone's just racing to make a great app like Netflix, like HBO Now, those things. We should hit your last question here because we're running out of time. Go ahead.
This will be it. It's a small one. You're seeing some folks sort of rebundle already, right? Hulu is selling Showtime together. Would you be comfortable having Netflix bundled with another service?
We don't see a lot of take rate from our consumer study on the Hulu Showtime. We think we're better focused on just establishing the Netflix brand. Again, at this phase in the market, we think the real key is focus. At some future time, the bundling may be appropriate. Of course, we'll keep an eye and watch the Hulu Showtime take rate to confirm that there's very little traction of that. We'll be open-minded, but our instinct is focus on making Netflix the passion brand in this space.
Before we sign off, we should remind everybody that Friday, tomorrow, is the premiere of "Beasts of No Nation" on Netflix and in selected theaters around the country.
Awesome movie. I hope you guys all watch. Thank you, guys.
Thank you.
Thank you.