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. Now 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 2nd 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? And then just delay concerns that it could be due to a greater increased competitive pressure or due to kickback pushback against some of the recently disclosed price increases? Sure.
I could 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 60,000,000 to 90,000,000.
I would say last year we had a little bit of concern at the same time when we over forecasted Q3 and we ended up in Q4 delivering up to 6,000,000 subscribers for that year, we've done about 5,000,000 to 6,000,000 for the last 4 years. So I would say our thesis on the addressable market isn't really changed, isn't changed. And in terms of the involuntary churn, we've been improving that. It's better year on year, but it does it is impacted at our levels even on a small basis, 10, 20 basis points.
So next Q3, Mark, you could be sure that we're definitely going to have low guidance in July. So we think it's just the summer part.
Okay. And then, Reed, if you've added 6,000,000 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 $5,000,000 to $6,000,000 range. So 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 sub ad level that $5,000,000 to $6,000,000 Just address how the consistency of that growth going forward?
When we look at the last couple of years where we've been last 4 years, we've been about 6,000,000 net adds in the U. S. And then accelerating number of new members internationally. But 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. So 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 to 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 Q3 Q3 Q4 next year. Q4 next year. So we got just a tremendous content coming in. And sure, there's a lot of competitors, but there always have been. I mean, we've competed against cable and satellite and we've competed against YouTube and all kinds of pay per view and DVD.
So there's a lot of ways to consume entertainment. And despite all of those, Netflix keeps growing because we keep improving. So that's why we feel good about next year, both domestic and especially international.
And then just a narrow point, Mark, on the pricing. I mean, we changed the price in the U. S. Last Q2. Q3 was came in less than expected, but then we delivered in Q4 and then subsequently Q1 and Q2 of this year with a higher price.
So 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. But 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 it?
And what didn't you see that
happened Q3?
Well, it's not Peter, this is David. It's not consistently the case that people don't have the same account number and some issuers are going to replace that number when they issue that. And 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. And 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 and they're going to 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.
And gross additions were above forecast, right? Correct. That's why we are attributing it to the missed forecast, 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.
And then you said as 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 a territory? Did something do particularly well or particularly underperform?
They're all doing really well, but some are bigger than others. But for competitive reasons, we don't give per country color. So we're continuing to learn in every market and improving every market. Every market is growing, but 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. So Reid, let me ask you one question and Ted a question to you. Reid, I know in 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. So at least could you just update maybe a little commentary on those 2 markets?
Our survey work indicated that Brazil was in fact a rocket ship. Is that continuing? And then Japan, should we continue to be mellow in terms of our modest in terms of the ramp up there?
It's clearly, clearly undisciplined in my no commentary on countries.
So 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.
And so even though there's tight economic times currently, that has not held back our growth. And we were definitely pleased with the content and with the offering that we have. And maybe, Ted, you can talk a little about the Japanese content
offering. Yes. I'd say even back to Brazil, I mean, 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. So 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 that is the local acceptance of our global originals.
So 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 is doing particularly well too. So it's been I think it's been a great success in being able to make shows for the globe and extend to places as diverse as Brazil and Japan.
And narcos is really just such an incredible story because it's twothree in Spanish and yet was a huge success for us around the world, including France and Norway. And so 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.
And great stories, Trevor.
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?
Well, 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. So as this initiative is aging, the desire to see the new seasons gets more builds up more and more excitement. So and we're not waiting for next year for that. We have an amazing launch scheduled for Q4. In the Marvel Defenders series, we're bringing out the 2nd 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 one is coming up after that.
Now when we talked about the $5,000,000,000 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 stuff for the 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 it's the media business is absolutely in flux. As Reade said, you've had this growing move away from linear and towards on demand, both watching and spending. So 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. So there's a lot of caution.
And you see how volatile the market can be just with a turn of a phrase last quarter. So I think what's happening is that you're hearing a lot of chatter. But you see in our earnings some major global television deals we 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.
So what we're seeing is more chatter, but roughly business as usual. But of course, some caution, caution that's been around since we've been licensing streaming content. And maybe
So to
get off, Peter, the caution, it's SVOD wide. So when you think about new content on Hulu, I mean Hulu is even more of a cord cutters dream than Netflix is because it's got the new network shows day after. So you really want to read it. A lot of the concern is about SVOD generally, which is to be understood.
But Hulu is owned by 3 of the major networks, James Murdoch, Fox said he'll be working with you differently. A show like Empire, the biggest show last year is going to Hulu and not to Netflix. Are you seeing any of the Hulu studios in particular steer content away from you and towards Hulu?
It's most remember, we're buying show by show. So it affects so what happens is happening on the show level, not the supplier level. As Reade 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 not to
We're accelerating cord cutting in that case.
And the thing to tease out here is, let's say, the Empire creators, they get paid based upon how the show monetizes. So the studio is under an obligation to monetize that as fully as they can. So Hulu can outbid us as they did on Empire, and that's fair game. But 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 2 questions. 1 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? So the decision to not renew it, could you just kind of 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 hours too high? Was it that there's a broader movement at Netflix away from feature films with too many restrictions on a renewal. Just explain to us why that deal didn't get renewed?
Sure. So some of our core initiatives around our content are around exclusivity and accelerating windows and giving consumers access to content earlier and earlier. So the pay TV window has been particularly out of step with consumer desire to watch content when they want it. And exclusivity, obviously, when we entered into our agreement with Epix, we were kind of de facto exclusive. And 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. So what we said was that if we were going to do a nonexclusive deal for Epix that would put the content on Netflix several months after pay television and completely nonexclusive, it wasn't a very strategic investment and therefore would be very small relative to what we had been paying. And so we agreed that we were our strategic initiative and theirs have were diverging and that they should go 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. So this isn't a studio problem. It's just really was the Epics product was less and less in tune with what we're doing at Netflix around exclusivity and Windows acceleration.
And while the movies on Epics are quite good, we found that there's more awareness on the original side. And what we're hoping for over this next 2 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 PayOne licensing.
And I think some of the economics match the success of original program 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. So $1,000,000,000 of output spending versus $1,000,000,000 in original spending may turn out to
be the right strategy.
Okay. And then a follow-up question on the price increase. So this is the 2nd dollar 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 dollar 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 tearing as opposed to just straight out price increases?
So Mark, Netflix is $7.99 for our standard def offering. It was $7.99 last year, it was $7.99 2 years ago, 3 years ago. So yes, it is due to the tiering. And what we're trying to do is spread out the tiers so that now we've got the $799,000,000 standard def, the $999,000,000 high definition and the $119,000,000 ultra high definition. So think of it as related to putting in a good tiering mechanism as opposed to anything else.
And really, Netflix is highly available, and standard def is DVD quality. It's not bad quality at all. So that's $7.99 for DVD quality, unlimited streaming video. It's an incredible value.
So just to follow-up on that, does that mean that we should expect those three price points to stay the same for the next 3 to 5 years? Do you have the tiering that you want right now?
We're not making any prognostications about the future on the pricing, but it is related to the value. And 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. And 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 2 years ago, I think we've really delivered on that promise.
And 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 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 performance of individual shows, movies or any other kind of content that?
So 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. So 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? So the range of budgets is very broad. The range of audiences that we expect to bring to it are very broad.
So that's why we've been right so far in terms of predicting the size of the audience for these shows.
So you haven't made any mistakes in your projections on your original content to date for the last 2 years?
Well, we're not a content write downs to your point. So basically, what we're saying is that we're investing according to the size of the show. And when we've been wrong, it's been there's been some more upside than we had forecasted. So we had gone into our original programming very conservative in terms of our modeling relative to licensing. And I 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. So some shows have been so successful that we're moving on to Season 4s. One show, Hemlock Grove, is great for what it was, but Season 3 was the final season. And so you could say, well, therefore, that was less successful, and that's true. But so far, we haven't had any show that's performed so weekly in Season 1 that we haven't taken it to Season 2.
I'm sure there will be such a show eventually, but that's probably the best indicator that you or an investor could use on. It didn't really work for us as we didn't do more of it.
And in that case, Riva, you'd say it was relative to an 8 season show, it was less successful, but in its own economics were quite successful.
Yes. 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. We could not be happier with AWS. And they've always kept that separate from Amazon Retail. So 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. But 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?
Yes. You should see those consistent.
Yes. There's no change in trend there, Mark.
And then in the Q4, I think your international revenue forecast implies like a trailing off in ARPU or pretty sharp sequential drop in ARPU. Is there a particular reason behind that? Are you are you
at specific
price points in some of the newer markets that you're launching?
No, it's the strong dollar, Mark. So there is 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? And then similar question for sports, you guys 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, I'll go 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. It'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 long very, very long shelf life movies and television series. So I think it's a very kind of similar migration or certainly exploration.
And 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.
So to translate that, it sounds like you're saying you're not likely to move into sports, but news you're already interested in may increase that appetite?
Yes. We're interested in being able to improve the viewing experience, whatever kind of content people are watching. So I think in sports, sports on demand is not as exciting as sports live, where I think everything else that we're doing to kind of freeze the viewers from the linear schedule in ways that they enjoy and more enjoy the programming that we can bring some value to that.
So Ted, you're leaving the lead there for innovation, right? You're giving yourself a little bit of room for innovating.
Well, let's be clear on that room. What's the likelihood that we compete directly with Vyze in the next 2 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. So 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.
David,
a balance sheet question for you. I think in the letter, you talk about likely to raise looking to raise additional capital next year. Do you think this will next year will be the last year in which you'll need to do that as you think about the plans for the 3 to 5 years? And then 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 3 or 4 years out. But I would say given our plans to expand content and given the fact that we're on pace to use about $1,000,000,000 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 that on a regular sort of cadence of about once a year. So there's no change from that.
But there's still some uncertainty in terms of the pipeline, how much we would need exactly next year. But I'd say safe indications are that we would be back in the market in the next 12 to 18 months.
And in the success scenario where Ted is 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. So in a success scenario, we would do a bunch more over the next 5, 10 years.
And 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. Are those European countries and some of the in 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 been similar to what you did in the U. S.
Over the last 3 years?
Similar to the comment that we don't give specific market commentary for competitive reasons. But we have said and I'll reiterate that there's nothing structural that means we can't get equal or better margins outside the U. S. That we've seen in the U. S.
And 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. So there's nothing 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 Apple phone 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? And why make that change now after years of not doing that?
It's a great opportunity to expand. So 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. But 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. So some higher motivation on our side to get access to that incredible iPhone customer base around the world.
I mean, 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 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. But it's essentially the gross revenue, the $7.99 or $9.99 that shows for us.
Got it. 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. So it's completely consistent with all of that. And 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.
So part of the reason that we may seem a little blase is 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. So 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 Sony VUE, you've seen the Sony VUE, you've seen the DISH Sling products. So 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.
And there's 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 e mails 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. So it's up to Disney how they want to manage access to those assets before, during or after the release of Star Wars VII. So it's certainly an ongoing discussion.
And assuming Star Wars launches theatrically this year, then it would not come to Netflix as part of
the No, it would be the last title in the Disney output going to Starz.
So it wouldn't come to Netflix? Yes, correct. Okay.
And then there was new user interface launched on the site about 4 months ago and I hope that that would kind of improve user retention satisfaction levels 4 months in? Any takeaways?
Super happy with it and we're generating new improvements already, improvements there, improvements on mobile, improvements on the TV. So think of the product group as just an amazing learning organization. It's always pushing the bounds and it's steady improvement on all of those fronts, Mark. And 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 7 years on streaming.
And it's been very flattered in terms of being imitated across the
world.
You guys change your amortization schedule for your license content, just like you had for originals, you said because you're seeing more viewing in the 1st month. What does that mean? Are people is that mean there's less people are less interested in this 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. And 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 1st month, not necessarily less viewing over the lifetime.
It's just moved up a little bit. And it could be that we've added so much good content over the last few years that it's become it's you have to make a good choice, right? You've got 20 good choices you're choosing. So 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.
And this past quarter, we noted some content that was trending up. So we accelerated the amortization on that. We wanted to be upfront even though it's relatively small based 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 will help on this one. Suppose we pay $1,000,000 for a title for a 4 year license, and we think it's going to do 1,000,000 hours of viewing. But the title is just incredibly popular. And instead, it does 10,000,000 hours. But many of those hours are in the 1st month as opposed to spread over the 4 years.
Well, then we would accelerate the amortization of that $1,000,000 even though the whole thing is doing much better than we ever thought. Its relative proportion over time is more upfront. So that's why we would front load that $1,000,000 So the
That is generally what's happening, are these things that are overperforming? 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. And so if it performs a lot in the beginning relative to
how it does at the
end, that's what gets us to accelerate. So 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 back loaded, then the right accounting would be to shift it out further as opposed to pull it up. And so you're thinking of it in a right up and right 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?
Yes, no, no. But in both cases, you're saying, look, there's these we have these things for so long that it always works out. That's why I was asking about the breakdown point. You've never once reached a point where you missed entirely and you thought something that no one wants over any amount of time?
Yes. 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.
But 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 brought in broadcaster accounting. And 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.
And a good recent real world example is Longmire. We just released the original 4th season of Longmire. So Season 1, 2 and 3, which we've been which we've licensed for several years on Netflix, where it could be kind of tail end of their life, actually exploded when Longmire Season 4 launched. So it's very unique to the behavior like nothing actually performs like everything else. So we are trying to do is make sure the Amort matches the viewing patterns.
And it's
a good lead in to remind everyone that these are dynamic, right? That's why we look at it every quarter because things change. We see when something gets released like Longmire or we release a 3rd season, then the first season of that particular title may see a bump. So it's something that we're constantly looking at.
And where it's ambiguous, we would tend to want to amortize it more quickly. That's advantageous to us. But 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?
Yes, definitely been the drive of myself and my team all year trying to get these 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 1 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.
So 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. And it turns out that the taste are rather global too. So it's actually really well lined up.
And then 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 with depending on the market that you're in?
Yes, 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 a year of research. And 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. And it actually moves with the global desire for some of these large shows, so that the taste, local tastes are usually determined by what you have access to. And if we're growing the access to great content around the world, people are moving or migrating to that kind of viewing.
So 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. So nothing really specific or helpful, except that we're in the still in the early stages.
And 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? Are you doing these for whole slates?
These are there were conversations direct with producers. So a lot of times that's if you can get to the rights before they get fragmented, that's when you could do those deals. So they tend to be more curated title by title in that way. 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, 3 to 5 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. And if we could have 10 more oranges and 5 more narcos, I don't put a lot of pressure on that, 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.
So it's a very international production, Brazilian cast. And 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. And 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, but it's also great because it's something new, it's something fresh. And as long as we're continuing to push the bounds on things like original movies or international productions, then the consumers are really embracing.
I'll follow-up. Sorry, David, help us think through, it's I guess one of the things I'm sensing very strongly is just increasing appetite, enthusiasm for original content. From a P and L perspective, that $5,000,000,000 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. So anywhere we get a little bit of lead time in terms of some visibility into the production. So our targets of 40% U. S. Margin already encapsulate this shift towards originals over time.
I think Reade made some earlier comments about a long term shift that could be upwards of 50% of originals. And we still anticipate being able to meet our margin targets and also shift towards originals, which are it's going to bring more amortization in, but we think we can do both.
And I'll use the word expansion. So think of it as our license content is growing, but our original content is growing faster. So there is a mix shift, but I don't want that to get misunderstood as a reduction in license 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 2nd year of original programming. So 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, sort of an a la carte world? Or 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. But I could imagine future bundles emerging once there's a whole bunch of apps and you go through this industry change now next probably 3, 5, 10 years where there's a lot of discrete offerings, everybody's improving their brand value And 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. But 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. This 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. And of course, we'll keep an eye and watch the Hulu Showtime take rate to see to confirm that there's very little traction of that.
So we'll be open minded, but our instinct is focus on making Netflix the passion brand in this space.
And before we sign up, we should remind everybody that Friday, tomorrow is the premier 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.