Good day, ladies and gentlemen, welcome to the Netflix third quarter 2012 earnings Q&A session. At this time, all participants are on a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce the host for today's conference, Ellie Mertz, Vice President of Finance and Investor Relations. Please go ahead.
Thank you, and good afternoon. Welcome to the Netflix third quarter 2012 earnings Q&A session. I am joined here by Reed Hastings, CEO, and David Wells, CFO. We announced our financial results for the third quarter at approximately 1:00 P.M. Pacific Time today. The shareholder letter and the Q3 financial results and the webcast of this Q&A session are all available at the company's investor relations website at ir.netflix.com. As is our standard practice, we will begin the call with questions received via email. Please email your questions to ir@netflix.com. After email Q&A, we will also open up the phone lines for additional questions not covered by the email Q&A or the letter. The dial-in number is within our investor letter, let me repeat it now. Please call 760-666-3613 if you'd like to get in the queue.
We may make forward-looking statements during this call regarding the company's future performance. Actual results may differ materially from these statements due to risks and uncertainties related to the business. A detailed discussion of such risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed with the commission on February 10th, 2012. A rebroadcast of this Q&A session will be available at the Netflix website after 6:00 P.M. Pacific Time today. Now, let's move directly to questions. As is our standard practice, we've organized the email questions by topic as we've received them this afternoon. Let's start with questions on domestic subscribers. Question one, your original thesis was three years for full brand recovery. Is this still the case? Can you recover faster?
It's Reed here. I'd say the three-year model is consistent with what we're seeing. We've made substantial progress, as you can see in the engagement metrics. We feel really good about the originals, particularly "Arrested Development," because of its broad existing reputation in terms of burnishing our reputation. Three years is still the right timeframe.
This is David. I would add, like I've said before, that we are seeing recovery in our brand reputation metrics, the likelihood to recommend, but it's not at the level that it was pre-price change of July of last year. There's still some room for recovery, but we've seen it trend in the right direction.
What changed as you moved through this year that has caused you to miss your earlier guidance of 7 million net domestic streaming adds by so much?
Well, we were within the range of our guidance from 90 days ago, but not within the annual guidance that we gave at the end of Q1. Roughly, I think we're feeling our way along as the streaming market grows, and we mispredicted it. I would call that more of a forecasting error than anything else. When we think about growing 5 million net additions in this year, if we had predicted 5 million, I think we'd all be feeling good that that's great growth. We own it in terms of a bad forecast. In terms of actual performance of the business to grow 5 million net adds domestic is substantial, and we've end up growing net adds here.
Follow on question. What does the new subscriber guidance of 5 million compare to the prior guide of 7 million suggest about the addressable market opportunity you have?
Well, I think it makes it a little bit harder. We think harder that the $16 million-$18 million will approach it not as fast as we would've if we had done $7 million this year. The long term of every household becoming an internet video household, that's definitely happening and going to happen. People are using internet video in huge numbers, and that's only spreading, and we continue to lead the market in a big way. I look at the long-term picture as very strong and not changed.
You predicted that the London Olympics might dampen subscriber additions and/or engagement in the third quarter. Did that play out in your actual data?
Yes, it did. We had a strong July, a soft August, then a slower bounce back in September.
How can you improve involuntary churn rates in more mainstream, lower income households? Why don't I take this one? Some of the color that we've seen in terms of trends over the last couple of years is an increased use of debit cards and prepaid cards over credit cards. The unfortunate thing about these different payment methods is that they have lower approval rates. What we've been doing is looking at a host of different things to improve those approval rates, and in particular, looking to recover as many failed transactions as we can. We're hopeful that there's a little bit of room that we have there to improve the overall involuntary churn rates. Let's move to questions about content. You have the advantage of perfect information on what your consumers watch.
You have licensed a wide range of content, some of which is not viewed all that much. With this information, how do you intend to handle negotiations when deals come up for renewal? Would you pay less for certain content or pay the same or more, but require programmers to provide you with newer, fresher, better content?
Well, we don't get the luxury of requiring programmers to do anything. We certainly look at the viewing as an indicator, that limits what we're willing to pay for certain content. If that doesn't present a clearing price and there's someone else willing to pay that much for the content, the programmer will go with someone else. I would say it's an informed auction market. We do have a lot of data that's very helpful in our overall programming. It's a pretty straightforward auction, highest bidder gets the content kind of market.
Question on streaming hours. You've not talked about monthly or quarterly streaming hours since your comment about June 2012. Could you update us on recent activity?
Sure. We were over 3 billion hours in Q3, which we feel great about, it's continuing to grow.
With two-thirds of viewing now television, are you limiting the size of the audience that you appeal to by not having even more in-demand or on-demand film content that helped build your DVD and then streaming businesses? How would that impact your cost of content?
I think we're expanding our market with our TV series. If you look on cable or satellite, what gets watched more, TV shows get watched a lot more than movies. I think there's a big expansion in addressable market, both in the sense for any consumer's time, and in terms of people who are interested in the Netflix service. We're trying to be very strong both in movies and in TV shows, and we're only getting stronger as we grow.
There's a reminder here, too, that even in our DVD business about a third of those DVD shipments were new releases, and two-thirds were things that didn't fall into a new release category or older content. Many subscribers just want something good to watch, and they're less engaged in terms of caring about the freshness or the date of the content.
Next, a question on fixed versus variable licensing. Amazon has structured some of its recent deals, i.e. Epix, to have a variable component on pricing based on subscribers. Given the lack of visibility you now have on future subs, is this something you would be willing to do? You've always resisted. It has worked to your advantage as you grew faster than content providers anticipated.
No, we're very happy with knowing exactly what our commitments are, and we don't have any plans to change our licensing structure. The people that we generally bid against, other networks, are in the same model where they're bidding fixed fee.
In terms of the goal to focus on licensing only the content for viewers when you negotiate with the studios to license content, their goal is to bundle together as much content to maximize the value of the deal. How do you balance your desire for more efficient spend with the studio's desire to bundle more content?
We really look at packages as a whole. We'll estimate for a given package how much viewing it will generate, which includes the stuff that's most appropriate for our members and the stuff that's less appropriate. We'll try to figure out a clearing price for that set of content. There's a back and forth about, well, if you added this or took out this, depending on are they revenue motivated or package motivated. That's all part of the give and take across the hundreds of different agreements that we have.
Disney's current output deal with Starz ends in 2015, with avails flowing through Starz until the end of 2016. Why should Disney choose Netflix versus renewing with Starz or starting their own streaming movie service?
I think in each market and country, there's a different set of content at a different time. In the U.S. content mix the Disney deal comes up in 2015, so it's a little premature, but we would certainly be bidders for that or other pay one deals as we have been in the past.
Can you discuss the device mix of content consumption? How are tablets and smartphones faring in terms of consumer hours streamed?
Tablets are growing, and smartphones are growing. You probably would expect that. Tablets are a little bigger than smartphones for us. The big viewing is really on the television. Smart TVs, game consoles, Apple TV, Roku, Blu-ray players, all the things that bring Netflix to the big screen.
Moving to questions about originals content. How do you quantify the success of proprietary content in terms of consumption and financial investment?
We look at originals like we do third-party licensed content in terms of how much it's going to be viewed or how much it is viewed relative to its cost. That's the primary measure. Outside of that, we do expect some ancillary PR value, public relations value, and subscriber excitement around the originals, we don't rely on that in terms of a primary relative measure.
Yeah. I'd say that's right. The base case is that it's good content that we're producing, the upside is that it transforms the consumer's relationship with Netflix because it's only available on Netflix. It's not also on cable and also on DVD and also on pay-per-view. It's really fully, totally unique, only on Netflix within our territories.
Investors are quite surprised that you are releasing all of the episodes of "House of Cards" at once, fearing they will watch all of the episodes over a weekend or two and then churn off. We are excited that Netflix is the first TV producer to put the consumer first and give them the content the way they want to consume it. How do you look at the trade-off between churn and hooking people on Netflix's other content if you are willing to bomb through 13 hours of "House of Cards?
Well, we do want to hook people, we want to hook them for the long term. We think we hook them for the long term by treating them right and making all those episodes available at once. Obviously, there's later "Arrested Development" and "Hemlock" and "Orange Is the New Black," then a season two of "House of Cards." If we do our job right there's always a reason to be a Netflix member on the original side in addition to the licensed side. I don't think that it will be material, the join only for "House of Cards" and then exit. That makes us comfortable with this very consumer-first trade-off.
Your original content efforts, to what extent do you have ownership rights that could generate additional revenues? Syndication, DVD licensing, et cetera.
It's a great discussion item for us over time. On this first round, we're a licensee in a certain window. So we're not essentially a producer that then manages and profits from those ancillary rights.
Moving to questions about international. Recently, you commented that the Nordics had the most content of any international launch. Can you quantify the level of content and/or magnitude of that spend versus other regional launches?
We've been very successful in the Nordics. We're very happy with that. I don't have any specific quantification in terms of dollars or title count that'll be helpful. We do feel like market by market, we are learning and getting better at the right content mix, both to attract the subscribers and economically. We look forward to having a fuller update for you on Nordics once we're a quarter in January.
I'd say that the basis for making those statements is an amalgam of metrics. It's not any one particular title count or dollar spend. Our experience has been when we look at box office or Nielsen ratings or other types of metrics, that it's a combination of all of those in terms of the subscriber perception of content quality.
In its early years, Netflix incurred significant losses in starting up its DVD-by-mail service. As you look at international streaming, do you see parallels to the startup of DVD, or are you encountering significantly more challenges?
Well, I think it's parallels with DVD or parallels with any successful business, which is you establish a new market and there's losses for some time period. Then the key thing is the durability of the profit stream after that. We never invested in having DVD expand around the world because one is the mail system's difficulty, but two is the profit stream wasn't going to be that long. In contrast with streaming, if we're able to establish a significant market share and franchise in a market and we manage that well, that should be a multi-decade profit stream. So the DCF on that is enormous, which is what gives us the confidence to make these big and aggressive investments in establishing our leadership in these markets.
Have you considered taking on partners and structuring JVs with certain countries? This appears like it could have three benefits, gain traction in countries where you have no brand equity, minimize the level of investment, and could accelerate Netflix's global ambition.
Well, that's definitely a factor. For example, when we look at Asia and some of the more challenging markets where U.S. firms have had a tough time and had progress in that. In Europe, most of the consumer firms have really been able to execute much better, faster by keeping those wholly owned, and that's our model for now.
Assuming that you are able to maintain positive consolidated earnings in 2013, what would be the maximum number of countries or regions you would consider launching into?
I'm not sure I would approach that in terms of a maximum number. We look at a territory launch. It could have four countries in the case of the Nordics, but it's sold as a content block. I think that what we've said is we're focused on global profitability, but also on a path to profitability for our large existing markets. Those are the two gating conditions that we'll be looking for in terms of finding that next market.
With regards to Latin America, what steps are you taking to improve payments? Have you considered withdrawing from any markets within Latin America? Have you considered bundling your offering with others in that market to improve your ability to collect? I can answer on the payment side. On the payment side, we've been looking across a host of options to expand our ability to collect payments from subscribers. Let me give you some examples of things that we're doing. In Mexico, what we found is that not all debit cards are accepted for e-commerce, we've been working directly with the banks to allow us to accept debit cards online. In Brazil, what we're looking to do this current quarter is to expand the payment methods that we offer, including things like direct debit and Boleto.
Hopefully, that will expand the addressable market of folks who have the ability to pay for our service.
In terms of bundling, that's not something that we're actively engaged in. We are looking at payment with other subscription services and trying to think that through. In terms of withdrawing, we're not thinking about that. All of our content agreements cover the entire region and are long-term in nature. We're making great progress on the revenue side. We're continuing to invest on that basis.
If the return to profitability for the overall business takes three quarters or more, is there a risk that you miss an opportunity to have first-mover advantage in Continental Europe? Does first-mover advantage not matter since LoveFilm had first-mover advantage in U.K. and you came later and surpassed them?
It's a matter of debate for us. Certainly, first mover helps, but it really depends on how big a scale you get. If a competitor gets to a great scale in one of those markets before we do, we would tend probably to focus on other markets. There's no easy answer to that one. It's something we try to balance, which is our rate of investments on the current business versus the risk of competitors getting ahead. Far, we like the set of trade-offs that we've made.
Moving to questions about the product. How do you think about improving the platform from here to stay ahead of where the competition is going?
We're making great progress on the algorithms that drive the merchandising. I know they're invisible to all of you, just like the UI is not the main focus because it's pretty easy to copy. Our main focus is showing the right content to the right person. When you turn on Netflix, whether that's on an iPad or a PlayStation 3, you can see 15 or 20 box shots. If those are the right 15 or 20 box shots for you, for your mood, for the time of day, we're very likely to get a play. If those aren't the right box shots, then we're much less likely to get a play. That builds our engagement, and the more people watch, the more they retain. That's really the importance of the algorithm development and testing that we do.
I would also say that for some subscribers, we're constantly testing user interfaces. There's a lot of exciting user interfaces coming up enabled by devices that enable gesturings and voice and other things. You'll see us continue to experiment and play with those types of interfaces in tests, if we find one, then we'll continue to innovate in those areas.
Amazon Web Services had another significant outage this week. Did this impact Netflix in any way? If not, was that due to Netflix planning for random outages or due to not using the affected services in the first place? Do these events affect your confidence in using services like Amazon's AWS for critical infrastructure and customer-facing functions?
AWS has done a great job for us, as they have for other customers, by having an architecture that isolates faults. It's built upon the notion that occasionally data centers will go down, and they give you the components to build around that. That would be true if they were our own data centers or if they were AWS. In the recent outage that they had, our customers were not materially affected. The traffic switched over smoothly as it's designed to other Amazon data centers. We're extremely happy with the decision to expand within the Amazon Web Services footprint.
Next, some questions on competition. Can you compare the value proposition of your streaming offering to that of Amazon today? Is the gap closing?
Well, Amazon Prime, there's two different markets that we compete with Amazon in. One is in the U.K., and there's almost no content that's on both services. Think of it as two really different services in terms of content. We believe our viewing is higher. We think our content is better. We're growing faster. It's a real head-to-head battle. We're both at the same price point, roughly speaking, within 20% in standalone services. In the U.S., Amazon is bundled with Prime, and it's got a subset of our content. Depending on how you want to think about the price of Prime as an annual $79 payment or free with free shipping, you get to different views on it. As we said in the letter, most of our subscribers want us to have more content.
They're not particularly motivated by a service that has a significant subset of our content. At this point, it's not in anything that we can measure affecting us directly.
Some of a related question. Given what we're seeing now in terms of slowing subscriber growth and lower guidance, does this change Netflix's view at all in terms of how many customers may be choosing alternative providers?
Well, we ask ourselves the same question, obviously. In every data source that we look at, unrelated. I think as Amazon builds out their original content, which they're very actively engaged in, they'll get exclusive deals against us, they'll more and more be a different service than ours. Many subscribers potentially will subscribe to both. I think that's the way that it evolves over time, like it has in the U.K.
Now a few questions on the financials. Will the company be disclosing its obligations related to original content production costs?
Well, yes, we are, in the sense that the obligations that we've signed up for on originals are included in our streaming obligations table. They're already in there. We don't break them out. We'll provide more color as they get more and more material.
You talked about your expectations for negative free cash flow for the next several quarters as you ramp spending on originals. Eventually, you expect to return to positive free cash flow. What gives you the confidence that you'll be able to return to positive free cash flow? Is it a slowdown in content spend or an acceleration in subscriber growth, or both?
Well, I wouldn't characterize either of those that way. I would say that we're focused on three things from a cash flow perspective. One is our growth and profitability in the U.S. and what that looks like. The second is our international investments and the losses related to those and how they close out over time. The third is our growth in originals, which takes more cash than ordinary types of content deals. You put all three of those together, and we want to maintain a comfortable margin, and I think those statements are based on the fact that I think that we're in a position where we can grow next year under various scenarios and expand our content expense, not slow it down, but to slow down the acceleration of the content expense in addition to funding our international investments in originals.
Can you help us quantify the original content cash outlays in 2013, understanding that they will be higher than the P&L expense?
Well, what we've said about those before is we do have some output style deals that have more cash than expense, and those have been about 10% in terms of content cash relative to the expense. Originals will mean that that ratio goes up anywhere over from 10%-20%, but probably not more than 20%.
20% in excess of the P&L?
Correct.
How might we think of content spend growing year-over-year in 2013?
Well, hopefully, content spend will grow substantially. That's what continues to make our service better, and that's built into our plan. We don't believe that we're over-committed. We have some flexibility there, depending on what the growth is, because we're very conscious of the variability in our growth outcomes. You can see that in the fact that while we're short on total subscriber growth this year, we are hitting our contribution margin targets. That's a demonstration of the flexibility that we have on the cost side.
On CapEx, what was the driver of the uptick in acquisition of PP&E?
It's cache boxes related to our Open Connect program.
Finally, there's been increasing talk that Netflix will eventually have to raise prices to increase ARPU. We've heard from management that this option is off the table, with the brand seemingly recovering from 2011's events. Is this something that is being discussed? Would it be unrealistic to expect an increase before 2014? Obviously, it cannot stay $7.99 forever.
Well, we're very excited about the $7.99 price point, and we have no plans to change that. Consumers value the incredible bargain that that is, and that helps our growth. We see increased monetization from increased growth rather than any change in price.
At this time, I'd like to turn the call over to the operator, and we'll begin taking live call-in questions.
If you have a question on the phone, please press star one. Our first question comes from Mark Mahaney from Citi. Your line is open.
Great. Thank you. As the usage model switches more and more towards TV viewing, could you talk about the impact that could have on the business model in terms of margins, visibility into revenue and into profits, and maybe any pricing options that that would give you? Thank you.
Mark, there's no fundamental difference in the way that we license TV shows from the way that we license movies. In other words, it's a fixed payment per year or per time period. The only difference, I suppose, is we'll do a contract that will have, if there's a season three, season four, season five, it's built in. I suppose there's a little bit of difference there. Fundamentally, it's content over some time period. The great experience about the TV shows in discovering them is being able to go all the way back to the pilot and really get a lot of fantastic viewing out of it, which creates a differentially better experience than any other provider. That's the big.
Thank you, Reed.
Our next question comes from Scott Devitt from Morgan Stanley. Your line is open.
Hi, thanks. I had a couple. First, on the domestic streaming subs, you mentioned the Olympics as a factor. You also mentioned the change in seasonality earlier in the year. I was just wondering, given the way that you exited three Q and the very back-end-loaded nature of four Q, how you approach the fourth quarter guide for streaming subs. On that topic, as it relates to early 2013 as well as more of the originals in the U.S. market, "House of Cards" and "Arrested Development" start to flow through potentially. Do you anticipate that that drives subs above seasonal trends, or is content and original content not necessarily a direct driver of subs? Secondly, Fox, I think, recently opted to renew with HBO with an exclusive long-term deal. I know it's two to three years ahead of the renewal.
Just wondering why you think they would opt to do that rather than giving Netflix a chance to bid for the rights. Thanks.
Scott, this is David. I can take sort of part A and B, I'll let Reed take the part C. Part A, the seasonal pattern is still in place. That is that we still see greater sub additions in the fourth quarter and first quarter than in the second quarter and the third quarter. I think even our midpoint of our guide implies that seasonal pattern to still be in place. The Olympics sort of affected the monthly progression of acquisitions through Q3, overall seasonality of net additions is still in place. Then your part B on originals and content. The originals we're very excited about. We think that they will drive a lot of consumer excitement in it. On a grand scheme, it's likely to be certainly less than 10% of hours viewed next year and maybe even less than 5% of viewed.
In terms of our planning, I don't expect that to drive a ton of additional adoption.
Scott, it's Reed. You're very gracious because I imagine what you really feel is why do we make seasonality excuses and then Olympics excuses, and aren't you getting kind of tired of it? We are tired of making those excuses as opposed to getting back to our track record. On the originals, like David said, we may have a upside from it, but we're not going to bake that into our spending plans. We're getting into unknown territory in terms of how many people come to us for "House of Cards" or "Arrested" or others. We'll gain some experience in that, and then that will help us understand how much more investment we should do in originals after that. At this point in Q1, we will think of it just as upside. Then in Fox and HBO, I'm not sure.
Maybe the deal from HBO was good enough. I think you'd really have to ask them or Fox. We'll take it from there.
Thanks. If I could squeeze one last one in. The social integration update. I think you talked about historically, there are restrictions in the U.S. Is there any update to that?
No, there's a bill in Congress now that is pending before the Congress and it's anybody's guess if they're going to pass it in the lame-duck session. That would enable all different types of consumer permissions for sharing, which would be useful in a Facebook context, but also useful in any kind of meta browse, various types of scenarios where people want to allow a feed to go to a service to help them. We're optimistic, but when it comes to the Congress, it's hard to predict. In terms of outside the U.S., we're continuing to learn on our international markets. We've seen some nice take-up in Brazil, which is a very social place, obviously, as well as in the U.K.
We're continuing to work on it, but no one yet has cracked the formula, us or anyone else, in terms of a real explosive generator. It's in the category of a little bit positive, and we're continuing to work on it.
Thank you.
Our next question comes from Youssef Squali from Cantor Fitzgerald. Your line is open.
Yes. Thank you. Hi, Reed. Hi, David. A couple questions. I want to go back to one of the first questions that was asked about the three years needed to restore your image. How did you get to that determination that it should take you guys about three years? Why isn't it taking shorter since you guys have basically, arguably after a year, think people start forgetting and to the extent that the quality of content keeps improving, it would kind of get restored faster than that? I have follow-up.
Youssef, let's hope you're right. It's not something we wanted to count on. Three years was something we felt comfortable we could deliver on in terms of our reputation. Some people do forget in one year, other people take a longer time. We're just going to have to work really hard on providing our great value and stick to our knitting, and then the brand will steadily recover. If it's sooner than three years, that's great.
You don't think that's an indication rather of just maybe perceived lower quality of content?
No, the best indicator of our perceived quality of content is how much we're getting viewed, how often you go home, it's Wednesday night, and you want to pick something to watch, and you have to decide, are you going to pick up your cable or satellite remote? Are you going to put on a DVD or are you going to watch Netflix? The more of those moments of truth that we win, the more people are engaged with our service and the more they retain and the more they tell their friends about Netflix. Our primary driver is winning those moments of truth, which, if you think about it, is based upon your expectation of finding something good.
The better that those first 20 titles are for you, the more likely you are to turn it on Netflix first as opposed to one of the other entertainment options first. Because our engagement is higher than it's been in the past, we're really confident, substantially up over 30%. We feel really good about that in terms of our content mix getting better and better.
David, if I just may, can you maybe just talk about trends of usage and consumption of exclusive versus non-exclusive content? Maybe parlay that with the mix in your content cost between the two?
We're seeing engagement across both exclusive and non-exclusive categories. In some cases, exclusive content may cost more, but it's viewed more because it's worth more. The consumer isn't able to get that somewhere else. You can infer from that in some exclusive categories have higher viewing. We're seeing user hours across non-exclusive content as well. In fact, at this point in time, there's more non-exclusive content on Netflix than there is exclusive content, and our hours continue to go up. Your second part of your question was around cost. Is that right, Youssef?
Right.
There's an expectation that we'll move to exclusive over time. That means that the cost will pay more for exclusive content.
You feel that you're basically, if you looked at an ROI for exclusive versus non-exclusive, you don't think the ROI on the exclusive is lower just because you're paying more for it?
No. We look for engagement across that category of exclusive. We look for deals and types of content that works well relative in that exclusive class. We think that there is a point where we're not going to be 100% exclusive, but we'll move more and more towards exclusive content as a differentiator. It is important for us.
Youssef and Reed, you really want to keep in mind how many different flavors of exclusive there are. There's exclusive for online, there's exclusive against DVD, there's exclusive against cable, there's cable with TV everywhere and without. There's a lot of different options and degrees as opposed to a simple non-exclusive.
Okay. Thank you very much.
Our next question comes from Doug Anmuth from JPMorgan. Your line is open.
Great. Thanks. Just wanted to ask a couple things. Reading your letter, you talk about the long-term domestic market opportunity potentially being 2 to 3x that of linear HBO. I'm just curious how you get there because if we think about broadband households, it would seem that the number is approaching the number of cable households, but at the same time, there's still a limited amount of time in the day and a limited amount of disposable income. I'm trying to understand how you get comfortable with that market opportunity being 2 to 3x. Secondly, can you just update us where you are in terms of your personalized plans, what you might do around dual screening? Thanks.
Sure. In terms of the 60 to 90, we've got that online strategy deck, which outlines some of this, but I'll run through it quickly. Which is, if you think about us versus linear HBO, we're able to be consumed on multiple platforms laptop, tablet, phone. We're purely on-demand with an on-demand brand. We have much broader content range, including a lot of kids content. We have a lower price than HBO. It's extrapolating those factors that make us feel comfortable about the 2 to 3x or $60 million-$90 million. In terms of broadband households, we do have the assumption that all households become broadband households, and that that will happen over the next five or 10 years. That doesn't become a practical limiter in the same way that cable's in every household.
That will equal essentially HBO in terms of addressable market. Because of lower price and the other factors, have a larger actual market. On personal screen plans, that's still something that's in development. We've been prioritizing some other things because it's a fairly minor issue. Maybe sometime this quarter or next quarter.
I think you'll see some testing this quarter and then depending on the actual performance of that, we'll roll that out accordingly.
Okay, thanks guys.
Great.
Our next question comes from Richard Greenfield from BTIG. Your line is open.
Hi, a couple questions. One, just the explosion of tablets. Reed, you talked before about how TV is still the primary viewing place that you need to get to to drive your business, but we're seeing so many different companies launch ever cheaper and smaller tablets to get them into more people's hands across the globe. Just wondering how you think that tablet rollout impacts Netflix's subscriber growth over the course of the next couple of years relative to the importance you've placed historically on the TV. Just two, somewhat related, you resigned from the Microsoft board. I guess it would be a lot of people are curious what should we read into that, if anything? Thanks.
Sure. On the Microsoft board, I'm on six different boards. I felt like this was a good time because Microsoft is strong coming out with Windows 8 for me to trim that back and to focus more on Netflix. That's the story there. In terms of the tablet question, it's definitely growing for us. The question is it a straight substitute for a laptop as it grows? In which case it doesn't particularly affect us, or is it a net addition because it's a better consumption device than a typical laptop. We think there's some truth to the latter. The other scenario where tablets are really interesting are choosing on the tablet and then consuming on a TV.
One second screen scenario that people talk about is you watch on the TV and then all the supplemental information, the history of the actors from et cetera is on your tablet. That's nice. What we see is a big opportunity in using the power of touch to really choose what you want to watch, and then to be able to select it, and then it's automatically playing on your TV. We've got a demonstration of that now on iPad and Android with a PS3, that's something we're working with all the CE ecosystem to build in so that over the next several years, this becomes a general capability for Netflix choosing. Which is to be able to, again, use the power of touch in the intimacy, but then be able to enjoy the large screen audio and video experience.
Thanks.
The next question comes from Andy Hargreaves from Pacific Crest. Your line is open.
I just wanted to ask on the international stuff, how long would you stay in a market before you decided the profit potential wasn't worth the ongoing investment if things weren't going the way you thought?
Andy, there's very little chance of that happening because we've got long-term content deals that we pay on. It's not an active topic. As long as the revenue growth is good and there's no competitor ahead of us where we have to face a decision of doubling down or not, it's clearly the right economic course to push forward and to derive the benefit. We look at Latin America will be an awesome profit source for us with a great service over time, like it is for DirecTV today. In the U.K., it's a more competitive dynamic, but we're really making great progress. Both are really important to us. Of course, Canada already is very successful.
On the U.S. marketing expense, it looks like that's come down through the year just on a run rate basis from where you were in Q1. Is that accurate, and can you just walk us through how you're thinking about your marketing domestically?
Well, in markets that we've already got a very large share, there's less need to spend in marketing on the margin than in new markets where we're just getting established. You're seeing a little bit of that.
Gaining in efficiency in terms of word of mouth being more and more effective.
just last clarification, was that 3 billion number you guys gave in terms of hours viewed, is that global or just U.S.?
All the numbers that we've been talking about are global. The 1 billion for June, the over 3 billion for the quarter, Q3, are global.
Okay. Thank you.
You bet.
Our next question comes from Anthony DiClemente from Barclays. Your line is open.
Hi. Thanks. Hi, Reed. Hi, David. Question about your comments about Hulu in the release, talked about it being a wild card and you said in terms of U.S. viewing, Hulu is your closest competitor. I just wanted to ask a little more about that. Is there anything that you can add as to why Hulu's programming is more substitutable for Netflix than, let's say, Amazon or HBO? What makes them a global wild card?
What makes them the wild card is the ownership owned by three of the largest content companies in the world. In terms of their viewing, I think they're closest to us because they focus on television like we do now. They've got a good map in that way. They have, in addition to some of the TV shows, they have some current season in sort of catch-up mode where they have last five episodes and then it falls off the service. They kind of have, you could think of it as almost two different markets or segments, but they get a lot of viewing on that new TV.
Thank you, Reed. One more just back to, I guess, one of the earlier questions about the studio output deals. It does just seem as though with Epix and Starz and Fox and Warner, that many of the majors are spoken for. Is there anything you can add to the comment that you plan to bid for further deals? Can you talk about other deals that could be coming up? Are they more so smaller studio output deals? Are we talking, I guess, Universal could be coming up? Can you just give us a little more in terms of elaboration on that comment that you wrote?
Sure. There's small ones potentially. Again, I think you're probably asking U.S., because that's our biggest market.
Yeah.
In the U.S., there's some smaller ones that we can work on. There's Universal, Disney, Sony, all of which come up over the next 5 years, but none of them are going to change. They wouldn't be live for us on the new movies in the next 2 years.
Right. Okay.
I don't think it's probably hugely material to your thesis. It is for the long-term good for us to be a bidder there.
The DreamWorks Animation movies go live soon, is that right? Could you just remind us on that one?
It's in 2013, Anthony. It comes up in 2013. It depends on your definition of soon.
We can ask what's the first one coming through in that deal.
Right. It's for any movies released in 2013 as opposed to just starting in 2013. Right, it would be any theatrical film released in 2013 would be eligible for the subsequent pay TV output window. Is that correct?
That's correct.
Yeah. That's right.
Okay. Thanks a lot. Okay, thanks, guys.
Anthony, just one final comment. We do have existing deals that have plenty of film output coming through, you guys focused on additional things that we could add. There's deals with FilmDistrict, Open Road, Relativity, and others that.
Sure
are flowing film to the site now.
Sure. Totally understood. Thanks.
Our next question comes from Jason Helfstein from Oppenheimer & Co.. Your line is open.
Thanks. Most of the question's been answered. Just a quick one. In the release, you do give some color about you don't see voluntary churn as an issue and you continue to see gross adds up on a year-over-year basis. Do you have any regrets, just given the volatility in the stock from not putting out gross adds and churn anymore, just given it would seem like additional metrics might help reduce the volatility in the stock and help people understand? Alternatively, how about providing churn kind of on a trailing 12-month basis or something? Just kind of get your thoughts about that. Thanks.
I don't have any regrets in providing it, Jason. I think the volatility was introduced in the 7 million and not meeting the 7 million. I don't think that would've helped.
Okay. Thank you.
Our next question comes from Tony Wible from Janney. Your line is open.
In the past, you guys have given penetration of the service in the San Francisco Bay Area. Can you guys give what that adoption number is today for just the streaming component? The second question is, have you guys seen any change in attitudes on the content producers in light of some of the recent ratings weakness? Have they been more eager to cut digital deals to kind of fill what may be an ad revenue shortfall, or are they becoming a little bit more wary? Any color would be helpful. Thank you.
Tony, in terms of the regional penetration, we used to do that because on the DVD side, we had several years of overnight delivery in the San Francisco Bay Area, but not the rest of the country, so it was several years ahead. There's not an equivalent market where we had streaming before another market. We don't internally nor externally focus on a sort of market-level prediction. In terms of the content producers, you get a wide mix. You get some who are concerned for all the reasons that you addressed, and some that are more interested in the digital revenue. The great news for us is there's no single producer that's a material part of our content. There's many different producers from many different companies. That helps us, and they're all looking for the best dollar, and then we're a bidder for that content.
Great. Thank you.
Our next question comes from Heath Terry from Goldman Sachs. Your line is open.
Great. Thanks. Just wondering if you could give us a bit of an update in terms of what you're seeing in the device ecosystem going into the holiday season. What kind of device penetration you're expecting, both television as well as to the extent that there's a mobile metric that you could provide as well relative to what we saw last holiday season, particularly for the remote Netflix buttons.
Heath, it's Reed. We'll have more Netflix buttons on more smart TVs than we've ever had. Smart TVs, as you know, are becoming a larger percentage of all TVs. It's becoming pretty standard and built-in. That's a significant positive. There's the Wii U releasing shortly. That's a new game console, we'll see if that takes off and provides us a special lift. Mobile has been very strong for several years and continues to be strong. I don't see a huge CE-related hockey stick to that part of the business.
Okay. That's going to be the last question for today. Reed, would you like to provide any closing remarks?
I just want to thank you all for the questions. We're continuing to work very hard and look forward to being in a better place relative to our guidance a quarter from now. We certainly try very hard every quarter, and it doesn't feel great to come in in a lower half, but it is what it is, and we're moving forward.
Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.