Netflix Inc (NFLX) — Q4 2015 Earnings Call Transcript

Welcome to the Netflix Q4 2015 earnings call. I am David Wells, CFO. I am joined on my right by Reed Hastings, our CEO; and Ted Sarandos, our Chief Content Officer. Interviewing us today will be Peter Kafka from Re/code; and Ben Swinburne from Morgan Stanley. Just a reminder, a cautionary statement that we will be making forward-looking statements and actual results may vary. Over to the first interview question.

I’ll start out, maybe for Reed and the team, can you reflect on the fourth quarter results for us that we are all going through right now, in particular, talk about the international strength, you mentioned you were pleased with the October-September-October launches, so can we infer that the outperformance versus your expectations may have come from those areas or any color you can give us on the international strength to start us off?

You know we’ve got over 50 countries in Q4, so we had a lot of experience, Ben, predicting these markets. And then we launched in Japan in early September and Spain, Portugal and Italy in mid-October, and let’s say they’ve gone very well as we said in the letter. In terms of the outperformance, it was pretty broad-based, many different contributors around the world to that. Now what we are seeing basically is that this on-demand Internet TV, watch wherever and whenever you want, it’s very popular wherever you go in the world.

And just taking that question over to U.S. for you also maybe for David, a little bit later this quarter than your guidance or budget, talk to us a little bit of the churn connects dynamic and anything you would want to add around credit card chipsets or any other issues you want to bring up around Q4 performance in the U.S.?

Well Q4 I would say was pretty close to our projections, we’re literally within hours of it. But we did anticipate that net additions would be lighter year-on-year. I would say the credit card was a background issue in Q3, it continues to be a background issue. But the larger thing is that getting to the next 50 million is a little harder than the first 50 million in terms of growth and we are doing everything on the content side, on the product side, we’re continuing to improve that service, but you’re seeing that as the larger numbers, when you grow steadily at 5 million, 6 million net additions a year on a larger number, then that percentage growth is smaller year-over-year, and that’s what we predicted and that’s what you see in our guidance for Q1 as well.

Hey guys, last quarter you said credit card issues were a bad rate issue, this quarter you said they are a background issue. How long do you anticipate this is going to be a problem for you? Additionally, any sense of why you are the only major consumer company that’s called this out as a problem?

I don’t think we’re the only ones experiencing this, Peter. I think because we are a recurring merchant, anywhere from five to ten basis points, 15 basis points is sensitive to us. We have optimized; we spend a lot of time optimizing our recurring billing systems in our approach, so we are very sensitive to it. Again it’s a small thing. I think we want to focus on the larger things and not the small things. And we anticipate that the EMV rollout will continue into 2016 into Q1 and Q2 and we’ll always have even globally these issues where there is mass reissues of things and disruptions in the recurring systems that we have.

So this may fall into the small thing category, but last quarter you added iOS signups. Any impact surprising one way or another from that?

You know we’ve always been able, customers have always been able to sign up on iOS, but they had to do it in the mobile web Safari Browser and now they can do it in the app. And it’s a positive, it’s not transformational, but it’s really a nice positive, particularly in new markets as we expand around the world where we’re less known and less trusted. The comfort for customers in terms of using the Apple payment mechanism versus entering their international credit card information is helpful. So think of it as one more in our long list of great payment options that we have.

Reed, I want to come back to the outlook in the Q1 guidance in particular, starting with international. You mentioned in the letter, the 2016 markets you are playing the long game here, but the guidance is obviously impressive and well above expectations. So are the 2016 launches a big contributor to what you are expecting in Q1 and sort of for the year internationally or just continue momentum building on the existing markets? Any color you can share there?

Yes, a lot of both. I mean honestly our global guidance for over 6 million net additions will be a record for Netflix and so we are super excited about that. And what’s amazing is we’re seeing some of our new shows like 'Making A Murderer' not only be huge here in the U.S. but it’s emerging as a big hit around the world for us. And you kind of expect Jessica Jones to carry internationally, and what’s been phenomenal about Ted’s team’s programming is that these more unusual content titles have also had great draw around the world.

Let me just ask you about the U.S. just to pick up on David’s comment with the next 50 million. What are you doing as a management team perhaps that’s head on the content side? What is your research telling you about the people who actually don’t have Netflix today? What are their genres that aren’t being addressed well enough? Is there a distribution decision you guys need to make to go after that? What are you doing to maybe go after that other opportunity in the U.S. market?

Well, David is a big thinker, so he is thinking about the next 50 million, I’ll stick with the next 5 million. We can clearly see the next 5 million; I’ve been hearing a lot about it, but nothing yet has compelled me to join. So the big driver is getting people excited about whatever title we have and then making it easy for them to join. So whether it’s integrating on the Smart TV or integrated into the MVPD set-top or the Apple TV, those are the things that make it easy to fulfill that desire. But the underlying desire is for these new titles, which is why we are so excited about the year coming and the content that Ted’s team put together, so maybe he can talk about some of the big hallmarks we have in the next few months.

Yeah, I mean just upcoming in this quarter, you are going to see, we were pleasantly surprised by how excited the world is over Fuller House. So this upcoming, you ask about different kinds of programming for the next 50 million or 5 million, depending on your level of aggression, that’s getting more and more mainstream in some ways with the programming. But as a function of breadth, as a function of doing more for all tastes, so opening that up to include multi-camera sitcoms like The Ranch, like Fuller House, we have also really single-camera sitcom with Arnett called Flaked and the fourth season of House of Cards. So you’ve got all this kind of breadth just in a single quarter; we’re releasing more programming than most networks run the whole year.

That being pleasantly surprised that shows that are not necessarily all in English are being embraced by U.S. audiences, just one of those things that has been rolling around in Hollywood for a long time that U.S. folks don’t watch subtitles.

The continuing success of Narcos in the U.S., where this primarily Spanish-language show is being watched enormously mainstream numbers in the U.S.

I guess for Reed and Ted, since last quarter, several of your suppliers, most specifically Time Warner and Fox, have been every more explosive about their desire to pull back on the amount of content they sell to you. Is that causing you to accelerate your original programming or are you ordering on that same trajectory?

We’ve been on the trajectory to accelerate original programming. I mentioned a couple of weeks ago we’re going to launch 600 hours of new original programming this year alone. So it is a function of as our budget continues to grow, as our subscriber base grows, we are licensing programming and we are creating programming. As a percentage of our spend, original spending is growing, but as an absolute, our licensing dollars are continuing to grow as well. And Fox is an important vendor for us, just like all others, and we’re also a very important source of revenue for them.

I mean if that rhetoric was less intense, if they went out they are saying look we’re going to stop selling to us, but would you be pulling back on original spending?

No, I think we’ve - the positives coming from original spending have been tremendous in terms of our international growth, in terms of really distinguishing and differentiating Netflix from an explosion of our services.

And then when you think about the Marvel relationship, do you see expanding that or is that kind of staying steady where it is right now?

It’s a pretty expansive relationship already, and then we have five seasons, five different series going in. We just announced yesterday that we are going to a second season of Jessica Jones. So when you look at those five series with multiple seasons plus the crossover season of the Defenders, it’s a huge commitment and we are all the way along the way. You are going to be introducing new characters who have the potential to spin-off and grow that relationship further. So it’s very important for Marvel; it’s very important for Disney.

And for us.

And for us, absolutely.

Just Ted, sticking with you on content, why the callout of family programming emphasis in the letter? Any comment around sort of what you are doing maybe differently there, and now you have a quarter behind you with some of your movies in the market, what you learn? How does that change your appetite around film?

Well, the reason we call that out is to acknowledge if there is a large volume of kids programming coming out when normally people think of Netflix’s original programming, they were thinking about our sophisticated dramas and adult comedies more so than our kids programming. But quietly I am asking for a very big selection of original kids programming at Netflix. Kidscreen magazine is our number one outlet for kids programming on television, which we are really proud of. And that’s going to continue to grow and we are also looking to grow categories like Fuller House, programming that are watched together, parents watching shows that their kids love that they don’t just tolerate but they enjoy too. It’s an underserved market, and that’s why we call that out specifically. And on the movie side, it was a great risk I think with Ridiculous Six and Beasts of No Nation. Beasts of No Nation is in the discussion about the Oscars, didn’t quite make it there, but picked up nominations in almost every other category. The viewings were thrilling around the world and have continued to be throughout, and thus we expand into new territories, both Ridiculous Six and Beasts of No Nation are watched in huge numbers in our new territory. So we’re really excited about it, and we’ve got an aggressive site in ‘16 to keep pushing on it.

And just shifting over to the hours data, Reed, that you gave in Las Vegas and then some in the letter, this comes up kind of every quarter, people try to understand the penetration growth curve in these international markets. So if you look at the European markets where you gave the subscriber number last fall, I think penetration grows relatively light so far compared to the UK, which was much stronger. What are you guys doing with you, David, as you think about trying to accelerate the growth in some of these markets that have been tougher out of the gate? What are the characteristics that as investors and analysts we should understand the dynamics that drive these growth rates over time?

You know the first year in the UK was a really tough market, so it’s usually successful for us now but it’s not true that it always went well. We saw the same thing in Brazil for different reasons. So being light in the beginning doesn’t worry us a bit. What we’ve seen in market after market, like Spain, Italy, France, Germany, is this building momentum as we do more and more local content. We’ve got this amazing Sophie Marceau coming out in May that we think will really uplift the way that our French members think about non-members in particular, so we’re really looking forward to that. So it’s a natural building cycle. And I think the way you should model that is pretty consistent growth in all of the territories. The variation is pretty modest. Again, if you time-adjusted from whenever we launched.

And just on your time spent number, I think we calculated in the fourth quarter anyway about a 12% increase per average sub year-over-year, which is impressive given you added a lot of new international markets. Anything you can tell us about sort of the highest and versus the lowest, and whether all markets are still growing? It would appear that the U.S. is still growing which is impressive; maybe you could talk about that a little bit?

Well, we’re continuing to invest more in content, more in platforms in terms of the performance and the speed and the service is growing. So I think it’s natural that we’re continuing to grow on all those dimensions; I mean on a per membership basis as a service which was in the idea. Think about smartphone usage now compared to ten years ago; of course the number of smartphones is up, but the usage and utility is up. I think we’ve only scratched the surface; you know, Netflix is a tiny percentage of all video viewing today, so we have tremendous potential growth ahead of us if we can continue to execute, we can continue to produce great shows to have this global launch with no snafoos, so not a hard execution, but the market potential is really quite large.

I would add that the more content that we’re adding, the more likely you are going to land on a show that somebody can’t live without, and I think that’s what we’re seeing as we are expanding in not just the volume of content but also the breadth of genres that we are covering in our original shows and our original movies.

Reed, we’ve talked a couple of weeks ago in addition to India, you called out the Philippines and Saudi Arabia as particularly important markets for you. Anything else you want to emphasize in terms of the 130 plus countries you rolled out a couple of weeks ago?

We also have a number of countries that have language match, so the Philippines, a lot of people speak English; we have English-language content. We have subtitles in Arabic; you know we’ve translated our service into Arabic, so that’s a good match for Saudi Arabia. Then in much of the world, Russia, Poland, Central and Eastern Europe, we’re still only in English. So we’ve got a ways to go over the next two years; we’ll keep adding more languages and make the service more relevant. We look at it in sort of two categories where we have language match and where we don’t yet. We’re seeing both growth but more substantial growth in those obviously where we have language match. Beyond language, we have work to do on payments; in each country, there are often local payments or different traditions around payments that we will start to work on. So think of it as we’ve really begun on the international or global expansion rather than it’s all showed up and we’re all complete on it.

We've had two weeks, right? So we've been two weeks in terms of that launch.

And what are you thinking about as you move into markets where mobile internet is sort of the dominant way people get online? Traditionally, people are watching on a connected TV. What happens when they are used to watching or consuming things on a phone?

Yeah, same thing. You just watch Netflix on the phone just like you watch YouTube on the phone. A lot of that phone viewing is on Wi-Fi because of the data charges. And then what you do on the cellular networks is try to have the most efficient video codec you can have, and we’re working hard on that. But think of it as the same way that people use other Internet video services like YouTube.

David, I want to come back and maybe talk a little bit on the numbers. Can you update us on your expected cash burn for '16, and then help us understand the relationship between content, cash to the P&L versus cash as we move through this year maybe into 2017?

Yeah, there is no change here. So we said before that we’re on pace to burn about a billion dollars of cash mostly on our branded or originals content. That ratio of cash to P&L is about 1.3 to 1.4 and that continues to hold. So you’ll see that it will run up in a peak in certain quarters if we take delivery of a lot of original content and then it runs back down. But I think the 1.3 to 1.4 range of cash to P&L expense will continue to hold. So far, our expectations of the use of cash have been about as expected. You see in the letter that we wrote that we’re on pace to use about a billion dollars and maybe a little more this year, but we upsized our debt last year about a year ago so in terms of timing, we’d be looking at later this year, maybe early next year before we would need to do any more on the capital side.

And on the U.S. margins, I realize how you allocate cost between the U.S. and international markets may change over time, but you got a lot more operating leverage last year than perhaps we all thought heading into the year. You maintained this 20-20 guidance of 40% contribution margin. Is that just being conservative, or do you expect maybe some change in the amortization rate to slow the margin expansion down? What color can you give us about the pace of U.S. margins?

Well, not the latter. I would say there are a couple of points on this. One is that to the extent that we launched in the Western World, it was a little early. Maybe 24 months ago that we would have been fully global or near fully global. I would say the U.S. P&L did receive a little bit of relief, right? But that’s a one-time thing and that sort of goes away. The second point is we continue to add content and add it at an efficient level. We look at the hours viewed and what is generated by the content versus the costs. And we continue to see new additions, even in the U.S. and markets that have been in place for four to five years now. We continue to see viewership, and Ted talked a little bit about engaging new audiences. You know you’ll see us do that. So for the foreseeable future, we think we can grow both margin and grow the content spend even in markets in the U.S.

Back to international, I know you guys aren’t going to offer any more guidance on when you might go into China, but when and if you do, do you imagine that you are going to have to restrict or alter the catalog based on censorship or other issues of the Chinese market?

Yeah, the standards at least today are fluid that the government uses to restrict; like Game of Thrones reportedly had 10 or 15 minutes cut from many episodes, so there are issues conforming to those local standards. That’s true of all of the Western content that’s produced as well as the Chinese content of that market. So we’ll be on a level playing field with all other services.

And same territory, would you have to enter with a JV, or some way you could enter China without doing a JV?

There are all different flavors. If you look at how Disney launched for iTunes or others have done, we’re talking to different partners and building the relationships. But again, as I mentioned a few days ago, we have a very long-term look and this could be many years or discussions or it could happen faster than that. You know, we are going to take our time. The clearest example is really the iPhone which took many years for Apple to get approval for that and now it’s a very large business for Apple. So our view is we are looking out for the business a decade from now; we should just be very patient and continue to build those relationships and listen and learn. So we’re in no hurry. Most of our time and effort right now is going into how do we build the Japanese market, how do we build the Philippines market, how do we build the Saudi Arabian market, markets that are open to us and available right now.

I want to ask about content spending maybe for David and Ted to comment on. You know we presume a relation between subscriber growth and content spend is not linear going forward. So as you guys think about growing the U.S. business, how should we think about the pace of growth in content spending? And Ted, is the 50-50 original acquired ratio still your long-term expectation, or have the relationships with the vertically integrated media companies maybe altered that at all?

Let me take part and then I’ll turn it to Ted. So I would say, Ben, it’s true that once you get to $4 billion of spend, the rate of growth is going to slow down, so that is definitely true on the U.S. side. But back to my earlier comment, we still think that there is great content to be added to the U.S. service that is efficient and will continue to increase the competitiveness and attractiveness of the offering in the U.S., so we are going to continue to add that to that service. It’s had a slower rate of growth but it continues to grow. And in time, it’s not true yet, but in time, we will be adding more of our original branded content than our licensed content. So today, we’ve been adding both; we’ve been growing originals rather quickly. We’ll continue to grow originals quickly but you’re seeing a lot of that added to the U.S. market. And to the extent that we’re successful, and Ted maybe this is a good transition to you about finding content that works across markets, you know there will be blurring in the lines between what is really U.S. content and what is international content and vice versa.

Yeah, I mean I think the order is going to be doing something that doesn’t feel modernizing for the world but still feels like great programming for everybody. We’ve had tremendous success so far; that would not go primarily Spanish language programming working in countries that speak different languages and making it, as Reed pointed out, in many parts of the world these kinds of true crime documentaries are incredibly popular in primetime television. So we’re pleased to see these continue to grow global genres. Where you asked about our suppliers and the contention is probably overstated, but there is a lot of letter going around right now about how quickly and how aggressively people will license. It’s still a very competitive business. What happens is that people sell their programming to the highest bidder, and if we are that bidder, we get the programming and if someone else is, they will get the programming. That’s true today; it was true five years ago. What’s happening now is we’re very pleased with the results of the original spend and not just driving it up; not fear of being cut off on either end.

And Ted, just on that foot point, what should you glean from your DreamWorks extension? Obviously, that’s a family genre and I think it’s kind of an output deal; you could correct me like output deals. On the same side, the CW renewal has not happened; I think that deal is still out there. Is that an example where you can get some independent studio but not with a vertical integrated one?

No, the DreamWorks is not an output in the traditional sense, meaning that we agree to a certain level of programming, but we work together on what that programming is going to be and developing those shows along with DreamWorks. We’ve been thrilled with the results; those we took it to be into more territories and expanded the number of years of programming that will come through that deal because it’s been working great. I think this in the CW deal that’s just in the process of negotiation, it’s not behind in any normal process. As you know, it’s a time-honored tradition to negotiate in the press, so you are seeing some of that for them. I would say it’s just in the process of negotiation. You should also keep in mind that no matter what happens in the CW deal, the programming that’s currently there remains with us to run those series, so it’s not like we’re going to wake up one day without the programming. We’d like to make that deal work; it’s great programming. We have a great relationship with CBS and Warner Brothers on that deal and we’d like to continue it.

Reed, you said you didn’t think Time Warner should spin out HBO, but if they ignore your advice, does that change your view of the way HBO would act as a global competitor for you? They have abilities to do things outside of Time Warner that they can’t do within Time Warner?

You know, HBO’s been a great competitor, one we admire for a very long time. You might have seen the recent news that they are now offering, HBO now direct to consumer in multiple new nations; they started just in the Nordics, then some countries in Latin America, and now in Spain. So they will be a formidable global competitor over time again independent of their ownership.

And then speaking of competitors, Ted, do you want to offer a theory on why your competitors at NBC and Fox and other networks spend a lot of time talking about you last week at the Producers Association?

It might just be putting up a shining object to deflect. They talk about Netflix as sort of what’s going on in their networks these days. But I really couldn’t tell you why; it was NBC that was a particular puzzle, mostly because they used us as an example to show what was and wasn’t working with data that didn’t feel very true to us, so it surprised everybody at NBC.

I think it’s just a tactical mess, which is kind of funny in the press.

Is the talent to anyone else ask for numbers or they happy now with customer reductions they are going to tell?

We follow the coverage from the DCA; most of them offered up that they are very happy with the relationship and not to be under that kind of weekly ratings show wouldn’t matter much of the success anyway, so they are happy not to focus on it.

Coming back to David on some of the financials, David, I think you said at CES or your presentation out in Las Vegas about 120 million loss a quarter internationally. It’s on levels that make sure that’s the right way we should be thinking about the year? And then on raising more capital, you mentioned in the letter you are looking at lowering your cost of capital, which we presume would have been the case. What are you referring to specifically there? Some of the gyrations in the high yield market causing you to think about raising capital definitely have in the past?

So on the first question, you heard me right in terms of 120 million. Looking ahead I would say there are two things that might alter that, not materially but plus or minus 10-20 million that would be foreign exchange; I mean we continue to have an environment where we’re running deep into some pretty headwinds of foreign exchange. If that continues, that might challenge that 120 million upward a little, again by 10-20 million. And then the other thing is just carving out a little bit of room for us. Like I said, we are 14 days into a global launch. We’ve got lots of markets that we’re in early days of setting our level of compelling and competitiveness in our service offering. This year is about investment; you’ll see that we’re committed to global breakeven, but we’re also trying to build multi-year businesses in many of these markets. If we see opportunities, I think there’s a little bit of room for us to pursue those later in the year to pour some additional content whatever the right mixture of investment is. But it’s true, it’s about a 120 million; it won’t meaningfully depart from that too much but it could be 10-20 million within that.

And then you should assume that the instruments are similar to the ones we’ve used in the past; we’ve been very happy with those.

Yeah, sorry Ben on your last question, nothing has changed there, other than our confidence that we will continue to drive some meaningful profit in the ‘17-’18. To the extent that people are focused on backward-looking financial metrics in terms of credit worthiness, we think that will become a better credit risk over time, irrespective of what’s happening in the high yield markets. You know today, their bonds have traded pretty well.

And just follow-up David on your global breakeven point. I think operating income was down a bit in ‘15 versus ‘14, but if I look at the‘16 outlook for international losses, you just gave us plus some U.S. margin expansion, I think operating income overall should grow a bit off the 15 basis. I need to know am I thinking about things the wrong way? Just I want to know that?

No, I think you are doing the right math but I think that question is a little bit of a modeler in terms of looking at the narrow numbers. That’s true and in terms of the math, but in general I would say this year is about our continued international investment. We’re not really focused on making sure operating income grows; the operating income growth is sort of an outcome of focused on international expansion but also committed to consolidated breakeven.

You guys said you are releasing people from grandfathering this spring on this price hike, David or anyone else. Are you thinking about ways you might reach out to folks? We’re going to see them build up by a $1.2 and keeping churn as low as possible?

Yeah, it’s pretty simple. I mean, well, let them know that, on a certain date, the price change takes effect, so nothing dramatic, pretty straightforward simple stuff.

Great, Reed, I’ll catch you here. Now I’ve been able to watch sort of what Amazon is doing with its bundle and Starz and Hulu. Anymore thought about attaching yourself to any other over-the-top service in some sort of bundle?

Yeah, I mean we do direct consumer research and we haven’t been able to detect any significant take rate on those. So we’ll continue to watch and learn and detect; you know, our people on Hulu taking a lot of Showtime, whereas it’s pretty much on the market.

But you are seeing it right now?

We’re not seeing it so far.

Let’s start a little more about the 2016 launches. Can you guys talk about how the go-to-market strategy is for these markets versus international markets maybe at a high level operationally? When you’re thinking about markets like India or parts of Africa, what’s different about what you are doing here versus what we’ve seen before?

So extremely similar to how we launched Latin America, where there are a couple of countries that we are focused on directly, and there are still some countries that we haven’t yet visited four or five years later, but we have a lot of members. The internet is a beautiful thing because of its openness. So again, it’s very similar to our Latin America launch.

And anything you are doing on the payment side? Since you brought up Latin America, I think that was a challenge initially. I am sure you’ve learned a lot, but what can you do proactively in some of these markets to help smooth that for the consumer?

I’ll take that one. So I think we’ve got pretty robust payments teams that we’ve invested internally in building that out, getting smart in terms of the payment systems across the world. We’re pressing on gift cards and prepaid cards that might open up the market to those people that don’t have access to a credit or debit card. But in the rest of the world, again it's pretty early days and I think we’ll take the approach that we took in Latin America, which is just to look at our next best opportunities to open up additional pockets of the market. We’ve done this before not in Latin America but in other places, and we’ll continue that without playbook in the rest of the world. Our partners are another element of this, right? Reed mentioned iOS; we’ll be looking to draft off of large partners in the group in terms of iOS, Android and other options. You know there are a lot of evolutions going on in the payments world. I misspoke at Citi by saying that we’re interested in Bitcoin, but what I said was it would be nice to have in five to ten years a borderless currency like that. I think those people that are so excited about it are interested in breaking down those barriers and using the power of the internet and the internet age to reduce the friction of payments existing today in some of those banking structures. We’ll be drafting off all those long-term as well. In the near term, expect us to continue to just knock down the best opportunities in terms of adding local payment methods, credit, debit cards, and drafting off partners as well.

Are you guys, you are participating with TMO and their Binge On program; are you going to Verizon on, I think they are calling it FreeBee? I think they announced today?

You know I don’t know enough about the details of FreeBee. But generally, the great thing about what TMO was doing is making a limited video consumption possibility without worrying about the data caps. The Quid Pro Quo from the customer’s standpoint on Binge On is that they only get DVD quality on their four or five-inch screen, which when you look at the DVD quality is actually very, very good. That’s a really unique program that T-Mobile has done and it’s seeing great reception among all users and we are seeing views go up. I think TMO has seen somewhat positive benefits from that, so we hope those kinds of programs expand.

So Reed, can you explain why you are comfortable participating in programs like that and then how that differs from stuff you’ve complained about a Comcast in the past with their data caps?

Well, it’s voluntary on the customer. Any customer of TMO can decide to turn it on or turn it off; that’s a big difference. They’re not charging any of their providers; it’s an open program. Many of our competitors such as Hulu and HBO are in the program also but it’s an open, no-charge program where they’re really focused on trying to get customers some optionality of limited to DVD quality, and then you get unlimited viewing, which you know their customers are choosing.

So you don’t feel that the network is putting it out and saying we favor this kind of program and from this kind of studio, this kind of service?

Correct; that’s the big difference.

With the $7.50, $8 price point in these international markets for the emerging markets where you know that’s a relatively expensive price, do you reserve the right to sort of go down market over time as well?

Well, we’re starting off definitely appealing to elite. I mentioned that in Russia and Eastern Europe, you know we’re still in English. In Vietnam and Cambodia, we’re in English. So we’re serving elites. You can think of them, shorthand, as iPhone owners, so they pay $800 for an iPhone, they are comfortable with entertainment in English, and so for them, $8-$10 is a sweet spot price. Certainly in future years, as we do more and more and try to expand to the mass market, we can look at additional pricing options, but we feel good about our pricing and the value for these global originals right now.

And just on these internal markets, you know there is a lot of press coverage on the VPN situation and proxies. Maybe you can walk us through what you are doing as a company that’s going to change your policy from prior periods? Could you envision a situation where that might impact your net adds because you have a million customers in an international market that suddenly have - went from having a fake U.S. account to not having access?

I don’t think we’ll see any impact and we’ve always enforced proxy locking with a blacklist; now we’ve got it expanded and enhanced blacklist. So I don’t think we’re going to see any huge change.

Just to be clear, so if you don’t think there is any huge change with VPNs and other proxy workarounds, then why go ahead and do it all? Just purely to appease content providers?

You can call it appeasing or you can call it catering to their desires, which you know they have legitimate desires that we license content in Canada. It’s not fair for us to be or for our customers to be getting that if we’ve only paid for Canada. We are trying to pay for it all by shifting to global licenses and we are working with our content providers on that, but it’s perfectly reasonable what the content owners want. We know there will be some people affected that are using it today, which is what we wanted to be open about it, but it’s really a continuation of what we’ve always done now with this enhanced blacklist and some other techniques.

And remember all of our originals are fully global; they go live in every country at the same time around the world. Increasingly we are spending most of our licensing dollars on content that’s successful in that way from small things to other way to big things like the Oscar-nominated movie 'The Big Short'; we’ll have the Pay TV window around the world, so people will be able to watch that movie on Netflix wherever they are.

In the past you’ve said piracy is a major competitor. Any concern that the VPN and proxy workarounds will push some of your users back to piracy?

You know if we see that, there are probably so few of them; it’s not a big contributor to overall global piracy. Overall global piracy is a big problem and we’re working with all the content owners partially to be a great carrot and also to have other services like HBO and Amazon be great carrots. So we can work together on this anti-piracy agenda.

And I think dual filter hacking and piracy are maybe just cousins at best; I mean I think dual filter hacking is people hacking to pay versus piracy where people are hacking not to pay.

Thanks.

I am curious that you guys could talk about where you are investing on the technology side. I think your long-term letter talked about over 700 million in technology development in 2016. There are some comments in the letter about the complexity-based coding. What about to hear beyond the general areas you are spending money? What are you doing to reduce the required speed or bit rate that’s needed to stream and enjoy Netflix, particularly thinking about the 2016 in the mobile-first markets?

You know, I think the whole industry is working on these advanced versions of H265 to be able to do very high quality encoding with small bit rates. YouTube has made great progress on that; we’ve made great progress. Again, people have been working on efficient video encoding for 50 years; it’s one of the classic computer science problems. We are seeing good progress there; we are seeing a lot of progress on our algorithms and being able to rank videos for each person, even being able to promote to the right person the right content. Hopefully, you’re seeing some of that in your own experience where this is just something that is the billboard at the top of the page or more often, very appropriate and something you’re just dying to watch.

What are the minimum speeds you think someone is going to need in a market like India, be it on fixed line or on mobile, to actually stream Netflix?

The minimum is around half a megabit; that’s been consistent in the past. It’s a fairly low-quality picture. It’s around 700 or 800 kilobits to be able to do DVD quality.

You guys have said a few times now that 'Making A Murderer' has surprised you; the success surprised you. Can you talk a bit about why you had more modest expectations for that? The surprise of that success has gone; how do you sort of rethink your modeling?

Well, it surprised me because I know so little about these things. When I met with the filmmakers and heard about the 'Murderer', the sequence was interesting, but I thought it would be a specialty thing. I would say Ted and his team had that surprise; they always believed in this content.

Yeah, it had something very special about it from the beginning. When it came to us, it was seven years into making already and this is came to us over three years ago and recognized then, even before making original docs, that they had something really special on their hands. The surprise is that you see it perform at the levels of scripted series. Even our best documentary series have done very, very well but not performed in such mainstream numbers.

Right, so given that surprising you thought, are we going to sort of rethink how we evaluate for more shows or are you sort of, or this a happy success and you are happy to move along with?

Yeah, I mean it’s on the continuing of expanding it anyway. It was, it’s only our second documentary series we’ve started with 'Chef’s Table', which is a very different show. The next documentary series are probably very different from 'Making A Murderer' as well.

We should take one more question and then let everyone go.

Real quickly, Ted - I guess for Ted, your competitors report that you are in many cases overspending despite significant amounts for original programming as well as repeats. Do you think that gap is going to continue? Do you think it’s going to increase? Do you think eventually sort of fall in line with those spending?

First of all, I’d like to thank them for endorsing our spending to talent. The truth is the only reason we can in their own work and John’s own words shock in outspending for a series is because we get shock in our viewing on that series, as David expected that David said earlier. The efficiency of the content spend has been great, meaning that we are spending a lot on great shows and they get a lot of yield relating to licensed programming or relative to other programming as well. So we’ve been excited about it as part of and I think it’s a competitive marketplace and overspending is relative. I would say if shows like 'The Get Down' and 'The Crown', which are relatively expensive shows, are successful, it’s money well spent the way it was for 'House of Cards' and 'Orange Is the New Black'.

Out of respect for one of our long-time questioners and your colleague Rich Greenfield, who had a question about Charter and was a good, if Charter acquires TWC for the Internet industry OTT. I’ll answer proactively that I think it would be a tremendous positive for the OTT industry because Charter has agreed to a multi-year strong net neutrality policy, something no one else has publically agreed to. That would cover not only the Charter footprint but the Time Warner cable footprint. That means that we, Hulu, Amazon and others can compete on an open basis. It would be a huge step forward for U.S. policy in terms of OTT. Thank you all; Peter, thank you Ben, we’ll talk to you again soon.

Thank you.

Thank you.