Netflix Inc (NFLX) — Q3 2017 Earnings Call Transcript

Good afternoon and welcome to the Netflix Q3 2017 earnings interview. I’m Spencer Wang, Vice President of Investor Relations and Corporate Development. Joining me today are CEO, Reed Hastings; CFO, David Wells; Chief Content Officer, Ted Sarandos; and Chief Product Officer, Greg Peters. Our interviewer this quarter is Doug Mitchelson from UBS. Before we begin, we will be making forward-looking statements and actual results may vary. With that, let me kick it over to Doug for his first question.

Thank you, Spencer. Good afternoon, everybody. I’m going to ask a question for each of you and then we will start rotating by topic. Reed for you to start, it was another strong third quarter. Do you feel like we are hitting some sort of inflection point with streaming video? You have your digital peers, perhaps competitors pivoting into Hollywood video. We have a slew of SVOD services that we will be launching over the next couple of quarters. You have the traditional media companies thinking about diving into direct-to-consumer themselves. Do you see a real sort of inflection point in the marketplace?

Well, Wall Street loves inflection points. So I’d love to say yes, but I think it's pretty much steady growth. And we've seen new competitors increase streaming around the world, new devices, new formats, just been a continuous evolution. You know we started streaming 10 years ago. Now we are completing our 11th year of streaming. So I’d say, overall, more of the same and continued great success for streaming.

Ted, takeaways for you from the third quarter, what surprised you? What was better? What was worse than expected?

Well, Doug, I was pleasantly surprised and relieved in our continuing expansion of our original programming verticals, including releasing an adult animated comedy with Big Mouth, big feature film like Meyerowitz. It's being received very well critically and being watched by large numbers all around the world. David Fincher's new series Mindhunter and an Italian original Suburra that we shot in Rome all in Italian for our Italian and European customers, but also for our Netflix users around the world. So, just kind of a continuing breadth of things that are working well for our subscribers, I’m excited about.

Greg for you to set the table, any learnings from your time in Asia, specifically the Japan launch and how that's informing your strategy as you get started in the early days here as global product manager?

Sure. I spent a lot of time there obviously trying to grow the service, producing and launching new content, and that experience allows me to bring those lessons back to the work we do in products. So, I'm looking forward to putting more investment into how we support content. How do we invest in technology to improve the efficiency and effectiveness of the team that Ted's team is doing, producing great content at scale. Also to change the product experience that we have to do a better job at promoting content that has little built-in awareness, so we can sell those new original series and films more effectively. But then also to continue to evolve the product experience that we have today to be effective at meeting the needs of the next 100 million, 200 million members, ensuring it is as compelling as it is for the 100 million members we have today.

I think we will talk through some of that as we get deeper into the Q&A. And Spencer, when combining the last question between Ted and you, on Millarworld, first company acquisition ever, can you discuss the strategy and how we should measure ROI on that field?

Sure, Doug. With respect to Millarworld, a couple of things to highlight for you. The first is I think you can tell from our track record, this is the first acquisition we’ve done in our 20-year history. So I think from that you can take that we’ve had a very strong bias to build over buy. Secondly, we remain very, very focused, so we’re now looking to diversify into new businesses but rather looking opportunistically at intellectual property and other content assets that can help enhance our content library and also accelerate our growth. So overall, I think you should expect us to be selective, but opportunistic as it pertains to M&A.

Yes, I would say Mark and Millarworld had an impressive collection of original projects that we were already considering for both television and film. We took a deeper look at their history of creating original content and the significant roles they had in producing truly iconic films, which we believe we can build upon. This makes us excited about the future.

Do you see a series of other acquisitions that have similar characteristics?

Obviously we're looking at a lot of things, so when there can be these kinds of efficiencies, meaning that much creativity under one roof, well that’s the one to explore.

I wanted to discuss the third quarter further, and I think this might be directed at you, David, but also Ted. This quarter had relatively less content compared to last year’s third quarter, especially in terms of significant original exclusives. However, the results were very strong again. In the second quarter, you mentioned some uncertainty regarding how much of the success was due to content versus the overall growth of the streaming market. It seems that in the third quarter, the driving factor is really the streaming market. Am I correct in that assessment?

I think so. I mean, I’ve been pretty consistent in quarter after quarter that the base force that really is the strongest force is the continued adoption of Internet TV and entertainment and that tends to drive the lion's share of our net additions. When we try to explain the quarter-to-quarter perturbations or some of the lumpiness in our net additions, we tend to use explanations that focus on the incremental, which could be content slate or particular title that had some notable strength. But I think, in general, it is the continued adoption of Internet entertainment that is driving our growth and it's really helped more and more by the increasing strength of our content slate, notably our global originals are helping drive that. And you saw that show up in the second quarter with all of the growth that we saw on the international line over and above what we thought we might do, but that was continued momentum carry forward from the second quarter as well.

It's interesting, because I think we've been wondering, for a while in the last few quarters you’ve talked about having some content strength or some titles that we're surprised that perhaps pulled forward growth, whereas maybe you’re getting into the critical mass where instead there is a carryover from strengths in previous quarters, and as you said it might level out from year-to-year. So do you think we are hitting that critical mass of content? And if so, how do you forecast the fourth quarter? It's a strong content slate year-to-year in our view and Ted might follow up with that just to see if you agree or disagree? Do you no longer sort of use new big original content like Stranger Things as a driver of your forecast?

I understand that it's challenging, especially as we continue to see growth driven by the adoption of Internet entertainment. Explaining the changes from quarter to quarter is increasingly difficult, even for our team to pinpoint specific areas of incremental growth. This year appears to have the flattest growth across Q1, Q2, and Q3. We're seeing a stronger content slate and more releases, which combined with seasonal patterns and robust global adoption of Internet entertainment, creates a complex situation. However, if we look at the entire year rather than just quarterly results, we are pleased to report that we expect to see nearly 22 million global net additions this year, an increase from 19 million, which itself was up from the previous year. The overall trend shows increasing growth and adoption. Now, Ted, I'll hand it over to you for commentary on content.

I believe this may be a reflection of the consistent release of high-quality content that viewers are engaging with, which isn't all focused in the same areas. This quarter saw the release of three different films—Death Note, Naked, and To The Bone—that would be considered significant hits if viewing were treated like buying a movie ticket. There's likely very little audience overlap among these films. This demonstrates the advantage of Netflix's continuous delivery of excellent new original programming almost every day.

And then David, last question in this wire questioning. When you think about the fourth quarter guidance, can you just discuss for investors what swing factors you do see in there? Obviously, there might be price increase churn, you do have some big content like Stranger Things 2 coming, though. What were the factors that were driving the guidance for the fourth quarter?

Sure. I mean, so one primary factor is just the pricing we had again, we had ungrandfathering last year. We got price increases this year, we have great content coming with Stranger Things 2, Crown 2 and more that Ted will talk about, but some big strong content releases. And we have just the sort of perturbations that we have seen. Last year was the largest quarter we ever had, so we are comparing off the largest Q4 we've ever had. And this is our best guess, and we’ve been wrong in the past, but it's our best guess for the next 90 days.

So why don’t we switch to pricing, so for Reed and for David, can you discuss the pricing strategy broadly and then I will have some follow-ups.

Well, prices are relative to value. We're continuing to increase the content offering and we're seeing that reflected in viewing around the world. So we try to maintain that feeling that consumers have that we provide great value in terms of the amount of content we have relative to the prices. And of course, we maintained our 7.99 standard program or €7.99 in the euro zone at that incredibly low price. So we’ve got a great range now, super value-oriented in standard F, super premium is great stuff in the 4K. And I definitely was watching Mindhunter last night on my Dolby Vision 4K TV, and if you haven't tried it yet you really need to experience this HDR TV, it is just unbelievable how beautiful the picture looks.

David, anything on your end in terms of why now anything that this suggests in terms of the piece of content spend, particularly on the cash side? And one more on that, David, it seems at least from what I’ve seen so far a lot of the price increases have been really hitting the big and perhaps more mature markets or at least the more developed countries. Is that right? Is that the strategy to raise prices in developed countries because the emerging markets are revenue-driven through self-growth?

I would like to emphasize what Reed mentioned. It’s truly about taking a slow and steady approach. We are not rushing things. We have faced criticism from investors in the past for being undervalued, but our priority is to align our actions with the value we believe we have, as Reed pointed out. As we enhance the value of our content library and produce more global originals that are exclusive to Netflix, we see a strong connection to that value and believe we can gradually increase both that value and our pricing over time. If we plan to increase spending next year, it will be influenced by member growth and the opportunities available.

Yes, I mean, I shouldn’t let that go without addressing that there's no timing correlation between our intent to grow content and to grow content spending, and the price increases. I mean, this has been planned for a long time and so we’re sort of growing and slowly growing and planning the business steadily. So we've assumed that we’re going to grow ASP slowly over time and we're taking the content up with that as well.

I think a great pattern to keep an eye on is that we’re excited about releasing new seasons of established shows like Stranger Things and The Crown next quarter. Most recently, we launched new shows like Atypical, Big Mouth, Mindhunter, and Ozark. This reflects a steady cycle of introducing new shows and continuing with the new seasons of existing ones, allowing us to keep building our content.

And just to make sure we address that in terms of taking up price in developed markets vs. undeveloped markets, is that right or we just really seen the price increases in the developed market so far, and it's sort of more of a global strategy?

In terms of defining a developed market, we raised prices earlier this year in Brazil and other parts of Latin America. It's not easy to make a clear distinction. While we may avoid raising prices in markets where we are only a year or 18 months old, especially in areas where we didn’t launch with a tailored library, we opted for a global launch with an all-at-once approach and a global library. We're focusing on enhancing engagement and the quality of our library in many of these markets. However, we may decide in some of these markets that we haven't increased value quickly enough, and as a result, we might lower pricing in those regions.

The last question on the price increase is taking the higher tier of $2 and a question I get asked a lot is whether password sharing is an issue. How high is it on the priority list for the company? Is the reflection of the higher tiers went up $2, or the middle tiers going up $1 and the lower tier at $0, is that you're making password sharing more expensive?

Sure. Regarding our priorities, password sharing isn't a significant concern for us at the moment, so we don't see it as a critical issue to address extensively. We believe that a wider pricing spread better represents the value we're delivering in the higher tiers, such as 4K and HDR content, along with the unique offerings mentioned in Mindhunter. Therefore, we are increasing that price difference to better reflect that value.

So let’s switch over to the content access for a little bit, Ted, and before I start asking you about all the competitors trying to win over shows that you might want. Just any update on your content slate, how the development process is scaling? I think we’ve got a pretty good visibility on the fourth quarter, but do you see a strong first half '18 coming?

Yes, we are very excited to conclude this year with our most significant original film project, Bright, featuring Will Smith and Joel Edgerton, directed by David Ayer. This high-budget film will showcase the potential of our original movie initiative at a grand scale similar to what we have achieved in television. I'm also pleased to share that we are increasing our local language original productions. Recently, we've seen new series emerge in local languages in Italy, with upcoming projects in Germany, such as Dark, which have performed exceptionally well in those markets. It's thrilling for us that these shows are transcending borders, allowing us to invest more in production since they are being viewed in much larger regions beyond their country of origin. Alongside our continuous stream of new original series, we recognize that the marketplace is becoming increasingly competitive, but we are pleased with our performance in this environment.

Any concerns around access to content, particularly, with Hollywood? Of course, the big news you reported last is Disney going direct-to-consumer and going back on the Pay 1 window with you here in the United States and Canada, but also having the Disney channel content in there. I think Bob Iger said he's going in hot in terms of his OTT launch in a couple of years on that Disney service. Any concerns that not only the Disney content going away could have an impact on Netflix and its valued subscribers, but also that other traditional media companies might follow suit?

I believe everyone will have their own strategies, and it's encouraging to see efforts to improve over-the-top television. This benefits us all, and we need to concentrate on creating must-have content that excites our members each month. We should not get sidetracked by the competitive landscape or whether our partners choose to collaborate with us or compete against us; that's their decision based on their business needs. We're happy to see more players in the market, as it fosters innovation and provides consumers with more choices. Our goal is to be the best option available. The situation is similar to traditional television, where networks produce shows for each other. Each decision is made on a case-by-case basis, and I'm not concerned about access because we have long-term agreements with these companies, which ensures our series continue to run. Even if a deal isn’t renewed, successful shows on Netflix will remain available as long as they exist in the second window. For instance, "Walking Dead" continues to thrive on Netflix even though its deal with AMC ended two years ago, as long as the show is still being produced.

And just to quantify, Doug, what Ted was saying, our commitments at the end of the quarter were $17 billion over the next years, so that helps sort of put another level of quantification for you on that, and we also have the benefit of our growing library of produced content, of which the net book value at the end of the quarter was about $2.5 billion.

And just one more thing to add would be we are including in all these transitions, we are co-producing content with CBS All Access by way of example with the Star Trek series, the Star Trek: Discovery. So it's a rapidly changing environment for sure.

And, Doug, Disney is a great brand with great content, but internationally we have it only in the Netherlands, Australia, and Canada, and you saw how big our international growth was in most of the world without the Disney content. So, although it's got an enormously significant brand in terms of its significance relative to growth, you can see that we've done very well in international without it.

We are ready to partner with them when they’re ready too.

I think that it's an interesting dynamic because increasingly the license content seems to be going to either Hulu or you have a Disney situation with OTT, so I think investors are struggling with Netflix as you look farther and farther down the road, that major U.S media companies might be licensing less and less to Netflix, but you have a strategy of more and more original content. And I'm curious how do you sort of derive the confidence that your ramping original exclusives on Netflix will offset any loss of licensing content in the future?

Well, what I’m confident of is that it will not be an erratic shift because, like I said, we have these long-term agreements and those deals kind of run out as we're ramping up. And that has been pretty smooth transition to date. I think that in those partnerships where there's still a lot of value that I’m sure producers and networks and studios are evaluating is something like Riverdale where having Riverdale on Netflix in the second window meant an enormous audience growth for it in Season 2. In fact, a 400% audience increase on CW from Season 1 to Season 2, and the only thing different from that in This Is Us is Riverdale was on Netflix. So I think people have to look at that and look at those trade-offs in value and to see when does the partnership become too competitive and make those decisions when the threat of the competition outweighs the value of the partnership.

And, Ted, how big was the increase in This Is Us from season to season given that it was on Hulu for the back season?

I don’t know. It wasn’t anywhere near the 400%. It was up from Season 1, but not — nowhere near 400%.

I think Jeff Bezos has said that he's looking for the next Game of Thrones. Any sense that perhaps Amazon is shifting programming strategy and that would have any impact on Netflix at all?

So as Richard Plepler looking for the next Game of Thrones …

That's Ted Sarandos, so is everybody. I mean, there is a lot of disruption going on at Amazon, it is an interesting lesson that you can't just necessarily buy success in Hollywood and you’ve had some success obviously and I don’t want to belabor the point too much in this forum for investors, but I would be interested if you could sort of discuss what you're doing and how it's sustainable in terms of continuing to create high-quality content when others are struggling?

I believe it's an extension of our employee and corporate culture focused on freedom and responsibility, which attracts top talent. We've established an environment where people genuinely want to work and create. They hear from friends and see from colleagues that they are producing some of the best work of their careers, and this seems to be easily replicable. We continue to enhance this by providing resources that allow content creators to have an excellent professional experience. This is an approach we rely on, especially since others are attempting to imitate the rigid network model that we've successfully steered clear of.

For Reed and for Ted, The Wall Street Journal reported, I believe, last week that the Board of Weinstein was considering selling the company or shutting down its business. Does the situation at Weinstein impact Netflix at all and if the company was put up for sale given the sort of massive intellectual property and the studio that resides there, would Netflix be interested?

Particularly interested in acquisition?

Yes.

There is a lot of smoke to clear from what’s happening there. Our business with the Weinstein Company is pretty arms-length and we have a second window, the alpha deal on their films, of course theatrical and some second window television agreements with them. So it's not material in either way.

It will be extremely unlikely for us to be a buyer for the firm.

Thank you. Let me switch over to Greg. So, Greg, on the product side, can you share what consumers of Netflix can expect in terms of changes in the short to midterm now that you're here?

There are many changes happening. One of the changes I'm most excited about is the significant opportunity to enhance the product experience, making it more effective at conveying to our members the strengths of one of the original shows created by Ted's team and connecting that with new intellectual property. There's also a great chance to utilize new types of video assets in innovative ways to facilitate those connections.

And what would you say your priority list is right now?

Priority list is supporting Ted and his team and making great content at increasing scale, changing that consumer experience to do a better job at promoting those new series. Making better use of the marketing that we do too, so we can actually provide technical support to our marketing team to really provide the right message in the right channel, at the right time for the right consumers that we are targeting and programmatic there as well. Also better leveraging our partners both for new acquisition and engaging our members, and finally making sure again that the product continues to be really, really effective at evolving to respond to the new needs of the consumers, the next 100 million, 200 million members that we will have, to make sure we keep an eye to that shifting global set of use cases and requirements.

And, Greg, just to add something about Proximus and T-Mobile.

Yes, I mean, one of the things we’re super excited about is the work that we are doing on bundling. We started in Europe with Proximus with SFR/Altice and we just launched in the United States T-Mobile here and we're very, very excited about leveraging our partners to find efficient ways for our members to basically care, our new members to be I should say to find out about our service and sign up and pay very, very effectively.

I think you're highlighting the importance of mobile access when investors consider opportunities in Asia. At this point, does the company view mobile as part of the addressable market and total addressable market, or is the focus still on broadband and Pay-TV households?

I believe we definitely do see opportunities. It's more about how much, considering where we are in the cycle of both learning and approaching that market, and Reed and David may have different views. However, we certainly view this as a significant global opportunity in the realm of Internet-delivered entertainment.

David Wells can tell you that I'm often complaining when we see internal metrics would number of broadband households, so it's the TAM. So I think about it as number of people and so it’s very much all people on the planet will get the benefit of the Internet over the next 20 years, and we hope that all of them will get to enjoy Netflix also.

And so then, Greg, back to you. How are you making the service work better on mobile? Any specifics around how much room there is on encoding and all the fun engineering things like that?

We are focused on enhancing mobile usability for user acquisition and member engagement. For members without smart TVs or those who want to watch while on the go, we aim to provide an excellent experience. One major effort is to ensure our encoding methods are highly efficient, allowing us to deliver high-quality video with reduced data usage. For example, with anime, which is very efficient to encode, we can now offer exceptional video quality on mobile at just 150 kilobits per second, a significant achievement compared to the past. We are excited about further improving these figures and maximizing the mobile experience.

Since we brought up T-Mobile there's a lot of investor questions about the new distribution deal here in the United States with T-Mobile. If you could walk through the deal at all, again a bit of a jump at all, but I think perhaps David and Spencer more on your court, and how are you going to measure ROI and the benefits of that relationship?

Sure. So I can jump in and David can fill out, but to sort of pull it back a little bit, Doug, our partnerships ultimately what we're trying to do is making Netflix easier for customers to sign up for and to access and to enjoy. So the T-Mobile partnership is an extension of that. Beyond that, the economic arrangements we generally don’t get into, we have a broadly speaking in our BD partnerships. There are marketing components and marketing benefits that we share. To the extent from a financial reporting perspective, those marketing costs are in our marketing expense line. To the extent that there is a billing relationship and the partner bills on our behalf. Those processing costs are in our cost of revenues alongside our other payment processing expenses. And, Spencer, if I've forgotten the download of film what’s my chance of streaming on airplanes and what’s our progress on that front?

It's getting better, Reed. So we are partnering with airlines and we just recently announced at the Apex conference at the end of September that we will be leveraging all the great work that Greg's team has done where there is more efficient encodes, and in early 2018 we will be opening those up to airlines that partner with us. So that we can help them more efficiently use bandwidth in-flight and in that case we hope that airlines will begin to support and promote in-flight streaming which we think is a benefit for our mutual customers. It will hopefully delight passengers as they fly and experience on Netflix. And we think it's good for our brand and generally more engagement is good from attention from Netflix.

So what does the company have to do in the markets where it's still early-stage where Netflix penetration is still low beyond just localization? And I would be curious if David in 2018 you add sort of a percentage of the addressable market that might be localized just to give investors some help on that end. What does Netflix have to do? Is it local programming from Ted, is it Greg continuing to work on encoding and more efficient bit rates? Is it just waiting for the markets to develop?

We are certainly not waiting for anything, Doug. We are aggressively moving on all those fronts of better streaming on the tech side, more relevant content. But, again, if you have been an investor in Netflix for a number of years, you remember our launch in Latin America and how we built out state focused on Mexico and Brazil, and we're doing the same thing in Asia. So we know how to run this play. There are specific lessons we’ve learned about which content, how to get that developed, we're working on. But again, the partnership model we've got that in every nation around the world, so I think we are making really good progress. It just going to take some time to iterate on the content as we did in Latin America five years ago.

Before I leave the product discussion, I did want to get in one more with Greg on AWS. Are you wedded to that platform? I think Google and Microsoft are trying to make strides?

I would just say that AWS has been a great partner for us and we really have enjoyed using their infrastructure.

Thank you for the enlightenment. David, switching over to you, just on some of the key financial metrics, again just to reaffirm our earlier discussion any change to the outlook across margins, 40% by in the not-too-distant future, free cash flow, anything that you would like to update?

Well, I think, one thing that of note is that 40% U.S. contribution margin was our useful target, say a year to two years ago as we grew out U.S. profitability and landed international losses. You fast-forward to that and we sort of approach that target three years early, we were able to turn international profitable which will stay profitable on a consolidated basis going forward. So we switch to global operating margin and we really are optimizing the business around global operating margin. So you'll see us shift some spending back and forth notably marketing. I think I've indicated in the past that U.S. marketing has gone up on an absolute basis. As we see the benefits and we test around some of the more benefits of promoting our original content, I think you'll see that increase again in '18, and so we really are focused around growing operating margin. We're 7% this year, well on track and guiding to be on track for that, and continued growth forward and we will specify that in January. But we are able to grow from 4% to 7% this past year to give you some indication of that growth.

Do you currently have an estimate for the working capital needs related to your original content development for 2018? It seems you expect around $3 billion in revenue growth annually, and Ted appears to allocate at least an additional billion for amortization affecting the income statement each year. This leaves investors with about $2 billion to work with, although there are other operational expenses to consider. The main figure we are struggling to determine is the working capital requirement. Do you have any insight on that at this point?

Yes, I mean, we obviously have a much better idea given that we're three months away or two months away, 2.5 from next year. I would say without sort of backing us into a corner of giving you a specific number for next year, we are going to spend $7 billion to $8 billion on a P&L basis on content. And in the past the markup or the working capital ratio markup on content cash to P&L has been somewhere in that 1.4 to 1.5 range. This year it will be about 1.5. We really do enjoy the benefits of owned productions, and you are seeing us move more and more of our mix, our content mix to owned productions. So I think that 1.5 becomes around 1.55 again on average. So there is a lot of lumpiness in these numbers as things shift around from quarter to quarter, but we know it's going to be higher and the $7 billion to $8 billion in content spend with a little bit of a markup in the ratio, the offset there is operating profit growth, but you guys run your models and I think that's giving you enough direction in terms of getting towards directionally where working capital and free cash flow goes next year.

And the two dynamics you had in place is approaching about 50% original content by 2020 and to the extent the company grows faster than expected the content spending might also increase or are those still in play?

They are and I will just say to socialize that 50% or provide a little bit more context around it is becoming increasingly sort of to a Netflix subscriber when they see a Netflix brand on the piece of content that feels like an original. To us, we have sort of different sub-classifications whether we own it and made it or we licensed it. At the end of the day to the consumer what's important is that it's exclusive and only on Netflix. But I would say that 50% number that we've talked about in the past could be higher in the future, you know as we accelerate more and more content development and as we like the benefits of owned production. But, Ted, I don’t know if you have something different.

No, I would say that’s accurate and that’s the trend for sure.

You know, Ted, I think as we’re talking about content spending that naturally makes me wonder, what you're going to spend it on? Any update on sort of two categories. One, international. How that's doing in terms of creating more and more local content? How that’s scaling? What kind of percentage of budget are we talking about now or in a few years, then similarly for movies?

On international originals, we experience significant production efficiencies when creating content outside of the United States. This allows us to produce at higher volumes and elevate production standards in those markets. We're quite pleased with our progress. For example, we currently have over 30 original anime projects in various stages of production. In terms of our series work, our project in Italy is more than just Suburra; it’s designed to resonate on a global scale, reminiscent of shows like Narcos and House of Cards, but in Italian. We are expanding our production capabilities both internationally and domestically. On the film side, we released eight original films last quarter, and we aim to have around 80 next year, ranging from lower-budget Sundance hits to larger projects like Bright and Martin Scorsese’s upcoming Irishman, set to be released in early 2019.

And that leads me to wonder about cost of content because you are scaling up the number of hours, the number of titles, at the same time we keep hearing about inflation certainly for the best content in Hollywood. Any sort of comments on the Shonda Rhimes deals specifically but more broadly is content cost inflation something that could become an issue for Netflix at some point?

Yes, I’m sorry, if I’m broken record on this one, Doug, but I get asked this a lot and I feel I’m going to say the same thing a lot which is that I compare it to a lot of professional sports where it gets very competitive for the handful of those superstars, but overall player personnel costs are pretty predictable. And in this case it's been those big unicorn shows, the price of any one of them might go up in a more competitive market, but general content costs are quite predictable. So and we're like and the thing about Shonda Rhimes as you mentioned earlier is creating a place where she wants to create, where she knows that she could spread her wings a little wider, where she can get outside of the network box a little bit, had a lot more to do with her attractiveness to Netflix than we just had to outbid ABC. And so as we continue to attract world-class talent like that, that will also attract more world-class talent like that.

And Doug, hopefully what gives investors confidence is in terms of our ability to manage content cost inflation is if you look at the long-term trend in our business, we’ve grown the content budget, we’ve grown the content library, we made a better but revenues have come faster, which is what’s driven the profit improvement and the margin improvement over the years.

That’s what I was going to say. So we face this content cost escalation over the last three years or at least the speculation of it, so what Spencer said.

One thing I find interesting about the sports rights discussion is a question for Reed. I have a sense of what the answer might be, but I still wanted to bring it up. Recently, Facebook bid $0.5 billion for multiyear digital rights for the IPL in India. Additionally, Amazon is currently broadcasting Thursday Night Football in the United States. This seems to indicate that investors are anticipating increased bidding for sports rights from video platforms. We also know that Netflix has previously stated that sports isn't quite right for them, but it reminds me of when they transitioned from DVDs to streaming. They took their time, waiting for the marketplace to evolve until it was the right moment to pursue streaming. I'm curious about what the key trigger points will be for Netflix as they consider sports content in the long term.

Well, I have to see over the next 10 years, Doug, what those trigger points might be hypothetically at some point in the near term. We have so much going on in the global expansion of movies, unscripted, series, documentaries, we're just running 100 miles an hour doing our thing around the world. And so nothing to really talk about that's interesting in the near term.

The other question that we end up asking a lot, but we still want to do it, Amazon is likely to launch some sort of ad product in the first half of next year, that’s not clear if it's pre-roll or post-roll or banners or sponsorships or what have you, in my understanding is they’re still trying to figure it out and given that you have emerging markets that perhaps require a lower price points than the developed world. Any updated thoughts on pursuing advertising at some point?

You know often the right strategy for a challenger brand which is Amazon in the case of streaming video is to try many things, because they're not sure, just copying Netflix is not going to typically get someone very far. The leader's role is to really as the famous phrase is to keep the main thing the main thing. And so our focus is not expanding into new ads at all. Our focus is on doing even better content, getting better partnerships, and better mobile streaming. We just have to have the discipline to keep doing what we're doing at many times the scale, and if we do that things will work out really well for our global customer base and thus for our investors. And Doug, I think we’ve time for one last question.

Well, it was interesting because I had two that I was going to go with, so for Reed, I’m going to let you try and divide between the two of them. And one was, I was curious, I think the investors are really focusing on competition and access to content these days as the market really evolves. And so one was, I was sort of curious if you would wrap up with the sustainable competitive advantages for Netflix. And I think, separately I was going to ask a regulation question Reed and that is that when you look at sort of content overseas and local quotas when you think about what some of your peers are going through around scale issues, is there anything on the regulatory side regarding those two specific issues that Netflix is focused on right now?

Well, Doug, very good about staying in character. We've all got our Stranger Things sweaters on because we're celebrating both the amazing content that's coming in 10 days or so, and also in terms of a great promotional strategy, we’re learning how to do merchandising, we've got some amazing displays and amazing materials out at Target. And Ted, do you want to tell us a little bit about Stranger Things?

On October 27, we will be releasing the new season of Stranger Things, which answers the question of how you will spend your Halloween. You can also get one of these ugly sweaters from Target for your next Christmas ugly sweater party, and it really celebrates the spirit of the show in a great way. We can't wait for this show to come out, which is not only an enormous hit in the United States but also matches that success internationally with our membership base. We are thrilled for Stranger Things coming this month.

And, Greg, what are we doing on product to support Stranger Things?

We are doing an amazing job of taking over big parts of the site to basically connect our members with this great show and show off how incredible content it is. And Doug to answer your question on scale, I'm sure others are figuring things out. What we're continuing to do is work with Amazon as well as investing in open connect and being able to handle all of the growth that we anticipate. And we've had a pretty good track record of that for the last 10 years. So I wouldn’t worry about that particularly.

Thank you everyone for joining us on the call and look forward to talking to you more over the quarter.