Netflix Inc (NFLX) — Q2 2019 Earnings Call Transcript

Good afternoon, and welcome to the Netflix Q2 2019 Earnings Interview. I'm Spencer Wang, VP of IR and Corporate Development. Joining me today are CEO, Reed Hastings; CFO, Spence Neumann; Chief Content Officer, Ted Sarandos; and Chief Product Officer, Greg Peters. Our interviewer this quarter is Mike Morris from Guggenheim. As a reminder, we'll be making forward-looking statements and actual results may vary. With that, let me turn it over to Mike for his first question.

Thank you, Spencer. Good afternoon. Let's jump right into the results and the member variance from guidance in particular. What changed during the quarter versus the outlook that you provided that made such a significant impact this quarter? And you didn't mention the content being perhaps a factor. I think that's really something we haven't focused on in the past in terms of driving the cyclicality, so maybe if could you talk about those things.

When we're forecasting, Mike, in the beginning of the quarter, we make our best estimate. And as you can see over the past 3 years, sometimes we're forecast high, sometimes we forecast low. This is one where we forecasted high. There was no one thing. And if I think about three years ago, we were also light, and we never really were confident of the explanation. Then, we were $2 billion in quarterly revenue. Now, we're going $5 billion. And so it's easy to over-interpret the quarter membership adds, which are a bit noisy. So for the most part, we're just executing forward and trying to do the best forecast we can. Do you want to add anything to that, Spence?

Yes. Thanks, Reed. Maybe I'd just add the fact that when we think about those paid net add forecasted, it's really about the marginal growth, Mike. On a subscriber base, it's over 150 million members, so we're talking about plus or minus 1%, 2%, 3% in growth rates on subscribers on an annual basis that are growing over 20%. So if we look at the trailing 12 months, we grew our member base by over 27 million members. If you take that forward to where we think we'll be at the end of Q3, we think we'll be, on a trailing 12-month basis, over 28 million members. So we're really playing for the sustained increase in growth in our membership over time, and there'll be some quarter-by-quarter choppiness along the way based on things like seasonality and content slate and so forth.

Can you provide more detail on the dynamics between gross adds and churn during the quarter? I'm also interested in the pricing aspect, but let's first focus on gross adds versus churn and how that impacted the net.

Yes, generally, we observed a slowdown in subscriber growth across all regions. This trend in our gross additions suggests some level of seasonality and the timing of our content schedule. Additionally, there may have been a pull forward of subscriber growth from Q2 to Q1, as we had a strong Q1 with 9.7 million paid net additions. We also noticed elevated churn rates and lower retention in regions where we raised prices. It was a mix of these factors. We believe the main issue was related to seasonality and the timing of our content, although pricing did influence the situation. The positive news is that, as mentioned in our letter, growth has reaccelerated in the first couple of weeks of Q3. We're seeing improvements in both acquisition growth and churn rates, which are returning to levels prior to the price changes. Overall, we are optimistic about these trends. It's also important to highlight that pricing increases are beneficial for revenue, and although there might be a short-term slowdown in subscriber growth due to pricing, the additional revenue is advantageous for our business and ultimately benefits our members since we reinvest significantly in high-quality content and product experiences for them.

Can we talk a little bit about that pricing cycle and where we are right now? So two things, I guess, specifically in the U.S. by June, the entire membership base seen a price increase such that there wouldn't be a lagging impact in the September quarter. And then internationally, obviously it's much broader. Can you highlight any particular markets, anything you can help us size the portion of your member base that is processing through those pricing increases?

Greg, do you want to take that or do you want me to take it?

I'm happy to do that. So I mean in the U.S. situation, we're through all those notifications. Obviously in the international perspective, we've got different markets in different places. But I would say just in terms of helping you size that, I mean we've built obviously that into our forecast for our Q3, so those effects we've already tried to account for and categorize in that forecast.

Okay. Great. And then, Spence, one other question with respect to the outlook. It's the second consecutive quarter you've come ahead in operating income relative to your guide. You're maintaining the same full-year guidance. I know that you've referenced the marketing, but help us there with, again, maybe why the timing. From your perspective, forecasting hasn't been as clear given that it feels that you would know when certain marketing was coming through.

We have some flexibility in deciding when to support different titles. We're really excited about our upcoming content slate for the second half of the year, especially with the launch of Stranger Things 3 and other shows like Casa de Papel and The Crown, along with major movies slated for the fourth quarter. There’s a substantial amount of content to promote, so it was a decision by the team to adjust some of the marketing budget to focus more on the latter half of the year.

Okay. So with some of these pressing topics covered a bit, Reed, usually we'll start with an overview question. And so I guess, we're halfway through the year now, this dynamic perhaps aside, any change to your view of the business strategically overall? And I guess embedded in that is touching on that question of your confidence about the growth outlook going forward, and why an investor shouldn't look at this quarter and say perhaps the business is approaching maturity more quickly than we anticipated.

Yes. I mean if you look over the past 12 years that we've been streaming, in the beginning, there was Hulu and Amazon and YouTube and Netflix and we've all been growing at tremendous rates over the last 12 years. And now it's really catching on in a big way around the world and we're having a lot of new competitors enter over the next year. And I think our position is excellent. We're building amazing capacity for content. Our products have never been in better shape. Our rate of investment is extremely high. So if investors believe in Internet television, which I think is an easy one to get there, then our position in that market is very strong. And all of the key things are coming our way in terms of, again, stronger content and a stronger service.

And Mike, if I could just add on your topic of maturation, I would just also point out that revenue growth did accelerate by 400 basis points in Q2 versus Q1. If you look at our guidance as well for Q3, I think you'll see that trend continue as well. So financially, I think that's actually a sign that things are picking up or continuing to grow very steadily.

I would like to add that we are also observing significant increases in viewer penetration and audience reach on both a show-by-show and film-by-film basis.

Okay. Okay. Great. Let's expand the discussion a little bit. Greg, over the past year plus, we've talked about some of the partnerships that Netflix has struck with the traditional video and wireless providers. I understand each can be different. There can be different accounting treatments. But perhaps can you give us an overview right now where we are on partnerships? Perhaps domestically in particular, how they're impacting the business? Did they have any impact during the quarter? Of course. But just in general, what do we look like in terms of those impacting and where we might go from here?

Sure. There's a long history of these partnerships, beginning with basic device integrations for the Xbox and Sony PlayStation. Recently, we've expanded the capabilities of these partnerships beyond simple device access to include payment integrations and bundling with pay-TV and mobile operators. Currently, we are still in the early stages of this process on a global level. The bundles we are creating serve as beneficial accelerants to our user acquisition, particularly for populations that might not be as technologically savvy as those who subscribe directly. While they might lack a Smart TV or streaming device like Roku or Amazon Fire TV, they usually have a set-top box from their pay-TV provider. By integrating the Netflix application into that set-top box and bundling the Netflix subscription with their pay-TV package, we simplify the experience for these users, allowing them to enjoy similar benefits as our direct subscribers. We plan to keep expanding these partnerships, as there are numerous opportunities worldwide, and we are still in the early stages. However, we believe that this bundle acquisition channel will be a valuable supplemental component, albeit a smaller part of our overall subscriber acquisition strategy.

Let's shift our focus internationally now, Ted. Before today's results, we saw some data showing strength in certain markets, particularly content-driven strength in France and Germany in Europe, as well as Japan and South Korea in Asia. Could you describe any specific markets that are currently experiencing a stronger momentum, especially in terms of content?

Well, one that we're going to be looking for starting this week is going to be La Casa de Papel that Spencer just mentioned. This is our largest non-English show, loved throughout the world at a very high level. We also have Elite and Chicas del Cable from Spain that are enormously popular shows, and new seasons coming in the quarter. And Sacred Games from India, which was a big driver for us in its first season, dropping a new season this quarter as well. And in the past 3 months with the release out of Germany of How to Sell Drugs Online, The Rain season 2 from Denmark and Quicksand from Sweden, what's been amazing is they've been deeply relevant in the home country, traveled the region very, very well and it found global audiences. So the 3 shows I just mentioned from Germany, Denmark and Sweden have 12 to 15 million global watchers. So we're seeing some real locally, regionally and globally relevant content coming from all over the world.

Great. And you mentioned India. It's a topic we like to dab a bit more into because of the size of the market, of course. So I guess for Ted and for Greg also, in this market in particular, as we approach the second season of Sacred Games, a bit of a milestone, where are we on the content offering? I think you've referenced some other markets where you can start with an original, it gets some traction, but you really need a certain amount of bulk to offer there. So where are we in the content offering in India? I also know you mentioned or I have seen reference that you have five other shows, particularly series or projects that we have a green light. And then, Greg, perhaps tied in with the question about product pricing, you made a reference in the letter to some new pricing. Can you talk a little bit more about both the product and pricing in India in particular?

Yes. Before we discuss pricing, I want to mention that we have announced five new original productions for India. One that we're particularly excited about is Baahubali, which marks our entry into large-scale Indian original films. It is based on a film that was extremely popular last year, and we are adopting a series prequel/sequel format that we believe will resonate well with audiences in India. We have been observing consistent increases in engagement among our Indian viewers, which we believe we can continue to enhance. Growth in India is a long-term endeavor for us, and we are seeing steady progress.

So as we're expanding that content offering and seeing that engagement grow, we think that there's an opportunity then to be able to broaden the access to the service and so more people can enjoy that increasingly relevant content offering. So that's clearly the motivator behind adding this mobile tier offering, which we think is going to be a lower price point. In a market where the typical pay-TV package is under $5, we think we need to have a lower price offering to improve the accessibility, but also one that complements the existing tiering structure that we have. So that's the primary motivator for that move, so we can broaden the audience that can love that content, enjoy that content that Ted's team is making. And that's great because like when we launched Sacred Games season 2, when you have a bigger audience for it, that means we can create more social buzz and more excitement about that show. So we're doing that. We're also working on the partnerships we have in the market because we think there's specific opportunities to improve accessibility via those partnerships as well.

Great. Reed, I have a broader question. How do you assess your potential global subscriber base? Many of us focus on the connected broadband marketplace, but I assume you view it as larger than that. Historically, you've projected a range of 60 million to 90 million members for the U.S. Would you be willing to outline your thoughts on what the global opportunity might be? If not, could you share your reasoning?

Well, we do wonder, in the fullness of time, can we be as big as YouTube? YouTube is 7x larger than us roughly in viewing hours, and a phenomenal service. Of course, it's free. So the real question is can we produce enough content that people are willing to pay for? If you look at benchmarks, it's about 700 million households that pay for television outside of China, so that would be kind of the equivalent of the U.S., 100 million, so that's one established market. Now, do we have enough content in each of those countries? Most of that is local content that gets consumed. But the Internet is capable of some very large customer bases, as you I'm sure well know. So we'll just take it year-by-year and try to have our net adds continue to grow. We still think our net adds this year will be larger than last year. We'll keep pushing on that. And what we want to do is just grow the net adds every year and then the future takes care of itself.

Great. I want to talk about a couple of broader strategic topics here. Reed, in the past, you've clearly stated that you view your competition for consumers' time pretty broadly, sleep, video games, et cetera. The financial press though loves this concept of streaming wars between Netflix and a number of existing and new platforms. So do you think that streaming wars is a fairer characterization of what the future holds for Netflix and for video entertainment?

Yes. I mean high level, it is. Certainly, all of Ted's world is very competitive. It's never been a better world for talent. They get to bid themselves off between us, Disney, Amazon, et cetera. So there's a real battle for who will pay for content around the world, but it's not a zero-sum competition. I think everybody gets that people will subscribe to multiple shows. Most Netflix employees are HBO subscribers. We love the content they do and that spurs us on to want to be even better. So it's a great competition that helps grow the industry. And the advantage of having something catchy like the streaming wars is it draws more attention. And because of that, people, consumers shift more quickly from linear TV to the streaming TV.

Great. Greg, over the past 12 months, the company spent approximately $1.5 billion on technology. I have a couple of specific questions. First, can you clarify how much of that spending is scalable versus incremental? It would also be helpful if you could quantify this and discuss the types of expenditures that fall into each category. Additionally, we often hear inquiries about how your investment in technology serves as a competitive advantage in the race for subscribers. Can you highlight any aspects from the consumer perspective that differentiate the Netflix platform from the competition?

Yes. There's a lot to unpack, so let me break it down. I would say that most of our spending is a fixed cost investment that yields greater benefits as we scale. As our business grows, we leverage this fixed cost investment more effectively. There’s a small part that contributes incrementally to our scaling, particularly in delivery costs. We focus on making content delivery more efficient, which involves fixed costs, but we also have some costs that naturally increase as we deliver more streams. To give you a consumer perspective, let’s consider a couple of examples. One is our encode efficiency, which refers to how we take the videos created by our creators and compress them into a digital format for delivery to various clients and devices around the world, under different network conditions—from highly reliable gigabit connections to unstable networks in mobile environments. We aim to optimize this encoding process so that we maximize our capability to connect with consumers in diverse settings at any time. The benefit to consumers is a high-quality viewing experience that fosters more engagement and a more immersive connection with the content. This illustrates the return on our fixed cost investment.

And Greg, about how many AV tests do you guys have running currently?

In a year, we plan to conduct around 400 tests, which we believe is a solid benchmark. These tests will explore our theory on how to enhance user experience and engagement. We will evaluate the outcomes based on actual usage of the service to see if our hypothesis holds true. The successful improvements that enhance user experience will be implemented globally across our user base.

Great. A place you didn't quite mention was the user interface itself. We do get questions about discovery and particularly with all the content that's being invested in. There's a survey that I just read about from Nielsen. Two-thirds of streaming users know what they want to watch when they go to the service, but another third look and they spend 8 to 10 minutes, according to the survey, looking for something to watch. So that's my question for you. Does that seem right based on anything you've seen? But also, is that a good thing or a bad thing? And where is the interface, from your perspective, to making that great?

Sure. We keep an eye on those numbers and have our own metrics to assess how our members interact with the service and the time they spend discovering content. We have our own perspective on this, and while the Nielsen data is interesting, it doesn't accurately represent the usual experience. Overall, I believe we're performing well, as reflected in our growth, engagement, and increasing subscriber numbers. However, we are introducing a significant number of new titles to the service, many of which are unfamiliar to our audience. This presents an opportunity for us to enhance how we present these titles to the right viewers in a meaningful manner, helping them understand the relevance of a show and generating excitement about watching it. Many of the 400 A/B tests we conduct each year focus on improving this process. We have a strong pipeline of ideas to make advancements, and we're looking forward to it. We believe that excelling in this area can give us a competitive edge, as it allows us to provide a better service experience that maximizes the value of our content library.

Great. Great. Okay. So I want to talk about some key content-related items. And I think we know the well-publicized topics that I want to get to. But first, Ted, can we just talk about your current strategic point of view on investing? And I'm thinking about allocation of resources across a couple of vectors, global versus local market-focused content, films versus series, and I think Netflix-branded versus licensed. Just if you could tell a sort of from a high level where you stand on how you're splitting your resources there.

One of the main focus areas is the balance between original branded content and licensed material, which is about producing programming that has global relevance and significance. For example, shows like Stranger Things are performing exceptionally well worldwide. Last quarter, we saw similar success with Umbrella Academy, indicating the presence of content that resonates globally. While there's a wealth of content that is distinctly local, we are continuously trying to find that balance. Occasionally, we get a series like La Casa de Papel from Spain that transcends borders and becomes a global hit, challenging the historical notion that most global content is American and in English. However, a significant portion of the audience still favors English-language content. We are constantly navigating the trade-offs between these two dynamics. Our overarching strategy has been to invest in original programming for over six years now, anticipating that acquiring licensed content would become increasingly challenging. This strategy has proven beneficial for the business. We are committed to producing more international, global, and original films. Additionally, we have substantial plans for animation that will start showing results early next year. We believe we are making wise investments in all areas of content that our consumers enjoy.

And just a follow-up. Film has been something where, clearly, we've seen more volume and more focus, at least on a relative basis. Can you talk about why film is incrementally important for the platform overall relative to the series? And is it fair to say that more effort is going there? Because it certainly feels like it from our perspective.

I would say there has been more effort than in the past couple of years, and that effort has been more successful recently. This has been particularly exciting. When a film like Murder Mystery reaches such a large audience, it shifts our perspective. We're not just measuring ourselves by our ability to license Pay 1 movies; we're really looking at consumer perception and what movies they want to see on a Friday night. The competition includes both large-scale films and intimate indie films, and the team has done an incredible job this year in getting those films into the public conversation, creating memorable moments like Bird Box and Murder Mystery. We believe that in Q4, with films like the Irishman and 6 Underground, these will be the kinds of movies people think about when they want to watch something, rather than just a pay-TV movie.

Great. Ted, you mentioned this, and I'm glad to open up the discussion more broadly. There's a significant question regarding the high-profile content leaving the service over the next year. The first question pertains to the impact, which you touched on in the letter. We have shows like The Office, Friends, and the Disney-branded content that will be removed from the platform. You provided some insights, but I would appreciate further elaboration on this. Specifically, how much of the viewing consumption does this represent? There are likely differences on a person-by-person basis regarding the viewing amounts and the number of members who watch certain shows in a single day, factoring in both domestic and international dynamics. Additionally, I would like to understand the historical context better. You’ve previously lost shows like Family Guy and X-Files. Can you provide some perspective on how we should interpret this situation based on past experiences?

Since we started streaming 12 years ago, the consistent dynamic is that content comes and goes. The licenses come on, they expire, they get competitive, they go somewhere else, that's been true. This is the kind of second round with the Pay 1 Disney films. Remember back in the day, we used to license them through Starz and had them on Netflix and it was a big swing off, along with films from Sony at the same time. So we've seen the entire output from Fox. We've seen the entire Nickelodeon kids output come and go on the site. And we grow through that by, we believe, by making these early investments in original programming and getting our consumer and our members much more attuned to the expectation that we're going to create their next favorite show, not that we're going to be the place where you can get anything every time. And we think there's more value in that proposition than there would be in the kind of low price aggregator.

Mike, I want to add that we have been preparing for this for quite some time. When you consider our portfolio, we are not overly dependent on any single studio or show. As we mentioned in our letter, even our most popular shows account for only a small fraction of our total viewership. As content leaves the service, it will do so gradually. Looking ahead three to five years, a significant portion of our current second-run licensed content will still be available. Therefore, we will continue to emphasize our strategy of developing more original programming. Additionally, as Ted noted, if there is second-run licensed programming available, it will remain a part of our business.

Understood. Before, we talked about that allocation of budget there. The international versus domestic dynamic for some of that specific high-profile content that's coming off, is the consumption of it and the availability of it consistent on a global basis? Or is this primarily a domestic phenomenon? How should we think about that?

It's primarily domestic now. For example, we recently added Big Bang Theory to many of our international territories. We had never made it available to our audience in the U.S. So I think it's mainly a domestic-driven initiative at this point, but we believe it will also be successful internationally.

Okay. And then, of course, you're spending money on this content. So it's not like it's just leaving; you have resources being freed up.

Absolutely.

When we talk about though the availability of product, if there's one thing to take a sort of iconic piece of content off the shelf and not have to have it recreated. When we think about redeploying that money and expanding your budget even further for originals, are there constraints on whether it be talent, any types of resources available? Or do you think that there's ample opportunity to go out and redeploy that?

We definitely think there's ample opportunity, particularly across film and television. Like we said, a couple of years ago, we were not investing in animation at all. And today, we're investing very aggressively. I also think that the emergence of the next global storyteller being from anywhere in the world certainly opens up that opportunity, and we are becoming much more seasoned producers all over the world to do that.

Okay. Great. Now, you are investing more on your own capabilities, of course. And Greg, I think that one thing that we don't talk about much is the technology side of the studio and production. Is there an opportunity for Netflix as a technology company in addition to being a media company to take advantage of some opportunities to be a more efficient studio, a better studio in terms of what you're working with Ted on?

Yes. If you consider the number of titles we are producing and our strengths in technology and analytics, we believe there is a chance to make fixed cost investments that could yield efficiency or outcome benefits. This relates to the quality of spending that affects users across our range of titles. It’s still early in this process as we are trying out various strategies and will observe how they perform. To illustrate this, after a show or movie is completed, a trailer is created for promotion. This requires looking through all the scenes and cataloging various aspects, which helps in crafting a compelling trailer. We can increasingly automate this indexing process, allowing our trailer creators to devote their time to the creative aspects. They can take the results of automation and create engaging trailers that authentically represent the show and appeal to viewers. This is just one example of the investments we are making that we believe will enhance our scalability.

And I would just add that being an efficient producer is a very good thing to do obviously, but being an efficient distributor and being an efficient marketer is P&L-changing. So that's a way to think about. We're working in all three of those things at the same time.

Great. I want to move a little bit to the reporting and the granular reporting of data that you referenced on the last call. One of the places we're seeing it more clearly is in the U.K. with the top 10 list. So my two questions are, #1, can you share any results from that U.K. top 10 list, #1? And #2, what can we, as consumers or members, expect going forward? And then I have one follow-up with respect to what it means for the talent, of course.

We mentioned in the last call that we are becoming more transparent with creators and the public regarding what's being viewed on Netflix. People use various inputs to decide what to watch, and popularity is certainly one of those. We are working on how to balance popularity with other personalization tools to give viewers the chance to see what others in their country, city, or town are watching. We aim to present that information in a way that helps them make better choices. Overall, we are still experimenting with the best way to apply this and it remains in active testing.

Yes. I'd just want to comment. I think we feel like there's a great way to actually enable that personalization, but enable popularity signaling for the users that want it. It's just basically looking at the folks that use that popularity as a factor in the decision-making they take about on what to watch next and making sure that those popularity signals are available and very present for those users. And for users who don't seem to want that, then we can sort of make those less present.

Yes. Recently, a specific piece of data we shared was that in the first four days of Stranger Things 3, over 18 million people watched the entire season. We shared that number because it prompts reactions such as, "I’m one of those 18 million," or "I want to be one of those 18 million," leading to excitement among fans. Giving them data like this generates a lot of enthusiasm within the fan base.

So from a public perspective or from a member perspective, should we expect more consistency in that type of data? Or is it going to be a one-off on selected items that you feel are valuable?

Yes. I think we'll be increasingly transparent with producers and then, over time, more and more. I really like that it's important for us to help condition the market to understand what the viewing data is so it's not being compared apples-to-oranges against things that are not similar. And right now, if we start publishing tomorrow, we'd be the only streaming service doing it.

Right. Right. So the value of this data to your content partners, content creators, as you create more of these large-budget films, you have actors or other talent that historically perhaps were compensated on box office performance. How are you approaching that when you want to make these big-budget films and you want to incentivize talent? And maybe the flip side to that is perhaps you have a little protection if a film doesn't do as well. In the traditional model, is there a way that this data starts giving you both the incentive and the protection?

Yes. We're trying to establish a new model, especially for box office-friendly talent who are interested in making their next major film with Netflix. We need to determine how they would be compensated in a successful scenario. Since there are guarantees involved, some discounts will be applied. Additionally, if the payments are made over a shorter timeframe, further discounts will apply. Ultimately, we aim for the economics to be neutral or at least comparable to what they would receive for a big hit in theaters. This is what we negotiate on a film-by-film basis, actor by actor.

Great. I'll open this up to anyone, Reed perhaps. Looking at the product placement or rather product partnerships for Stranger Things, certainly very high profile, a lot of buzz, very broad. In the letter, you referenced it as being more about building the product itself versus monetizing. Does it become a monetizable part of the business at some point? Or put differently, expand a bit on the benefit of doing that and how that might be broadened to other properties.

Well, we're monetizing it today in more membership growth. The focus is get more people excited about Stranger Things. So they join Netflix. They tell their friends about it. So this year, we'll add about $5 billion of incremental subscription revenue, which is almost all of gross margin, and that's faster than any entertainment company has grown in the history of the world. So what we want to do is keep that engine going, keep that subscriber engine going and not get distracted with alternative revenue sources which just don't add up when you're growing $5 billion a year. So the core focus is create all these merchandising opportunities, tie-ins, touch points so that you feel the Stranger Things energy so that more people join. So together, as we do monetize all that, it's just we're monetizing it through our giant engine rather than through little sidecar vehicles.

Mike, I think we have one more...

You should consider, especially in the case of Stranger Things 3, all those product partnerships as if they were a character in the show. Keep in mind that the series is set in 1985, during a time when major summer blockbuster films were filled with product placements. There was a strategic decision made when they discussed promoting that season almost two years ago.

Mike, we have time for one last question, please.

Okay. Great. Usually, we like to provide an overview, but this is a specific financial question we frequently receive, particularly regarding the margin potential of the business over time. I believe it connects several of the different points we've discussed. Spencer, we've heard your thoughts, and I would like you to elaborate. Since Netflix operates on a single revenue stream model, you've clearly stated in your letter that advertising is not part of your future, despite media reports to the contrary. Can Netflix ever achieve the margin levels we have historically seen from cable networks, such as HBO, which follows a unique single revenue model, or from networks with dual revenue streams? Or should we expect Netflix to maintain margins below historical averages on a global scale?

I mean, you take it or you, Reed? I can take it.

You got to do it.

We've shown over the past few years that we are dedicated to developing a strong long-term business model while increasing our margins by around 300 basis points, targeting 13% this year. Looking ahead at our margin potential and business scale, we aim to significantly expand from our current 150 million paying members, creating a network of unparalleled size for a premium entertainment platform compared to historical margins. We also focus on revenue per individual subscriber, considering whether a dual or single revenue stream benefits us more. Our current strategy for building a global network emphasizes a single revenue stream, enhancing member experiences and providing valuable pricing starting with excellent content. We believe this approach will help us scale margins effectively. While we won't provide specific guidance, there are factors favoring us and some that don’t. Ultimately, we believe the subscription model is advantageous for us, and we expect margin growth over time. It's important to note that we still have much potential ahead.

And Mike, we don't want to finish on a dull note. I want to quickly mention two things. First, congratulations to HBO for an outstanding record-breaking year with Emmy nominations. They continue to set the standard we aspire to, and we are very excited for them. Additionally, on July 26, we will conclude our seventh and final season of Orange is the New Black. I want to express my gratitude to Jenji Kohan for her remarkable vision that significantly elevated the concept of Internet television. The show concludes on a powerful and emotional note, and we hope the fans will love it.

Awesome. Great. Thank you for livening that up, Ted.

Thank you, Mike.

Thanks.