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Netflix, Inc. (NASDAQ:NFLX)

Nomura 3rd Annual U.S. Media & Telecom Summit Conference Call

May 30, 2013, 11:00 am ET

Executives

Ted Sarandos - Chief Content Officer

Analysts

Unidentified Analyst

We’ll get started. Our next guest, Ted Sarandos has been in here for three years in a row. He is a key part of this conference. I can’t thank him enough for getting here; he flew all night to get here. Thanks for Erin for being here too. I really appreciate their support. I’ve seen Ted work the past four years or so. And every time there has been doubt about what he can or can't do, he has always been able to do it. So I really appreciate you being here and we love talking to you.

Again Q&A from cards towards the end of the conference, the end of this session, (inaudible) has distributed the cards and we will pick him about 10-15 minutes to the end of the conference or the interview and we will do Q&A from those later. So thanks.

Ted Sarandos

Absolutely; when you said flew all night; you know other people did that too, but commercial.

Question-and-Answer Session

Unidentified Analyst

Exactly [Technical Difficulty]. So as we’ve said, all the previous visits with us, it's been a good year for you and Netflix. Your strategy continues to evolve. So lets start with some high level questions and then we will dive into some specifics. If you look forward for me [Technical Difficulty] what would Netflix’s streaming content offering look like, types of content three years from now and what will be different about that versus what it looks like today?

Ted Sarandos

Well, I suspect that the mix will continue to be movies and TV shows, both. Today, there is a lot said about the growth of TV programming in Netflix and it has been phenomenal, but a third of viewing is still movies and the numbers in terms of being able to get be more creative of windowing of movies. So the traditional long delays from the box office to DVD to pay-television, I think are getting increasingly out of whack with the way the people watch and the revenue models do now. So I think there will be much innovation in the windowing of movies, and programming will become, which already has become increasingly exclusive and much more original than it ever has been.

Unidentified Analyst

Okay. I remember when you first started buying streaming rights and you guys split it a window that not existed before, it was a window that kind of gets filled with the rest; I want to know what your thinking about growth of competition from the established as far as players that are out there, maybe in some new names on horizon and then what we are hearing in these conferences is existing push by traditional MVPD players for TV Everywhere; so the company isn’t evolving, so how do you see that playing out so?

Ted Sarandos

I mean we have always identified TV Everywhere as the long term risk of the business and I feel like what's emerging from it is that catch-up television is good for the industry, it's good for the TV industry, it's good for us, because it's strengthens the brands of the content, but it should be only catch-up television. Once it gets into full season stacking of a show that’s an (inaudible) right and that’s a separately monetize-able right that we pay a lot of money for.

So if the MVPDs want to pay producers and channel owners, if they want business for the right that’s where we’re probably happy to get into those bidding orders, but the truth of it is they, I think that the MVPDs would rather muscle it out of the channel operators and it is going to be increasingly difficult to defend economically with producers, when we run to pay a lot of money for that right.

So what I would like to see is a very healthy, but well defined TV Everywhere, as catch-up TV which by the way outside of the US it's very common. There are four, five episodes, as catch-up TV; it's very, very common; it’s really kind of new thing only in the U.S. And separate from that is a monetize-able subscription video on demand right that we’ll bid for. So I think the best way that, and that’s why we approach our deals today which attempt to not box out TV Everywhere, but to kind of keep it in some in the catch-up mode, which is what it is.

Unidentified Analyst

Now what amiss is past couple of years as you’ve done us how is competition evolved your thinking. So what initially certain deals what’s evolving you are thinking about due to competition what’s changed there?

Ted Sarandos

Exclusivity, right; so I don’t’ think that if I think it was a right thing for short term in the beginning of the business to do non-exclusive inexpensive licensing, because there was de facto exclusive anyway there was no one in the space bidding with us; and I think that once people started emerging I think differentiation really matters overtime. And the way you differentiate obviously is in the difference of the content; we’re differentiated today on a bunch of technical issues for this service just simply works better than everybody else’s streams better, streams faster, doesn’t buffer, the sound quality is better, it works on all the devices, all of those things I think better than anyone on the planet.

But I think overtime those things will start get find standardization and the programming differentiation is going to matter more and more. So getting in, breaking some new ground like you mentioned earlier about creating a new season after licensing window for television, creating kind of new pay-TV windows for Hollywood movies, all of those were important, but I think now using the strength of the subscriber base and the growing footprint, multi-territory footprint to have some buying power to create exclusive content I think is really important.

Unidentified Analyst

So when we think about the offer, and I wondered how important is it to get a wide array of content or a more targeted fashion in key genres, so do you to be all absolve people or…?

Ted Sarandos

Now I mean one thing is important is we are not, because our roots were in the DVD business, where we had basically everything ever published on DVD, and because it was economically feasible to do that because of the right for sale, you could literally have a disc and rent it to work. In the streaming where everything has to be licensed and relicensed and relicensed so there is no economically feasible way to have everything ever produced for television under one subscription that people can afford. So in that case you become a program and you pick on behalf of your viewers the kind of programming that they are going to relative to viewing to their license dollars and things that they are going to watch the most and be most engaged in.

So we are not trying to be all things to all people for sure, but I think because of the scale of the business, because we are direct to consumer, because the size of our subscriber base, we have the biggest content budget to be able to put on more programming out of a single channel than any other single channel. So we will be much more board and much more diverse than any single channel, not, if you think about more like the rolling up of all the premium channels together and that would be the kind of diversity I am talking about.

Unidentified Analyst

Okay.

Ted Sarandos

But it doesn't go all the way down the chain, so I mean as you point out that there is our floor for programming is much lower than anybody else is because of our cost structure is much more efficient and linear, so you have got a group of titles that may or may not get watched ever which will be hard to defend the economics of that and so that’s below of the floor and another one which is the hard cost encoding, the product is and so the content itself and the cost of doing the contracts and if you doesn't meet that threshold that’s below the floor but that floor is much lower than it would be on any traditional channel premium or…

Unidentified Analyst

Even basic cable?

Ted Sarandos

Even basic cable, absolutely.

Unidentified Analyst

Okay. We have Richard Plepler from HBO, with David Zasloff and Philippe, the one from Viacom and I wondered as what their fundamental goal as a programmer, they may have different answers than what your goal is. So when you look at what are you trying to do every day? Is it lower subscriber churn, is it customers position, is it driving more efficient spending?

Ted Sarandos

It's to grow the subscriber base, which is the function of all those things you just said, you know lowering churn, increasing satisfaction, increasing engagement. So I think the more the people watching Netflix, the more that they stick around. So it's important to program the right stuff so that they have high engagement.

Unidentified Analyst

So sometimes, I know we want to be really mathematical about hey remember viewing hours, the cost for viewing hour, but sometimes you have to programs things that grab people without being the most efficient.

Ted Sarandos

Yeah, in terms of to say, it's the art and science of what we're doing. So I think there is a great scientific basis for how we license content and what we target and how much we pay, but there is also a -- it's coded in the art of saying, if we had that one, that would drive -- it doesn’t quite beat the model. So one of the things I look for in my licensing executives all the time is someone who can figure out the balance of analytics intuition. So they know when to question the data and say I know what the data says about it. It's wrong and the show is going to explode and it takes us certain kind of executive to do that. So for that reason, a lot of this season, I don’t believe that you can reverse engineer content, right. So I think some things have all the parts and still don’t work, or sometimes they have none of the parts, you know somehow they still work. So I think it's a mix of arts and science in that way.

Unidentified Analyst

Over the years, we've asked you about the importance of film content for streaming business. When you guys lost stars, (inaudible) fear because it wasn’t, the one supplier was in disproportion share of our views and you had a lot of other film pipeline with a pay one out per window. I would say, given the context of what was previously said in strategy and film, has the Disney up a deal with probably the biggest [ah ha] moment for the past year for us. The Disney up a deal, fit in the evolution you are thinking on a subject of film and a price of film.

Ted Sarandos

So I looked at the Disney up a deal as a combination, it's a dual strategy move for us, one was obviously big temple movies in our earlier windows and second is it's a pivotal part of our kids content strategy. So the big animated features get a lot of watching on Netflix disproportionally to pay television. So we did the Dreamworks animation deals as well last year so our first movie that will come through that deal the Croods. And so between Dreamworks Animation and Disney on the big feature animation films, it's an incredible offer and they have never been under the same roof before.

So it will be really interesting in that way to have their content and I do think it's a kids feature viewing displaces kids television viewing, not other kids’ movies. So it's a growth of kids viewing in total and then it also has this beautiful feature of Star Wars movies too, which I think our subscribers will also disproportionally enjoy.

Unidentified Analyst

Right. So on that answer can you then it's really interesting that once the Disney deal is done, (inaudible) Universal would held which we thought that would not happen and Stars got to Sony and that happened very quickly. So given the scarcity of now film part available, why did Netflix or why did Viacom and others decide to change the exclusivity around the Epix output that seems me like a viable set of rights or has Epix film to the world for you?

Ted Sarandos

Don't forget we still have the Epix program in the exact same window that we did. The problem where there is paying for exclusivity that doesn’t really exist. So in our Epix exclusive deal those are bunch of carve-outs that allowed for broader distribution of the service on cable operators. So at the beginning, we were betting on it as we are going to better at that and the more they got better at that the more that those authenticated versions of Epix would start showing up online anyway. The deal with Redbox and all those kind of deals all work on because of the rising connection all would have fallen outside of our exclusivity anyway. So I looked at it and just said it’s not us of exclusive premium dollars, if it’s not truly exclusive.

Unidentified Analyst

With the Disney was the pay one window and you know that that’s going to be yours without any kind of?

Ted Sarandos

It exclusively gets other subscription all other subscription services and a more like HBO style exclusivity which is working for I guess and it was in the Epix case.

Unidentified Analyst

Okay. One of the biggest (inaudible) trends that we see, we go out to (inaudible) agents and producers and it’s the change in television programming, that’s been an evolving form for more from dramas five, ten years ago to now more from serialized dramas -- sorry from procedural dramas to serialized dramas. So you are getting more green lighting of serialized dramas and the supply of those dramas are going on and how is that affecting your buying power now?

Ted Sarandos

I mean I think it’s a direct result of our buying power and I think people are making and the networks are green lighting, serialized dramas is another -- I know there is revenue stream off the network now for buyers like Netflix where and those shows have a chance if they didn’t connect doing a meeting earlier and a theory around a lot of the windowing and the around ratings and it’s important to network, not so important to me.

But, if you look at the continuum the networks have -- broadcast networks have like an instant feedback upon ratings and which I think has a sometimes a devastating effect on the creating of content. So it’s like that showed in work in the first week on the first day of release, it’s [toast] and so these shows now are gone upto three episodes. And the writers are furious, they are writing for the lines tried to change the show to make it connect with people.

And there was a home move a few years ago that deserialized serialized shows because they had no syndication value and the DVDs are slowing down and I think as we emerge as a bigger buyer the people realize they can create high quality content. A lot of time it seems to be moving from broadcast to cable, basic cable because basic cable at least is half dependent on advertising and the other half on carries, so they get paid if you watch it or not, but I think it shows a little more reading room and it shows a more creatively strong and the story telling threads and density of the programming is better all those things because they don't have to worry about that first overnight, and then you get it to the other end of it which Netflix which is where I don't care if you watch House Of Cards and Arrested Development, the first day it's on or the last day of the license it’s equal for me. So to add releasing overnight rating is added step in that way. So I do think that our ability to give long shelf like to shows has influencing the kind of shows that are getting made, and the kind of shows are getting picked up by TV networks.

Unidentified Analyst

Do you think it is influencing ratings of certain broadcast networks because if you are heavy on procedural versus maybe (inaudible) it’s hard to see it monetizing as well with no more catch up TV going on?

Ted Sarandos

Well, I think we don't -- we are not that heavy on procedurals and I think which does that kind of leaves that area of the business for, it feels closure to live, closure to sports, closure to competition that thing and I got to watch my CSI whatever this, all this is a very different behavior I think, so we kind of leave that untapped not to say that we don't do a lot of procedurals we do, but I think we are really, I think we unequally offer value to serialize programming where another place to watch procedures.

Unidentified Analyst

Okay. So let me talk to about cable content on Netflix. Yesterday we had (inaudible), you guys say that peers don't like the Viacom have another slate deal with Netflix, you also fail to agree to terms that they did with A&E as scripts to sign with Amazon. So can draw a conclusion from this data points about the value of cable content for Netflix’s audience?

Ted Sarandos

It’s not really reflective of values at all; we value that content for sure. We just disagreed on the value of the content. So the [slight] deals I think was an entry point for us. To just try -- we were trying to figure out if we were going to watch too. And remember we started, our streaming service started out as a complementary service to the DVD business or people would kill some time in between things by streaming something between disc and we crossed the threshold where people started to watching more streaming and DVDs. And we're in to whole new space in terms of what people are watching and what things are worth, so one way to figure that out was to have a lot of stuff. So as we mentioned earlier about moving from not being distributor but being a programmer is you want to be much more curatorial about what you buy and how much you pay for it. So pay a lot of money for things that people watch a lot and pay very little for things that people watch a little and don't pay anything if people don't watch it at all.

Unidentified Analyst

Right.

Ted Sarandos

And the problem with these slight deals is you know, if you want to show X and you have to take full 50 other shows that people aren't going to watch and it kills the economics of show X. So we just mostly focus on and by the way, I think there suppliers have all morphed to that kind of selling because that's how we buy. It's smart but I think like in the case, in the cases that you just referenced, they typically sell us much more like an MSO, much more like a distributor than they do a programmer and we're buying as a programmer.

Unidentified Analyst

How much of the conflict was also besides the value, was about exclusively windowing? Is that it -- it says I wonder whether MSOs --

Ted Sarandos

When I say value, I meant across all the deal terms. So the exclusivity is very important in that model and like I said, like you asked about FX, it's the same kind of thing. It's -- if you, I don't want to pay for exclusivity in the show is on being marathon 24/7 and it's full stacked on demand for a year before us. It definitely affects the value of the content. So if the cable operators are putting muscle on the general operators to put more and more of their product on demand, then that is interferes with their ability to sell it to Netflix exclusively for sure.

Unidentified Speaker

You know the answer we got from everyone so far we talked to three cable network programmers, it's very fluid short term deals and trying to figure out how do they balance our (inaudible) deals with their (inaudible) deals?

Ted Sarandos

Yeah. I think it's a real challenge for them to manage through, which is how do you get the most high quality programming, if you're aftermarket revenues dry up, because they can't sell the right, because they have to give it away with license fee.

Unidentified Analyst

Okay.

Ted Sarandos

So I think it's going to be a way to get better and better content is to allow the cable operators to actually make some money on the programming that the channel operators to make some money on the programming, so they can put on more expensive programming.

Unidentified Analyst

Okay. Let me ask you going back to beginning, when you first put the service you definitely got a lot of older library TV content by your own admission you paid a pioneer tax, a word you've used before for that, how is the usage of the first types of deals holding up broadly more than cable as more newer exclusive content is added so is there a big [fade] rate going on with your first (inaudible) stuff.

Ted Sarandos

It's probably been pretty consistent, I mean we've -- the things you've seen most of that stuff that we did at the beginning that's not getting renewed, is things that didn't get watched and you see the things have stick around than the things that did. So the one thing that I don't know if TV wanted it but one thing that we, I think are bringing to the business is a little bit of equilibrium. Paying a lot for things that are valuable and you can measure how valuable things are about people watching them, where a lot of as you see there is supper premium, this is super premium, well I don't know if no one's watching, it really can't be the premium. So I think they have kind of equilibrium of attaching engagement to licensing fees is probably great for consumers and that and probably mix bag for the TV industry itself, so I want to ask you one time, at a film festival why does some movie go for $2 million and one movie go for $10,000 as if only because someone was willing to spend $2 million and someone was only willing to spend movies only willing to spend $10,000 and beyond that there is no kind of equilibrium to pricing of content.

Unidentified Analyst

So let me ask you -- and that's really still surprising me it was early in the process from a couples of suppliers and then one in particular, their decision to basically buy shows that were coming off network in a cancellation forms or shows cancelled, they got sent to you. What was the rationale there and has that rationale changed over time. So if you could get more output when the show was cancelled off or broadcast?

Ted Sarandos

Then we would take that

Unidentified Analyst

Yeah.

Ted Sarandos

Yeah, I mean there was a way -- it was a way -- we've there's still a life for that programming on Netflix, shows that are on air do better than shows that are off air for sure, just because the awareness is higher and those kinds of things, it's more there is more natural search for a show that's on the air than when -- once they go off the air it's totally dependent on our merchandizing and we have to recreate all the viewing hours on a show like that. But it was a way to add value to the to our suppliers in a way that's really -- for a piece of content that's really difficult to monetize. One out of four years you can't syndicate the DVD box set up a one and out series as almost a zero. So we become the last bit of revenue for some of those series, which is in total a small amount of money and a big amount of support to our suppliers.

Unidentified Analyst

Okay. So it's [horse] training and accommodation.

Ted Sarandos

Yeah exactly.

Unidentified Analyst

Okay. Have you have any experience --

Ted Sarandos

And every once in a while you stumble on, I mean every ones a while and the rest of the development happens. On three seasons and out right and every -- wouldn't it be only, in a traditional role we even gotten a syndication.

Unidentified Analyst

Right, true yeah. Do you have anything else in your pipeline that you say is hey this is potentially being the rest of the development that can be brought back to life?

Ted Sarandos

It's such a sexy idea, that's why people write about it so much, about bringing shows back for life. And it's pretty rare, it's a really rare bird I mean the TV calls particularly they get more intense but typically smaller over time. So and people the internet took me to task for saying that a few months ago around Firefly. But the truth is about 6 million people watched firefly when it was on television and a few million people still love it, they still love to talk about it, and blog about it, and write about it's -- but it's fewer than the 6 million people who watched it even when you take the DVD watching and all that.

So we would get some subset of that original audience if we were going to bring back WiFi and rest of development what unique and that the audience actually grew dramatically from the time it went off the air, if you saw any of our coverage at the Banana Stand to where we did -- towards the Banana Stand all over New York and London and LA, look at the people online, I mean they were lines two or three box long in the New York to get a frozen banana but it was all 15, 16, 17 year old kids who have discover the show on Netflix, so it's a whole new audience for the show that is not the same for a lot of these other TV calls that have gone away.

Unidentified Analyst

Okay, can we get -- one of the things and any questions (Inaudible) [works rockets], well think as you heard early on in the dialogue about Netflix was, look it's place where I'll give a show that's going to have sprockets run off it, meaning that it's going to be used so much and then when it's all said and done the syndication value is going to be depleted, is there any evidence you could point to where there is this a [fate] of a show or basically by end of that run of Netflix the usage has dropped down to?

Ted Sarandos

I think it's probably the opposite, I think that we've exposed a brand new audience to that show that didn't because not only people do skip, I watched that 100 times I'm not going to be able sell it again on syndication, there's a new audience you can open up the shows through all the time and I think that's what we're doing as for finding an audience that the markets wouldn't have found otherwise through a personalization of merchandizing through our subscription model where people tend to be a lot more adventurous and try new things.

So I think that unfortunately some sellers to us characterize those shows like that to make it appear like they got a great deal. And I think it's a --

Unidentified Analyst

Well also some people who are selling were afraid that I gave you a show that had syndication value, lets say Big Bang Theory in its first window; that one is all done off, Netflix, or (inaudible) it's going to have a depleted value when it's all set?

Ted Sarandos

If you point to the couple of times that it does and that it has happened and then like a show like How I Met Your Mother, it has an incredible syndication value that the ratings went up when it came on the Netflix and continue to do very well syndication extremely well in Netflix and up until this year when it's going to go up in air, extremely well in the network, so great shows tend to be great shows in every window.

Unidentified Analyst

Let me take you down to original content; we do a lot of query content. So most recently we made some big bets on regional content; Lillyhammer, House of Cards (inaudible) and of course Arrested Development just premiered a few days ago; I know you probably, people would want to know is there any stand you have, which is moving away from looking at overnight ratings, but you know anything you want to talk about US development intensity of experience what you found?

Ted Sarandos

We have extremely high expectations for viewing, both in the first couple of days and over the life of the deal and it met our expectations and went throughout. For both with the customer engagement of the show and throw with the critical response of the show; there were some very interesting round of headlines yesterday about the mixed reviews of the show driving the stock up or down; I hope you guys are really not trading on near time reviews, but the truth of it is the show got tremendously great reviews.

It got a bad review in the New York Times, but it's not a Broadway show. It's not going to close tomorrow because it got a better review and in fact I think what's interesting about it, I am not taking the critic to task for anything, but if you read the review pattern, so Arrested Development in the four season on Netflix is a radically different television show; it's told in a different way. It's the same people, it's the same places, it's the same relationships, but the story telling itself, the structured of the story telling is radically different.

So if you watch an episode, every time you watch an episode, one of the 15 episodes, the more you watch it fills in the episodes. So you really can't appreciate the first episode until you watch the 15th. And then you appreciate at such a level that you will go back and re-watch all 15 again. And then probably again and again, I jokingly said that it's like there is a brood of film sitcoms that people watch it over and analyze it frame by frame and so the truth is if you are a critic in New York and you set your alarm for 3 O’clock in the morning and you wake up and you watch a half hour television and write a review, which is like the equivalent of writing a review of the first 10 minutes of a movie; you’re probably not going to have a great experience and by the way no one in the world had that experience.

Everyone watch a couple of episodes, went to bed, got up the next day watch more, and some people, a small percentage of people burn through all of them, but hardly anybody does and the further you got removed from that Sunday mid-night launch the better the reviews got. And in fact if you read the review in the Washington Post, it was phenomenal yesterday, which was, I watched all 15, I had a day to digest it and here is what I saw, and the other thing is we made the show not for critics anyways it’s made for fans, and the fans love the show. So 85% of people who watched Arrested Development Season 4 in the first 24 hours rated it four or five stars, so they really loved the show and if you read the social chatter on the show, off the charts is positive, all the reviews on Netflix site off charts positive. Of course there are some people didn’t like it, but remember, the expectations for this were so high, so critics are lot like analysts, not only do they have to perform, it has to outperform your expectations and in this case, in some cases it would have been impossible because the expectation really show at so high.

Unidentified Analyst

So next question, how do you measure the success if social media, you open a movie in New York, you go, you look at the crowd, okay, people like it and its crowded, think of it moving of course (inaudible) next day. So what are the metrics that you look at and everyone back at the home office look at, so see if it’s success or not and what we should do about it?

Ted Sarandos

Well, the success would be measured and the idea of all the things for unreserved programming, all serve the same thing, which is to grow the global subscriber base. So you either do that through acquisition which is a pretty long shot that a show itself, the people going to join just to watch a show, but more unlikely it’s the culmination of retention, word of mouth, increased PR, all the things that keep people excited about the service. So even if you don’t particularly like them like growth, the people who we’ve made the show for did like it and we presented very heavily to them and they loved it. And doesn’t’ surprise me if you don’t like whole you probably don’t like them like growth.

So for that subset of people it impacts their general feelings about their subscriptions in Netflix that we hope results in better retention over the long term and more lifetime value. So metrics would be we made the show with an audience size in mind, but not over night, over the life of the license. So we can do regression models and tell you what the first week probably meetings of the first six months but beyond that whether we would be unhappy if it wasn’t getting the viewing relative to the model, but not relative to the whole universe, just relative to the model that people we licensed it for. So, there is the engagement, there is a critical review only in that it creates positive buzz, versus negative buzz. And then the other and the other also the obviously the consumer reaction is the most important one which is did the people who we targeted for the show, liked the show, watched the show and do they want to watch more.

Unidentified Analyst

Okay. And yes, you quoted occur the day and how the reports are saying how you are going to increase your spending on originals. So given the conference you have in making some of these bids…..

Ted Sarandos

Could you mind if I clarify; in that article and I didn’t realized until a couple of days ago somebody…..

Unidentified Analyst

Sent around us like…

Ted Sarandos

Well, what do the network set, to sum your question that basically that I didn't read it this way that he did, so just for clarity. I was not trying to size the market for House of Cards by saying that it was similar to Walking Dead, the question and the answer was about the demographic make up of the people who watch House of Cards. So when I said it’s much -- we anticipated to be able to kind of like Mad Men and was much broader like Walking Dead, the demographic was much broader. It does not intended to question or the answer wasn’t about how big was the audience; I wasn't comparing House of Cards to the biggest in cable history in its third season because that would be a ridiculous comparison, but I was saying is that the demographic make up of the show was very broad and which was a nice surprise for us.

Unidentified Analyst

Okay, cool. Let me ask you how, can you quantify how many your originals and the size of the originals would be down the road next year, because you guys made some promises like we’re going to double the number of…?

Ted Sarandos

Yeah, its hard to narrow the window to tell you when, but I think overtime and successfully we want to keep going, so I don't know that right now the spending on original programming is some 5% that we grow to 10%, 12%, 15% over the next couple of years and I wish I could be more specific for you just that the lead time on the programming is long and we don't, I am not trying to get us into a position where we are trying to jam volume through the system, we want great high quality shows, so the lead time on those is from the time we sign the deal to the time that House of Cards actually aired on Netflix it was about 19 months, and that’s an ambitious show and it can be shorter than that, but not dramatically shorter than that. And we have several shows we have one (inaudible) is the science fiction series from the Wachowskis is in pre-production now and it’s a deal that we already have announced and we have several other deals that are in various states of negotiation. But I think the volume which we were talking about doubling would be probably over more like 18 month timeframe.

Unidentified Analyst

So it goes 515, and the Disney movies come what 2016 or so, what's shrinking out? I know there is bulk (inaudible) of content deals and I think it gets reduced within your programming budget are we sure about an (inaudible)?

Ted Sarandos

No, I think what we're seeing is a more efficiency in the licensing itself which efforts and this programming would be probably in the place of inactive long-tail concept. So that it's just getting more and more efficient with the spend and more and more -- they are creating more excitement with the spend. So something a lot of people did model, it seem how many subscribers does Netflix have to get to pay for House of Cards? We're going to spend the money anyway. It is part of the content forecast. So it's not that we were just going -- you have to do this to make to recover the investment. It's just a different piece of spending.

Unidentified Analyst

One of the things we watch is the evolution of your strategy and that also requires evolution of your staff for people who actually can now rating and cure and help with the evolution of their content development. So what types of skill sets do you need to change the types of people who have employed with you and what are you doing to make sure that the cutting put on is as good as it can be from a curation standpoint?

Ted Sarandos

So we're pretty lean, we're relatively lean considering the size of the spend and so what the people that we're adding, we're more likely to be adding, we've always added pretty specialized ways. So the original content team, you read a little bit about the Hollywood Reporter, really fantastic, Cindy Holland who has been with me for a long time is actually my first VP hired Netflix with Cindy. She and I had a very similar background, but her background prior to the home video industry was in film finance and film development, from reading the scripts and doing budgets international finance forecasting. So she absolutely understands the creative parts and the financial parts or the creative parts of the business. And then we have sense -- she has since hired a terrific team, Peter Friedlander came from Tom Hanks Production Company. was a producer on Big Love, who is much more tune to that world; Nina Wolarsky who is the person responsible for finding the magazine article that became our Ergo forecast. So you are right these are not people who got hired a couple of years ago, we have but we are thrilled to have them now and we continue to grow our staff like that.

Unidentified Analyst

And one of the things I find interesting and most ironic is sometimes you will buy the right film markets or media and that’s how you do business by basically picking up (inaudible) so why not try to gather as many rights as you can in all media and all proprietary for a piece of?

Ted Sarandos

I feel like we take a very, I think like the early days of stream we have taken a very measured approach to this. So we could have got in, we probably spend, we probably could have more rights on House of Cards and probably client side, but I look at now I said that I think it was the right thing to do which was to hedge our best not build a big infrastructure around managing rights that we otherwise wouldn’t own and not knowing if we’d be very successful.

So what we will do is first have some of content, they are fairly traditional license deals where there are rights that exist outside of Netflix, so four years from now, House of Cards were selling the syndication somewhere, we may buy it, we may buy the syndication rights then but was it acceptable risk for me not to over build infrastructure around stuff that we may and may not expand upon.

So now I think we are more confident, we are more likely to take full ownership of our original programming over time. And there is the other part of that would slow that down is a lot of the intellectual properties owned by studios, who want to monetize those rights elsewhere. So we’d have to do all rights deals and those kind of things. But I got rights have expanded in every, with every series from Lillehammer all the way through to [Sunset].

Unidentified Analyst

Last crucial question and then we’ll move to some other questions. And also if you want to me hand the questions to me, and we can gather on and then break them up to me in five minutes. Another question about regionals and I’ll move to other subject is how do you balance, one of the things that people are responding to from the digital studio side, I’m sure you heard this, plus other discontent networks do not shows one at a time Sunday at 10 and then having coming back and having the buzz (inaudible) generally over lifetime of 15 episodes. So why decision to play to the binge viewing aspect of it versus leak it out build the momentum over a quarter or two quarters?

Ted Sarandos

So I should point out the there is I think a lot of (inaudible) or Arrested Development was this idea that binge somehow became, I have to watch everything in one sitting and I’m turning it into an endurance sport which is silly. Binge actually just watching more than one and nearly everybody watched more than one episode of the Arrested Development, but it came live. Everyone who watched the first episode of House of Cards watch more than one but some people watched two, some people watched four and the [Harry Edge] watched all 13.

And what we were able to do by launching all 13 was give symbolically give ultimate customer choice, which is if you are on that area Harry Edge, you want to sit and watch 13 hours of programming in one sitting go for it. If you want to watch two or three, but this way you didn’t have to get, I don’t want to make everybody happy, I knew that it was probably three, it might have been four for, some people it’s six, but instead of that (inaudible) into the path of just give the customers what they want.

I think most of the entertainment business functions and is model of managed dissatisfaction. So if they’re hoping that opening weekend of movies are completely sold out so there you go see something else or doing so that it helps overall business and the idea said you love the show, you have to wait for next week to watch another one, so that is 50 minutes of joy watching the show that you love and 10,000 minutes of waiting for the next one. And I think that is a lousy consumer proposition and it’s not a bet, I don't know that its lousy business proposition but we think that we can monetize satisfaction rather than dissatisfaction.

And that people were happy to have more choice and what I mean by recall by the way some of that negative reviews on Arrested Development we’re complaining about having to watch it all once, you don't have to….

Unidentified Analyst

And let me talk to about kids for second, how important is the kids business to Netflix, I know you created just for kids back in August 2011, so any measures you can give me on time use, how is that different than traditional usage of (inaudible)?

Ted Sarandos

It’s an important part of the business but not more important than drama or action or 400 minutes, it’s an important category because of parents engagement and kids engagement and the next generation of subscribers and all those things. So we invest heavily in the category, our next regional deal that we announced is with DreamWorks Animation for a series based on the movie Turbo which will be our first bit of regional programming for kids. So it’s an important part of the business. I will say it’s not disproportion or the important but it’s important.

Unidentified Analyst

Okay, are you seeing any signs of backlash from the new content coming off, I was receiving email whether we can not from Viacom investor or Netflix investors saying that their kids were kind of looking for their shows and kids little (inaudible) about it. So what are you seeing any feedback and when do you see resolution?

Ted Sarandos

A lot of people were really (inaudible) about smash getting cancel and see to, but I will tell you that it’s a perfect I think illustration of the move distributor to programmer which is yes. By the way, these discussions are ongoing. So could still -- but the truth is yes that content comes in out of license. They came out of license and what came in to license was Jake and the Neverland Pirates An Adventure Date from Disney Junior and Adventure Time from Cartoon Network. Two of the hottest kids brands on the market today. Well that we didn't have four weeks ago. So yes, things come in and things go out and at the end of the day, what I want to have is the most relevant concept for our subscribers and I feel like that was the right trade off.

Unidentified Analyst

Let me ask you this. I liked your long-term view. And you wrote almost a long view note after the last earnings release about Moments of Truth and you try and win the Moments of Truth and Netflix have hundred choices in front of them to turn something on. You won't be I think the turn on. Given the growth you had in minutes, where is that usage coming from and can you talk a bit about the risk you see to linear TV consumption because I think you laid some, you never tried to throw bombs at your suppliers but only on that note, there is some risk around the edges that they were appearing.

Ted Sarandos

Well, interestingly linear television hasn't shrunk much. You know, with all that growth in on-demand and I think it's because it's evolving, continue to evolve. So sports is a critical part of television business and it's all live, linear. There's no on-demand replacement for watching a live game. Looking at the ratings, things like the voice, have been phenomenal for NBC and again there is no, like on-demand equivalent to figuring out who won the voice. So people tune in multiple nights a week now to watch these shows. So I just think there is an evolution of the kind of programming that's happening and more than likely it continues on that trajectory, more television, more and more live and they really start focusing most of their dollars on things that are very event driven and that the most of the highest quality, scripted programming probably move to services like ours, where we have figured out better how to monetize, the way people are watching it. So remember television only gets paid in the kind of Live plus three or maybe Live plus seven model. So anything beyond that is not monetizable to them for advertising, whereas we are monetizing the Live plus five year model.

Unidentified Analyst

Yea, so someone wanted you to bring back Friday Night Lights and you promised to subscribe (Inaudible)?

Ted Sarandos

Okay that's one.

Unidentified Analyst

Okay that sort of you did and done.

Ted Sarandos

That's expensive subscriber acquisition.

Unidentified Analyst

You know who set it up here.

Ted Sarandos

I love Friday Night Lights too by the way, it does really well for us.

Unidentified Analyst

And then you mentioned sports. What kind of sports is the glue, it's also most expensive stuff within our system, you're not into live, I know but sport is a category anytime soon do you see that happening?

Ted Sarandos

No I think, I wouldn't look for it, I mean I think our focus really is on kind of things that have really long shelf live. And I think that we can do best we add much more value I mean, broadcast even by the very nature of its name, it's broad, so it's about sports it's broad in that way, where I think we're more like single casting. So that content that you can discover a year, two years, three years down the road. I think it's really important to our business model.

Unidentified Analyst

What the impact on you if Hulu is acquired, so how was -- how does Hulu have had (Inaudible) by someone out there has a change, approach your business?

Ted Sarandos

Just depends that who acquire them. So the mix bag is there, with the rights are pretty uncertain, so if you can get the right after broadcast, rights really cheap, it's a pretty good model, but it's the only way to get it really cheap is to be to own it. Have a network own it, so it would be interesting to see how it plays out.

Unidentified Analyst

And then all a lot is how important is it to stay independent, a reference Amazon owns Love Film, Google owns YouTube, which I think implies a huge amount of investment spending behind a business, so how important is -- say independent to your success.

Ted Sarandos

I think it's important, not critical, but I think really important in terms of staying innovative, being able to very nimble, well others have been able to have there, where others have had the ability to outspend us in every phase of our business. We've out innovated them and I feel like it's one of those things where big doesn't always eat small, but fast always eat slow.

Unidentified Analyst

All right. Okay. And then a question is House of Cards, Arrested Development and Hemlock Grove are three different genres of programming with different development budgets, backgrounds, audiences, based on only results. Is anyone of these shows look like a better account of models than the other two?

Ted Sarandos

No, it's really been great about the outcome so far, has been that as each as we've added each show it's actually grown the total audience of original for original programming. So there was a very little overlap, between House of Cards and Hemlock Grove. It was -- audience expanding and that's what we're trying to do. So we're trying to size these shows to the size of their audience and produce and promote accordingly. And so there is not one better than the other and either they weren't missing from the series Turbo which is a kid show. And then Lillehammer which is half 65% in our region. I mean the demographics of these shows are really remarkably different.

Unidentified Analyst

Okay. Let me ask you a bit now about viewing habits on Netflix itself, has behavior of viewing habits changed over time, between the viewing of TV content and film content. So I has the mixed view hours shifting that much since the evolution of them.

Ted Sarandos

Yeah, I mean from DVD to streaming we saw it go from 15% TV to 70% TV and it's pretty stable around two-thirds TV one-third movies.

Unidentified Analyst

Okay. And so once you guys have streaming environment not much has changed.

Ted Sarandos

Yeah.

Unidentified Analyst

How about this, as you add new subscribers do their behavior change, we see that with DVR users, DVR -- the later DVR users tend to skip less commercials, was anything different about your composition as the audience ages subscribers ages?

Ted Sarandos

Probably not that and probably couldn't be that broad about because everyone behaves differently. I mean it's interesting, I think there's a lot of people, come in and watch you know they come in not for a specific show and then wind up figuring out you know at the entry point might be Breaking Bad, and then they figure out the movie business they figure out the kids program and they figure out some other things that they didn't see before and they branch off from there.

Unidentified Analyst

Okay, let me ask you this there's report recently in the journal that ESPN actually denied later the very consider subsidizing the cost whilst data plans, is it something that you would ever consider doing to help customers are bringing this caps that you're seeing on data -- on mobile -- mobile data caps?

Ted Sarandos

We kept that mobile data caps have not been an issue for us and where they places like in Canada where you think there would be real issue of all kinds of data caps we've managed through them. So we don't see it as a big driver or big problem and I do think -- I think the other I would make -- the opposite might be true over time which is -- you know that they should pay us to put their data on those programs which are why people are buying those programs to start with.

Unidentified Analyst

All right. Okay, let me ask you this in our sure amount of time, we were interested the first is you have a big bulk deals on content and most videos we do in traditional media MSOs are on par-sub basis have any deals evolved to bring in a more per subscriber rate car then the flat fees that you have didn't seen that?

Ted Sarandos

No. And remember that's thinking of us like a distributors several programmer again which is I think on the because of our, I think we have higher degree of confidence in our license models which is pay on the upfront and pay it like every other broadcaster would for the content, licensing the content but paying on person's called a basis I don't think this.

Unidentified Analyst

Yeah, I think some of your competitors have tried to do that because I don't have the initial budgets to do that, and the content industry wants another competitor?

Ted Sarandos

Yeah, but this is what makes exclusivity so important because I can’t prevent that from happening, you know, short of a budget and we spent our whole lives fighting through MFN language where I think it's more important to have exclusivity to prevent that kind of. It's bad for producers and in terms of revenue models and it's bad for the overall health of the business to give it away.

Unidentified Analyst

Let me do two more competition. Richard Plepler from HBO. How do you HBO goals impacted the value proposition for HBO and how is it affect positively or negatively your business model because that came a little bit later in to?

Ted Sarandos

Yeah, we've not seen any direct impact from that. I am sure people love it. That's a very fund and simple product.

Unidentified Analyst

And when you, and it's funny because their strategy is keeping their rights on their platform. Other providers are selling the rights to you, hopefully road. They have taken a different tact.

Ted Sarandos

And it was a big motivator first for exclusive and now for regional too, which is that over time if you believe that, you read the documents, how we kind of foresee the kind of the app world for television coming through that those broadcast and cable networks are going to want to keep their content under some form of abc.com as an app. It will become difficult to license contentpreneur at time they think they can monetize it better through their own kind of app programs. So that’s why I think differentiating the marketplace is important over time, not in the short, in the short I am 100% confident that the more the values are higher from us than they can be on their own but over time that may not be true.

Unidentified Analyst

And as you evaluate TV Everywhere, when

Ted Sarandos

It's an interesting thing that happens in these new and these evolutions where when the perception that the value could be higher creates some kind of enterprise value, it also can create a new rationale content market. So Epix is a good model for that I think, which is, if I owned a movie studio, I would want the best possible Pay TV deal and I don't know that the Epix partners have the best possible Pay TV deal, but they have this thing, they have enterprise value now. So it kind of creates in a rationale marketplace for those rights.

Unidentified Analyst

It was now rights can monetize in the public market in a different way than they are?

Ted Sarandos

Then they are this way correct, which again is not great news for producers.

Unidentified Analyst

Right. For TV Everywhere theme we have had with AT&T and Time Warner Cable on three content companies before you got here, everyone is gunning for TV Everywhere, it seems like it's a nice solution down the road. I will point you TV Everywhere impacting your potential to be as competitive as (inaudible)?

Ted Sarandos

I think what they are recognizing is that consumer really want on-demand choices. So the first step of that is they got to lock it down, and lock the content down and their problem is in classic kind of (inaudible) is a cable operators one of doing in super consumer unfriendly ways. So the best way if you have got a lot of people watching a show on Netflix, (inaudible) is a great example, where exclusively Netflix after (inaudible) everybody from Vince Gilligan to the head of Rainbow Media acknowledged that being a Netflix has grown the audience for the show and is growing quality, growing the strength of that brand and growing the strength of the network and it's been great for consumers to discover breaking bad years later and get into the show and catch up with later and all those things.

So what in a kind of TV Everywhere what they are trying to do is lock down the content in a way that you have stay in that universe to get to it and then be kind of behold into their subpar user interfaces and their usage rules that sometimes do and sometimes don't make sense, what devices you think work on, all those things. So I think they get themselves trapped at these things that are not very friendly for the consumer.

Unidentified Analyst

And with that if anyone has anymore questions to pass up, I will do one more from the room if they want. And if not, I thank Ted.

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