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Netflix, Inc. (NASDAQ:NFLX)

22nd Annual Goldman Sachs Communacopia Conference Call

September 25, 2013 2:05 pm ET

Executives

David Wells - CFO

Analysts

Heath Terry - Goldman Sachs

Heath Terry - Goldman Sachs

My name is Heath Terry. I cover the Internet sector for Goldman Sachs. We’re really excited to have with us today David Wells, the Chief Financial Officer of Netflix. Not a lot of Internet companies are here at this conference, but no company in my space deserves to be here more than Netflix because of the impact that they’re having on the broader media landscape. So David, really appreciate the fact that you could be here. For people that maybe know Netflix most or best is as customers, how do you decide -- describe Netflix as a company these days?

David Wells

Well, I think Netflix is increasingly a global Internet entertainment network focused on movies and television and increasingly offering exclusive and original content, but that would be the sort of one descriptive statement I would apply.

Heath Terry - Goldman Sachs

Yes. You mentioned increasingly offering original content, you guys had your first Emmy win this week, and and I think in a lot of ways this has sort of been the year of Netflix within entertainment because of the success that you’ve had in original. What kind of impact have you seen from that original content on the financial side of the business, whether it’s your growth in subscribers or the efficiency with which you’re able to acquire the content?

David Wells

Sure. I think the primary outcome or result of the content is just the overwhelming perception of quality of the service improving both on the content side but with the perception of the content as well. So if both can move together, they can move independently sometimes, but they both are helped by just having a great set of content that’s out there with the originals being associated with only on Netflix and being very much associated with our brand, so it’s very helpful, not quibbling but it wasn’t our first Emmy in the industry.

Heath Terry - Goldman Sachs

Right.

David Wells

We’ve got a couple of a Creative Arts as well, but it was definitely our first one that was known to the wider audience in terms of David Fincher winning for Best Director.

Heath Terry - Goldman Sachs

Yes, absolutely. Has the success in original content changed the way your conversations are going or the type of conversations that you’re having with the content owners that have licensed content, has it changed the leverage points you have got?

David Wells

I don’t think so. I mean I think that they -- we’ve been pretty well intended and sort of signaled in terms of this is the direction we’re going in. I think they may feel, they may make some folks feel a little bit threatened in the cable channel world or the cable world. But we don’t -- we think that there is plenty of room for success, and there is not really a need to feel that much of a threat. We think that this is a start of another golden age of television.

We were just entering and [Mr. Bukes] was speaking, and he was talking about the overall value for the content especially around series going up, and we’d absolutely agree with that, and we think we’re part of that, especially as we become more global, we will drive a lot of value -- a lot of value in terms of global value of that content seeing greater reach than it might ordinarily see.

Heath Terry - Goldman Sachs

Yes. I mean we’re now at a point where traditional television producers are timing the release of some of their content around when that product is going to be available on Netflix or timing the availability around Netflix, how much of an impact do you feel like television is having -- the television content you guys are having within the overall business versus the movie relationships that you have got?

David Wells

Well, it’s only exciting to see us able to build audience for folks, and I think there has been some speculation, but now we are seeing some acknowledgment of that in terms of building audience for a particular television program. And I think that’s just a function of our scale, when you have the ability to -- you have a quality product and you introduce that to a large group of folks that can experience that on their own time with the freedom of on-demand, with the freedom of that discovery, and perhaps being recommended to them after they have watched something else that we might say you would enjoy because you’ve already seeing something else, it’s exciting.

I mean, I think it enhances the overall experience of the product that extends all the way back up to the content producer as well -- to the content owners. So, we are very excited about that ability.

Heath Terry - Goldman Sachs

Yes. And so, at the same time earlier this year, you signed a pretty big deal on -- more on the movie side with the new Disney relationship. Can you give us an idea how you evaluate the value of that type of relationship and how important you think those are going to be going forward?

David Wells

Sure. Our content offering is -- it baskets a portfolio of various categories and genres of content, movies, pay one features, children and family, all important pieces of that. We would evaluate all of those as important to the overall offering. And within those categories, we look at things in terms of how well they are viewed and how they perform relative to their cost. So, when we are trying to decide, you have a scarce budget content dollar, and you are trying to decide between project A, project B, or project C, it is helpful to look within that category.

So, we are excited about the Disney deal, we think that the children and family content works well on our site, and I think it works well for Disney and I think they’d probably feel pretty good about the economics.

Heath Terry - Goldman Sachs

Okay. How important -- you had a relatively higher or at least from what we can tell a pretty high hit rate on the original content that you have done and certainly enviable compared to many of the industry averages, how important role does data play in the ability to whether it’s take down some risk or improve your batting average?

David Wells

Well, sticking with the baseball analogy. We are mindful it’s our rookie year as well. So certainly, I’m excited and very pleased. We couldn’t have expected the results of the original slate that we have had, so the credit goes to Ted and Cindy and that team in terms of acquisition and to the creative side in terms of David Fincher, Jenji Kohan, and others, Mitch Hurwitz and all of those guys for just the production quality of that content.

And so for us, data is important in terms of helping identify genres, helping identify types of shows that might be important in resonate with our subscribers and potential subscribers, but there is sort of no execution or no substitute for execution either, so you produce quality or you don’t, people are smart to figure that out.

So, I’d say it’s helpful, it’s mostly helpful on the merchandising and marketing side. We are not a site that has to require to -- has to rely on aggregating audience on first night, first week. We can let people discover the content over time, and we can use our personalization and recommendation engines to focus them on that content again over time or we will run a PR to kind of splash it out there, but then also let the audience build over time.

So, I’d say we enjoy an advantage on the marketing side in terms of just the discovery of that content.

Heath Terry - Goldman Sachs

Does having the hit rate that you have had this year on your rookie season change the waiting that you feel like originals will have in future content decisions?

David Wells

I don’t think so. I think we were mindful that we might have something here on the originals, and we wanted to see what that looked like and we have proven out the concept. I think it certainly helps in the creative world to demonstrate the quality and the level of the quality -- of the types of shows that we can produce. Early on, someone not familiar with what we were trying to do could throw us into a webisode category and sort of be dismissive of what we are trying to do. I don’t think you can do that today.

So, it’s certainly helpful in terms of demonstrating what can be done via our distribution channel and our distribution network. But I don’t think it necessarily makes us say we are going to triple these, I think Reed and Ted before have said, look we are very encouraged, we are going to grow these, and we are going to continue to grow them over time.

I as the CFO am mindful of how fast that grows in terms of maintaining that quality, but I think it takes a little bit of time in terms of just the lead time in the creative process, so even if you have the intent to double or triple, it takes a little while to get there, and we will have the experience of viewing the performance along the way to validate whether we should continue to expand or not.

Heath Terry - Goldman Sachs

Yes. When you look at the impact that the investment that you have made in original content is having on subscribers, how much of the subscriber growth that you have seen would you place on the content side of things versus the growth and distribution that you have?

David Wells

Well, it’s hard to parse the pieces. When I get asked the question about, well, how do you know if you spent the right amount on content or marketing or product development, you don’t always know exactly where on the optimal frontier you are, but I would say we certainly put a lot of investment in the content, and we have seen a lot of growth. And those two things go together, and I think you should continue to see us expand and improve the content offering which held marketing somewhat flat. We think we have become more -- a little bit more efficient, and the marketing has sort of shifted in orientation from teaching people about how streaming works and that it can work and be a pleasurable experience and that we buffer on you to the content forward and the offering and the freedom that comes with our service.

And so, I think we are pretty comfortable with the levels of spend, you should see us continue to invest in content product. We continue to invest in product to making the service better as well.

Heath Terry - Goldman Sachs

Yes. And so, on that service side of things, you are in connected television sets, you are on iPads, you are on iPhones, you are on a variety of set-top boxes. How important is that distribution to the platform, and how much of what you are seeing from a growth perspective is really coming from just being in more touch points for people?

David Wells

Certainly in the U.S., early on device penetration and device ubiquity was important. Then early on, we had the game consoles were not nice rocket booster in the sense that they started with a very large installed base. You see that the growth of connected televisions or smart televisions, you see the growth of tablet which is somewhat cannibalizing PC but also growing sort of an interesting in between category, it’s not quite mobile. Generally we see tablet usage on the home Wi-Fi and not truly in a mobile setting on a train or somewhere on a cell network, but we hear about it.

And so in the U.S., I think there are a lot of devices and that’s increased the freedom and increased the use cases for Netflix. So, it’s part of the overall growth, but outside the U.S., when there is lower device penetration, I think it’s a little bit more of a tailwind. Then so, it can be more of a growth accelerator in terms of both the price point for devices and the ubiquity of those devices.

Heath Terry - Goldman Sachs

Okay. And how did that drive – how did that drive the decision to begin to offer multiple stream packages?

David Wells

The four-stream package solved a problem for very small percentage of our subscriber base. We had a problem where folks would call in, and if they hit the two simultaneous stream limit, our customer service people didn’t really even know how to handle that. They actually walk them through signing up for another account which is not exactly an elegant solution.

So, I think we solved that and it’s a very small percentage of folks today. Most people don’t even realize what -- if I ask them what a simultaneous stream is, they wouldn’t quite understand what that is anyway, but I think over time, it might develop into a known concept in terms of the value delivered to the service.

Heath Terry - Goldman Sachs

When you look at the way that people are consuming Netflix at this point, how would you illustrate for the audience kind of where that consumption is happening; television, tablet, or phone?

David Wells

It’s mostly the television. So, when somebody wants to sit down and enjoy something and have a cinematic experience, they want it on the large screen in their house which is generally their television. So we increasingly see tablets. We have always seen PC Mac be a pretty healthy percent of viewing and that continues. And those devices augment sort of the experience around the television. So you may have your children in the house, that’s on a second or third device in an upstairs bedroom or in a den. But, generally the folks that really want to sit down and enjoy Netflix are doing it on a television or a connected television to a device.

Heath Terry - Goldman Sachs

Between the need to have a connected television or a game console or some sort of device, how big do you feel like the audience is? When you look at the addressable market for Netflix, how big is the audience, maybe even just in the U.S. that you feel like Netflix just isn’t reaching right now because they either don’t have a game console, they don’t have one of the newest televisions that have (tractability)?

David Wells

Sure. Well, it certainly true that in the U.S. there is much more device penetration in device ubiquity, but we would articulate that our total addressable market, and we said this before, it’s somewhere in the 60 million to 90 million. There is no reason to believe in our mind that with the 100 million pay-TV households, if you take a haircut for rural folks that have difficulty in getting sort of higher broadband speeds that anyone who is paying monthly for a television experience also wouldn’t be interested in an experience like Netflix if they have access to broadband.

The other way we might get there is to look at an HBO repeatedly in the 30 million to 35 million domestic subscribers category, and we believe that if they were direct to consumer with similar sort of device penetration, ubiquity, freedom, and control, there would be materially subscribers that would pay for that in the U.S., so that’s another way to validate those two pieces.

There is a reason that a lot of adoption curves have that S shape to them. There are a number of factors that derive why people are in the back half of that curve. I had a good friend who went to graduate school with me, very sophisticated, very smart, very wealthy enough to not -- not have to worry about the $8 a month who was never member, I showed it to him and now he loves it and so it -- I’m not quite sure why there are folks that haven’t tried it, but there are, and I think it’s just a number of reasons for folks that are in the back half of that adoption curve.

Heath Terry - Goldman Sachs

Just the introduction of much lower cost devices, things like Chromecast which are a launch partner for start to change that or help you reach that audience?

David Wells

Well, certainly every device that’s out there especially on a low cost end, and the device that enables someone with an older television that has an HDMI hookup to be able to connect to the internet is helpful. I’d say that tailwind, just to tieback to an earlier comment, is a little less helpful in the U.S. when we’re talking about a pretty wealthy population with access to lots of devices than say outside the U.S. that may have either lower income or higher device prices or a combination of the two.

Heath Terry - Goldman Sachs

How do you think off about subscriber acquisition at this point? You guys have run television campaigns in the past, you’ve done a lot of online advertising. What does the marketing message from Netflix look like these days and how does that look on the financial side?

David Wells

We’re company that experiments, we experiment a lot in terms of television, non-television online. We’re definitely one of the larger online advertisers, and we’ll continue to be so. Our marketing message as I mentioned a little bit earlier has sort of shifted from at least inside the U.S. and teaching people what’s streaming entertainment is. I think most people are somewhat familiar with it, there is a few that aren’t to content forward what’s available on our site, what content is available, and part of that is highlighting our originals and our exclusive content.

So you should see us continue to sort of do that. I also think I’m personally as an employee proud of our return to making the advertising a little bit playful and also fun in terms of -- I think that’s associated with our brand and it’s associated with the product and the enjoyment that we bring to people.

Heath Terry - Goldman Sachs

Yes. So, we’ve mostly been talking about the U.S. business; internationally what have you learned so far, what do you feel like is different about these international markets versus the experience you’ve gotten here?

David Wells

Sure. So, we’ve launched in Canada, it’s probably our oldest market at this point. Latin America, so all the territories in Latin America with Brazil and Mexico sort of being the primary drivers of that territory. The U.K., the Nordics, and most recently last week essentially or a couple – a week and a half ago in the Netherlands. I would say with the two biggest markets being U.K. and Latin America, the U.K. particularly competitive, we knew that going in and it’s lived up to that reputation, continues to be competitive. I think here there is Sky talking about a 10 pound box that’s going in. So, it’s the U.K. consumers really enjoying a lot of competition, and we are competing for those subscribers and other companies are as well.

That said, we’re pleased with our growth in the market. So, we continue to be competitive. And so, we’ll continue to improve our service in the market. Latin America, we went in expecting there to be sort of the higher out of the gate penetration rate than I think we saw, and that’s manifested itself in our comments about the time to breakeven being a little bit longer than we expected. But we’re still very, very excited about the growth we see in Latin America, and we’ve made some improvements both on the payment side.

We’re looking to optimize some local advertising. And so there are some levers to pull, but that market in particular might benefit from a low cost device in the market. So there is lots of headwinds we might be riding broadband penetration, just content income growth in general, all helpful in that market.

And then the other smaller markets are equally important, Canada continues to grow well, very, very happy with Canada. The Nordics, again happy with that, but on the -- little bit on the smaller side, and then the Netherlands is probably our smallest market to-date but helpful in terms of understanding the dynamics of consumer behavior in Europe, in Continental Europe, and non-credit card markets.

Heath Terry - Goldman Sachs

What are the financial markers that you look for to decide when you’re going to roll out a new international market?

David Wells

It’s nothing that you wouldn’t probably be able to guess, and that we said before, but essentially we look for (inaudible) stability to pay proclivity to enjoy U.S. based content. Most of our markets are somewhere around the 80:20 rule in terms of 80% U.S. based, 20% local, that could vary in any given market, but it’s mainly tipped towards U.S. based content. So we’re not yet entering into markets that are highly local, highly localized. And then there is -- we are an Internet e-commerce recurring e-commerce company. So we look to what payments look like and particularly LatAm sort of taught us the lesson. And so I’d say that’s the combination of things.

But it’s really about do people enjoy content as evidenced by -- do they pay for television, how much do they pay for television, is there online usage, is there a TV Everywhere solution and do they utilize that, how much does that pay-TV cost. In markets like Germany and U.K. they’re very, very effective and very robust tax supported offerings. In the U.K. it’s the BBC, in Germany it’s ARD and VDF. But both mean that the consumer have a lot already provided. And so that the calculus is how much is the consumer willing to pay more, how much value is derived from paying more. So, there is different calculus’ in each market but I’d say that those are the big ones.

Heath Terry - Goldman Sachs

You should just pitch the Europeans on universal Netflix.

David Wells

Yes, potentially.

Heath Terry - Goldman Sachs

Latin America is obviously a huge potential market for you, how far have you come in addressing the payment hurdle there?

David Wells

We have come a long way, so we got a direct debit in Brazil, we got a debit card in Mexico and only people in the payments industry will understand the difference between those two. But essentially it is the dominant payment method within the market and it opens up the ability to pay and the trust to pay, I’d say that we still have a long way to go in terms of just the general e-commerce development in those markets in terms of people how they feel about putting a credit or debit card into a website.

If you hark it back in the U.S. to the late 90s in terms of e-commerce development in the U.S. and you’re discussing with your friend that how comfortable you were to put that method of payment online and whether or not you were fearful about whether it would be misused or identity theft and all that. But I think there is definitely some elements of that as well in the market. So that will take time to grow and develop.

And as our brand builds and it becomes better known and established in the market that will also help with that.

Heath Terry - Goldman Sachs

Yes.

David Wells

So, I think we’ve got some room to go but we’ve made some really good progress along the way.

Heath Terry - Goldman Sachs

Yes. How do you think about the DVD business these days? What role does it play for you with your customers in the U.S. and particularly with Europe financials given the margins in that business?

David Wells

Yes. It’s a very important source of a customer base in profit. So I don’t think we have illusions that we’ll grow it. But I think it would continue to slowly, steadily decline and we’re trying to do the things, I think we’ve done the things around a low hanging fruit to slow that level of decline to make it more integrated for those folks that choose to have both services but we expected to continue to slowly decline.

And in terms of the economics of the business, it’s largely variable and you can look at our sort of margin progression over the years in terms of when we split the operating segments. And we’ve been successful in terms of managing the margin as that business declines. The U.S. postal rate increases which one just got announced today are always the element of that which we have to absorb.

Heath Terry - Goldman Sachs

So, I know we’ve got a large audience here in the room. We do have microphones around for people who have questions, if you have a question please just raise your hand and we will get a microphone to you. We got one up here in the front. So there is a microphone. Do a much better job of looking to my left today.

Question-and-Answer Session

Unidentified Analyst

Two questions for you. The first one is, if you looked at domestic streaming what percentage of your subs you actually have their payment info versus people who use a gift card or something like that?

And the second question is, I think so far you guys have chosen the license share original content but going forward, do you see yourself owning more of that content?

David Wells

So on the first question in terms of percent where we actually have the payment information, it’s the majority of it – it’s the largest share of that right. I think gift cards -- prepaid cards are relatively smaller portion of that so you can think of that as just a smaller portion.

And then on the second question, would we be in a situation where we are owning our originals? Hollywood has a number of successful production models. And they are successful, it doesn’t mean you have to have one of the other, many shows have different pieces or companies that are partners one might be the producer, another is a distributor, I would think that our originals will have a number of different successful production models. But ownership is certainly one of them, in terms of full ownership, perpetual license is that ownership, what’s important to us is a materially long exclusive license in the first window. I mean outside of that it might be important to us to only restricted to those rights to just Netflix.

Piracy is always the foil to that in the sense that if you are going to steal it, if you are going to steal it that’s a little bit of a foil to quote owned content. But for us I think, you will see us in a variety of models.

Heath Terry - Goldman Sachs

Do you – you mentioned the production side of things, do we ever get to the point where Netflix is doing production, is there a Netflix lot in the future?

David Wells

No. I wouldn’t expect that. When I’m talking about a variety of production models it might be much more of a variety of sort of distribution – of ownership of the IP but not necessarily in terms of fully backward integrating into a production lot.

Unidentified Analyst

Thanks. Helpful clarification.

Heath Terry - Goldman Sachs

All right. So if you do have a question just raise your hand, one of the -- one here, just behind you.

Unidentified Analyst

Regarding usage based pricing, what are your expectations or preparation for the possibility it would happen and are you lobbying the government behind the scenes and what are you doing in the event of possibly the end user gets charged or that the cable company tries to charge you for the end user using it? Thanks.

David Wells

Sure. There is two flavors to that. In terms of usage based billing, we are definitely interested in the discussions. So, we definitely have a government affairs department is interested in that conversation. I would say we have already got usage based billing on some mobile plans we got. Canada has some usage based billing at least initially when we launched in that market on the eastern side of Canada with Rogers and Quebec was particularly restricted usage based plan.

We responded to that by lowering the default bit-rate delivered to the consumer and largely and we since put that back and largely both of those events have gone where we have continued to grow in the market so largely unnoticed essentially by the consumer.

So I think, we feel confident that the amount of bandwidth consumed by our product can be adjusted down a little bit. And well within reasonable usage caps. I don’t think that for an ISP usage caps are necessarily a successful business model outside of particularly low income and very value oriented consumers. I think the successful business model is much more – let me sell you faster broadband and I will charge you more for it. And so I would expect to see that being a more common and successful business model.

On the second flavor of that which is on totaling what I call totaling the content providers of Netflix, I would say again we are an interested party in that conversation. We hope that there is a private market solution to that because I think the consumer is better off if there is a private market solution to it.

But we believe in an open Internet in that respect. We believe in that open Internet ordered with the SEC dictated and we would I think that the consumer welfare and the overall consumer is better served if there is -- it’s not totaling on that side. The ISP already charges the consumer and gets a healthy return on that, a very healthy margin on that. And we’re using our Open Connect program to try to lower the overall delivery cost for those ISPs that would like to participate, we essentially put at our expense a cash of the most popular content and bring it to the last mile. So, we take out the Internet transit cost to that customer and they may say well we still have to spend money on the Internet ports within the data center and the devices within our network and it’s just not borne out when I talked to network engineers, that’s the smaller of the two costs in terms of that. So I’m hoping that we’ll – I am optimistic we’ll get to a solution.

Heath Terry - Goldman Sachs

You’ve mentioned sort of a -- on the – do you have a question? Go ahead. Bright light. Yes, go ahead.

Unidentified Analyst

You recently announced the deal with TiVo on the Virgin Media system to integrate Netflix with the Box. It sounds like a great customer acquisition tool. I’m curious what other opportunities might there be like that globally? And to what extent are you precluded from those type of things in the states given your rights agreements with content providers? And when might those roll-offs such that you can do something similar?

David Wells

Sure. So the question is on the Virgin TiVo deal. What we did with TiVo it’s consistent with I think we’ve made comments a couple of years ago that we’re taking sort of what we bundled with MVPDs in the U.S. And it’s consistent with our willingness in premise that we would love to reduce the friction to the end consumer and to be available via the existing device in the home which is the set-top box.

In the case of the Virgin TiVo we’re in app on that set-top box. We have integrated search results, we maintain the billing relationship. And so it’s an essence very consistent with those earlier comments and we haven’t really changed our willingness to do those types of things. I think it’s useful in terms of the President for a cable company to have done that and demonstrate what we’re willing to do but it’s up to the MVPD to decide how much of a competitor they view us as or a complement and how much they might be willing to do something with that.

It is true that in certain content deals there is a distinct line drawn. And there is a -- it’s not everywhere but the content orders do care in terms of maintaining distinct channels between the distribution because they’re trying to understand the economics of the monetization of one channel versus another and it becomes blurry when those things start to overlap each other and they have less minor site in terms of how much value is being delivered to the channels so I think that’s why one of the reasons they care about that.

Heath Terry - Goldman Sachs

One another question up here in the front.

Unidentified Analyst

Thanks. You have a tremendous amount of data on your subscriber base but just following up on the addressable market those that have not subscribed yet and you mentioned about your high net worth friend and not quite sure what prompted him. Just wondering the overall, do you have any analysis or a research suggesting that the addressable market that is not subscribed yet given all the (inaudible) this year, is it a technology issue? Is it a demographic issue? Is it a content issue? What do you think are some of the gating factors keeping those that have not subscribed yet to the service?

David Wells

Sure. I think, I mean part of it is a number of those factors are just part of dictating the shape of that S-curve. And so I might not be able to name them all. But it certainly the dominant reason would be folks just don’t find it valuable, they go on there and it doesn’t fit their lifestyle in terms of the content. A good portion of those may have tried is year ago or 18, 24 months ago and the content offering has changed since then. And so we’re being reminded off the content offering including our originals might be the catalyst for them.

Another portion might be that they just haven’t yet had a connected device. They’re older or just hasn’t been a priority in their life. And being shown what’s out there with a very low cost solution that’s easy to understand might be the catalyst for them. But I think there is a number of used cases that would explain some of that.

Heath Terry - Goldman Sachs

We got one over here. We’ll get you a mic. Can we get a mic over here?

Unidentified Analyst

You mentioned -- thank you. You mentioned that you are starting to get credit for audience building and so something like Breaking Bad for example if you are kind of latecomer to the show you can catch up on all the old seasons on Netflix. So how is that affect the kind of negotiations with content creators and content providers when you are signing these deals because obviously they are kind of getting right of it now because you can help build their audience so when the next season comes, they can have record breaking like Breaking Bad did – record breaking viewership.

David Wells

Well, I think it’s generally been understood, it maybe talked about now or publicly acknowledged. But I will tell you it’s been understood, so it’s part of the overall calculus of trying to reach a business deal. So price is one of them. The ability to grow your economics and your advertising channel because you build audience for a particular show might be another one.

I mean there is a number of deals as we already talked about whether or not set-top box integration is possible or not. So it’s just part of the overall calculus of the deal. But it’s helpful anytime where we can find somewhere where we make our content partners more successful, we are all for that.

Heath Terry - Goldman Sachs

How would you -- how should investors think about the decision that you’ve made to stay out of the download market as a way to sort of address consumer demand for the content that is not on Netflix?

David Wells

Repeat that one more time?

Heath Terry - Goldman Sachs

Just asking how investors should think about the decision that Netflix has made is to generally stay out of the download end of the market as a way to address the content needs outside of Netflix?

David Wells

Well, it’s a relatively small used case maybe not in this room in terms of the ability to download on an airplane or on a train. Outside of that there is development with mobile Wi-Fi, you are asking some…?

Heath Terry - Goldman Sachs

I’m asking more for the content that you don’t have yet so Star Trek comes out, I really, really want to watch it and Netflix is a place I go for movies, I search for it, I can get it via DVD. But –

David Wells

Helpful clarification?

Heath Terry - Goldman Sachs

Yes, I’m sorry.

David Wells

So in terms of, we are always -- we have a fixed -- there is a content budget, its growing but it is still a scarce content dollar in the sense that its not large enough to buy everything out there.

Heath Terry - Goldman Sachs

Yes.

David Wells

And so we are always looking at the viewing performance of the content that we have relative to its cost especially within category. If it’s exclusive, if it’s premium exclusive, if it features all of that is useful. So we are always looking on the margin to add high value content. But, I don’t think there is a number that people are going to be willing to pay for that actually produces the result or it’s modified where you actually have access to everything.

Heath Terry - Goldman Sachs

Yes. And so the model where listed along side, it says we don’t -- this isn’t part of your subscription but for $3.99, you can download sort of the iTunes, Amazon model does that ever make sense for Netflix?

David Wells

We’ve looked into side by side in terms of having transactional VOD available. It becomes confusing to the customer because they are not quite sure what’s available in their subscription offering or if you are baton switching them in terms of -- but I thought this included everything. So it hasn’t really been successful in terms of the specific implementations in tests that we have worked out.

Heath Terry - Goldman Sachs

Okay.

David Wells

It is relatively easy for folks to flip over to a transaction VOD service.

Heath Terry - Goldman Sachs

Sure. We probably got time for one more question, if there is one. The question here in the back?

Unidentified Analyst

Hi. In terms of your original content strategy, I’m curious how you evaluate the value proposition associated with being able to binge view for existing consumers versus perhaps the lack of built buzz in marketing as a customer acquisition tool of more traditional serialized content. For example, Breaking Bad in the last couple of weeks -- every week is a bigger audience on Twitter on Sunday when I was talking about it, on Monday its written out on every blog with your guys content strategy you don’t get that so much after its originally launched. So I’m curious how you evaluate both sort of models.

David Wells

Our brand stands for freedom and control. And so the practice and the release strategy of allowing all episodes at once of a particular season. It’s consistent with our brand and in fact, it’s really enjoyable for the consumer. It’s based on their pays as to how much they want to consume rather than stringing folks along and sort of waiting for the next one.

It’s our ideal state to be able to offer several there is no magic number. It might be different for you. But three to seven titles that you really are engaged in over the course of a year. We may offer all of the episodes of one season -- of a particular title and you watch that and there might be something else that comes out after that. And you find a lot of value in terms of pacing yourself through different titles rather than on a release strategy of pacing out of an individual season.

We will have titles that have -- just based on the creative process and the delivery. There may be a half season delivered or something like that. So there might be experiments on the edges. But, we have been pretty successful with and then pleased with what we have seen in terms of the all at ones release strategy.

Heath Terry - Goldman Sachs

Dave, we really appreciate you taking the time to join us. Thank you.

David Wells

Thanks.

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