Netflix's (NFLX) Management Presents at UBS 42nd Annual Global Media and Communications Conference (Transcript)

Dec. 8.14 | About: Netflix, Inc. (NFLX)

Start Time: 13:30

End Time: 14:20

Netflix, Inc. (NASDAQ:NFLX)

UBS 42nd Annual Global Media and Communications Conference Call

December 8, 2014 1:30 PM ET

Executives

Theodore A. Sarandos - Chief Content Officer

Analysts

Brian P. Fitzgerald - UBS Securities LLC

Brian P. Fitzgerald

So why don’t we get started while everyone is trying to get settled. So, Ted I think a good place to start, you posted a question a while back and Netflix become HBO before HBO becomes Netflix. Has Netflix succeeded?

Theodore A. Sarandos

Well I think it’s on a continuum, I mean when I said that the intent of that quote was to more crystallize the competitive landscape, in other words we weren’t trying to displace the whole cable universe with Netflix, we're a channel like HBO. And we're not the main channel, we aren’t over the top channel, we are direct to consumer channel and we do all those things better than anybody else.

And at that point we had just entered original programming and I think that’s something that at that time that HBO was doing better than everybody else, and I think that we've made a pretty competitive inroads in a pretty short time and we've been fortunate lucky or good or all the above in our launches and we've been quickly kind of distinguish ourselves for our unique original exclusive programming as much as we have for our technology.

Brian P. Fitzgerald

And I was a little clustered with the lack capacity in the room, so everyone is here to see you so I didn’t even properly introduce you. So I apologize for that and this is Ted Sarandos, Chief Content Officer of Netflix Inc., very happy to have you. Thanks for coming.

Theodore A. Sarandos

Thanks, Brian.

Brian P. Fitzgerald

All right so now we've got that out of the way. I’m curious the vision for the next five years, right you walked up the quality route over the last five years so you started with Starz films, you got that at a very good price, you had some deep library, then you worked all the way to award winning original premium and relatively fresh TV shows, soon original movies. So you look out five years, given the change you’ve already gone through what’s the vision.

Theodore A. Sarandos

Well, I think within five years we definitely would love to see, the product to be completely global, available everywhere in the world. I think that we can expand on our original programming, your thought frame from where we are today to probably as many as 20 original series. So the idea of launching original series or original season of content every two half weeks or so kind of getting into a regular drumbeat with consumer expectation around originals.

Not a show or not a new show for everybody, every two and a half weeks, but a new show that for segments of the viewership every couple of weeks. I want to continue to expand on, but we’re starting with our original movies. The original movie strategy mostly is around I think the - what’s happening today is that movies are being nearly completely displaced in the culture by television. And I think it has less do to with the quality of television to the lack of quality movies and it does with a really lousy distribution model for movies.

So our first - we're a subscription service, so our first access to film is kind of in that pay TV window the 10-months to a year after they open in the theater. So if you wanted to see one of those movies you would have seen in the theater, you would have seen it on DVD, you would have seen it on VOD, you would have seen it in a hotel room, you would have seen it on an airplane seat. There is many ways you could have seen it, but so basically it’s very dispassionate, quite expensive viewing these pay TV output deal.

So we're looking at the opportunities for then they were coming up. One of them was the Sony Starz deal, had thought for the billion dollars that you spend on those deals over a three to five years of an output. May be we could invest all or some of that billion dollars into trying to accelerate the distribution windows the way we did for original series and produced and released original films only for Netflix and not TV movies, but the kind of movies that would have come through those deals with real movie stars and real directors and produced for the cinema, but also available or primarily available or exclusively available on Netflix.

Brian P. Fitzgerald

Interesting.

Theodore A. Sarandos

And I don’t think by the way that any network would have given us their show to release all 13 episodes once ahead of them and the same way I don’t think any studio will give us their movies to release the same day they are in the theaters, not yet, not yet.

Brian P. Fitzgerald

Might be a little late for that one.

Theodore A. Sarandos

Little late.

Brian P. Fitzgerald

Your local lines with direct ownership of a movie studio or a premium network in hands or hinder Netflix’s competitive position?

Theodore A. Sarandos

If you buy infrastructure like production infrastructure there is some efficiencies in having it, we are in various states of nine original series right now, several of them in New York. So you run into some capacity issues on stages and all those kind of things, but we are filming all over the world, so there is lots of infrastructure, it’s rentable for sure.

Typically if you buy a studio with a library, their library is pretty well licensed out many years in advance, so you are not really gaining access to the programming in that way. I think in the premium TV channel I don’t think that we have any differential skill or value in running a linear television channel, so particularly one that would be unattached to any other media conglomerate so it probably wouldn’t be the best buyer for a premium show.

Brian P. Fitzgerald

Well let’s try and figure out the value of movies to Netflix right, and there are sort of two dynamics, so now you are getting to original production, are you starting to lean back more been a [Fannie Mae] with Hollywood where they are certainly receiving pretty big checks from you and they are pretty excited about that same time, but now you are starting to pull talented into exclusive deals and separately as part of that once upon a time by the time you had the Starz movies and when you were loosing them you said don’t worry about it, it’s not a big part of you, but then you turn around and buying the movies from Disney. So just the dynamics around our interesting.

Theodore A. Sarandos

Yes, no and it’s fluent. The Disney deal for us we are very excited to be there their Pay 1 partner, where we are a big licensing partner of Disney all over the world in all different windows. The first pay window in some countries, window right after outside of the U.S. big movies are available after a 12-month models versus the kind of nine year to 10-year block that you could see in the U.S.

So we are a big licenser, we have closed in on Netflix in the Nordic right now where we licensed their television content across all windows across all channels. So they are great, great provider. The Pay 1 deal in the U.S. the attraction to that was mostly around the big tempo animated features and the kind of brand comfort that parents can take from Disney being on Netflix. So I think it’s a very valuable thing different than a normal movie output deal.

And as to about competing with studios, or our studio partners for talent the way we did with this Adam Sandler deal. Studios have a very rich history in selling to their competitors, all right they sell products to their competitors, they compete with each other consonantly and they sell to one another, the way that Fox makes modern family for ABC.

Of course I mean they are competing [indiscernible] in the exact same time slots and they sell each others shows that could work better on one network versus the other. So I don’t think there is anything unique in that and because our licensing stream keeps growing with our international and our domestic growth we are licensing, we are probably one of the largest off-net buyers in the country or maybe in the world and eventually we’ll be probably the largest producer of the original programming in the world.

Brian P. Fitzgerald

Yes, I think [indiscernible] hopefully I…

Theodore A. Sarandos

Then those shows would be just as likely to be produced by those same networks in studios for us as the ones that we buy from.

Brian P. Fitzgerald

Right. I think I did the map right I think you spend something about $6.5 billion acquiring content this year which has to put you as one of the coolest jobs in media. So and turning to TV and first just on the competitive side you guys talked about TV Everywhere a little bit while, you talked to all of our traditional media companies they really focus that when distribution gets TV Everywhere rights and gets the interface right that the fresh content, there is a huge amount of spend against that, that as a chance takes share back from our mind. What’s your philosophy behind that?

Theodore A. Sarandos

Well, this channel has developed into a mature revenue stream for the studios, in other words or the networks. So in other words if taken better monetized themselves they could and they should, but they have to make a choice. So in the case of TV Everywhere products, we’ve not seen Netflix under index in Comcast also that have a more over - a better developed On-Demand infrastructure then most.

So but there is a big complete in this issues and all those things and I think that they kind of On-Demand and a lot of the internal debates that we have with our suppliers around, do we block, we block stacking and all those kind of things. Is that true? We don’t pay, it’s less exclusive if the On-Demand services or the kind of catch-up television part of the business is fully stacked then if it isn’t.

So I do pay a higher price for content if that show isn’t fully stacked online ahead of - around the cable On-Demand services ahead of us. And that’s just to making a distinction between On-Demand and Xbox. And On-Demand four, five episodes is catch-up and it’s really good for the help of the industry and I supported 100%. But if you’re going to stack the whole season that’s on - that is Xbox and we pay a lot for exclusive Xbox rights and we will continue to license if they want to stack ahead of us, but we just don’t pay the exclusive fee for it.

Brian P. Fitzgerald

If you look at the marketplace now, where your competitive advantages on the TV side in terms of buy and developing TV shows as you see I mean certainly the [indiscernible] comes to mind?

Theodore A. Sarandos

Yes, I mean in a competitive situation what’s been great is talent is wanted to work with us I mean they wanted to have - we give, we do afford writers and show writers a level of creative freedom that many networks don’t, we do ask and return for that that the product comes to us a lot better developed then it would otherwise. So we’ve got it really before we go to a full season, we’ve got a really good idea we have both in terms of attach talent, scripts written in advance, Bible's written in advance.

So we know where the show is going for the season, we know it could go for four, five years and people have been - talent has been impressed with our ability to push a show out into the culture to where we have with our Orange and House and even to having that grow which people always often underestimate, but has enormous viewing audience, BoJack Horseman which you know we went into that show we were kind of copying it to the Futurama’s and Bob's Burgers and Archers of the World and we’ve got favorable results first time out with adult animation. So we've been pretty excited about it and talent has been pretty excited to work with us and found us pretty talent friendly and I hope we can remain that.

Brian P. Fitzgerald

So it’s more than just you know who is going to write the biggest check for the latest show.

Theodore A. Sarandos

Definitely, definitely. I mean I think I have talked to people who have been through some very painful processes, maybe justify it maybe not and kind of interfering with the creating process when I feel like for us our role is really a business model is a really a business process taking the best shows, using our data, using our ability to analyze that data to pick shows and to pick universes that would make great shows and then sizing our commitment to those shows accordingly and then hire people who have a great idea, who have a history of executing and trusting them. The way that we - the same kind of premium responsibility that we trust in our executives, we trust in our show runners and writers to run their shows and create their shows and so far the result has been that creative freedom has paid off.

Brian P. Fitzgerald

You did a deal for Gotham recently exclusive worldwide rights before even had aired on TV which was certainly new and there are some international programmers that are not very happy that they didn’t have a shot at the show.

Theodore A. Sarandos

It was a second actually, we did Better Call Saul prior to that so we're second window in North America on Better Call Saul and then off of their operating territories or current operating territories were first run. So the show will premier on Netflix outside of the North America, Better Call Saul.

In Gotham we had seen the pilot and its you know all the best to make this year, I think Better Call Saul and Gotham were probably two of the hottest most anticipated shows of the season and that we worked to secure those deals for all of our territories early in the cycle. And we see this emergence one of the probably the first global buyer programming and which is definitely upset the system of that they were operating in 50 countries, it means they are shifting TV buyers around the world would have liked to been in mix to buy the show and we went in preemptively and worked on those deals, because of our confidence one of these televisions commitment to making that a great show.

All right they’ve got a lot of money tied up in the Batman brand, we see expansion in the television, its very important for that company, Fox has a great history of launching great shows in that genre. So that we bet that this show be a success and bet forward by preemptively doing second run around the world.

Brian P. Fitzgerald

So if it was a unique situation which doesn’t mean there won’t be more unique situations but not a new standard.

Theodore A. Sarandos

Yes and breaking - Better Call Saul was another example of that right it’s a pretty safe bet that the prequel of breaking that written and show run by Vince Gilligan starting most the original cath will be making appearances throughout the year, it will be - it’s a pretty safe bet that those we’re going to be the - because a lot of people are very surprised with the global success of breaking that that it seemed like a very American show, but it obviously was a phenomenon and I think we were the first window for breaking that in the UK after Season 2. And so we knew that that show had a really meaning impact no our business in the UK, maybe even more so then House of Cards did do our business in the U.S.

So betting on the that prequel was a safe bet and we’ll make more of them, I think what’s more precedent-setting is that kind of multi-territory intentional global buying that we will do kind of shield by the encouragement that most of the viewing in every territory operator is U.S. content the stack of the top 25 might be in different order, but they are very similar shows. So we think that we have some real global scale - some scale on our ability to license content around the world at the same time.

Brian P. Fitzgerald

When I talk to some of the different players in the marketplace, some say that the studios would prefer to sell county-by-country, because I think they could add up to more dollars and in other cases you see a deal like Gotham where obviously they made the decision to go with global deal.

Theodore A. Sarandos

Yes, when I think in - it is true that its possible, but it’s a little bit of bird in the hand is worth two in the bush scenario where if you have a global buyer that you can get done and you have a big risk in terms of a show that size that you can show off your economics earlier, I think that’s probably pretty attractive too.

Brian P. Fitzgerald

I think the point in your strategy where you’re willing to pass in a show if they don’t give global agency, they come back and say no I'll give you these five territories, but I’m not give the other 45.

Theodore A. Sarandos

It would depend on the show.

Brian P. Fitzgerald

Right, and especially on the TV shows while back you announced Marvel, so you are hedging your bets on superheroes it looks like. So the how the development is progressing and when do you get visibility on what those shows are going to look like and what the value might be for Netflix.

Theodore A. Sarandos

Well, the first one is Daredevil that we’re shooting right now in Brooklyn. The episodes we’ve seen several of the cut episodes are really fantastic, cinematic, dark, Charlie Cox who plays the lead is latest amazing and Vincent D'Onofrio is one of the great superhero villains you will never see and we have been throughout the progress of the show so far. So we are in real time with Marvel in the production.

And I don’t think there is any like natural limit to how much you could do with it, I think this is a very different take on the superhero model than the Avengers is not quite - it is much darker and more gritty and I think that the shows can have different tones and still be set in the comic world.

So I don’t - and we obviously weren’t stilt by the volume by doing the - we’ll have the all the upcoming Avengers movies in the Disney output deal. We have our own Marvel series with five different unique series that will come out of that Marvel deal and then now the global license on Gotham, but also we have an output deal into CW. So we have the Arrow and Flash and we license those in multiple territories all works as long as the shows are well executed and tell great stories I don’t think there is any limit, because it’s a comic book world or not.

Brian P. Fitzgerald

Understood. I mean you reviewed some shows and renewed others and you’ve got a little bit of a rhythm to the original content business and one of things that we’re seeing on the media side is obviously Hulu, and Amazon, FX, TNT, they are all ramping original desk. So there is sort of two parts to that the first is that there is a concern that your early success is going to lead you to take creative risks that aren’t going to workout as well as those first initial shows and there is also is frenzy around. dramas particularly serialized drama created by you?

Theodore A. Sarandos

Sure. I think I don’t feel uniquely compel that we have to do as well as we did with House of Cards and Orange in our next run of series. I think we will, I think the product, the projects are every bid is compelling with great proven talent behind them, but I really think instead of trying that that risk would be if we are trying to create four quadrant shows, shows for everybody all the time. And we’re trying to really create shows for the audience that will love it.

And so I mean some big shows, like Marco Polo that premiers on December 12 that will have very broad appeal and some other shows that are kind of more in the - that is certainly not a niche, but more in a specialized markets. Shows like Lilyhammer which is 65% Norwegian. So if you size the show, you size the invest right size to the potential audience. You could be really successful without having to take big swing to the fences every single time.

Brian P. Fitzgerald

Well I mean now the Nielsen is going to measure viewership in Netflix, we could talk about how much viewings taking place on your shows.

Theodore A. Sarandos

Yes, I hope you have every bit of - all the confidence in that number that you have in Nielsen’s current tracking. I doubt. So we bet 50-years or so, I don’t know how they are doing.

Brian P. Fitzgerald

Yeah.

Theodore A. Sarandos

But as I see we don’t really have, we said it before, the reason we don’t give ratings is not because you like to frustrate the press or not because we like to frustrate talent or not because we’re trying to squeeze suppliers. It’s an irrelevant measure of success for us. We don’t sell advertising; Nielsen’s ratings are all about just applying the cost of advertising. We don’t jockey for channel position with cable operators, there is no reason for us to review all ratings, because I honestly think that it works against the quality of television.

When a show comes out of the gate it has a soft number and can’t make it to a third episode and gets cancelled that tells you that ratings have been - ratings measurement has been bad for creative of television. Now maybe it’s been necessary for the business of television, but it’s been horrible for the creative of television. If you watch - f you remember Seinfeld was not a hit show for four years. I talked to James L. Brooks recently many times or more that was not a great show until the third-year. I mean there is a lot - if you look back to the history of television these shows really take a while to get their stride.

And I think that - I think that first couple of episodes of every new shows is little clunky trying to figure out how to introduce a lot of new characters, a lot of new story lines in a very fast time to get one of the speed and look how many shows don’t get passed to third episode, because they get a sub number, not because they are bad, because they were in a wrong time slot on the wrong network. That happens always, that’s why we got breaking that in the UK, it was on the wrong network at the wrong time and it got cancelled, because it was being the failure. So I do think that the rating discussion relative to the television has been very negative for the creative of television.

Brian P. Fitzgerald

Well, one thing for TV ratings that you do have to pay some attention to is if it’s a client too much then media companies might change the behavior, because if TV rates are dropping because too much viewing shifting to S5 that do they change the dynamics around paradigm around what they are willing to sell, any concerns about that?

Theodore A. Sarandos

No, what I hope it does, it puts real pressure, there is no question the viewing behavior has changed, we can all debate and what’s driving it and what the ultimate outcome is, but people like on-demand viewing, they like to watch multiple episodes in one sitting, they like to stack up the viewing so now you have people saying either waiting three, four weeks and watching them stacked on cable or they are waiting a whole season to watching them on Netflix.

That is absolutely happening because that’s what people love, so you can spend all your energy trying to circumvent that business or say I cannot sell to them anymore on and on or you could say how do we fix the root of the problem. But it wouldn’t matter if they had, if cable operators would invest in dynamic ad insertion. So if people are watching content weeks, months later that begins to monetize it and it’s absolutely fair for Paramount not to want to pay for an ad for a movie - that they placed before a Friday opening that doesn’t get watched for five weeks after the movie opens.

It’s absolutely a fair, but I think that if you want to fix the economics of ad supported television you had to fix the product.

Brian P. Fitzgerald

I think the one area the question we are talking about earlier that I want to make sure we flush out is who is starting to change its behavior where they’ve gone from sort of dipping their toe into water in originals and wet with some let’s call it more in expensive shows to now sort of full on premium. Are you seeing them in these deals and are they starting to bump against you more aggressively in any way?

Theodore A. Sarandos

I don’t know. I think we are - I would say for - we typically I think are seeing most shows mostly first, definitely first or second. I really do think the people are excited about the model, it’s a better - so they are finding in a better way to go in because they know that we are not going to do a pilot, we are not going to do a development deal, we want to go right to season, that’s a good thing so that they are typically they like to go through us first and see if we want to get there.

A lot of the shows that we are seeing go through those models are not shows that we would have done or that we would do or that we had chose to do. So I think that we're probably still competing mostly in the HBO, AMC effects of it, in terms of those shows and there is a lot of original programming going on everywhere, but we're not competing for all of it.

Brian P. Fitzgerald

I sort of felt like this being an interesting line of question.

Theodore A. Sarandos

I don’t think by the way, because they are interior shows, they just - now there is a sub-premium.

Brian P. Fitzgerald

So is growing the subscriber base in the U.S. now a programming challenge or a marketing challenge, what is the next 10 million or 20 million U.S. subscribers need from Netflix to be willing to subscribe, is it breadth of TV genres, more movies, is it more over the originals, what do you think.

Theodore A. Sarandos

I think we definitely have got to keep the programming in front of people that they want to see. They have got a - we spend all of our early years explaining what Netflix is, every marketing dollar was spent on showing how Netflix works and what a great value it is and starting with House of Cards was the first time we started spending marketing dollars on content brands.

So that was a shift from here is what Netflix is to here is why you have to have it, and I think we have got to keep that up, in terms of being that - continuing to be strong on both the programming choices and the positioning of the programming in the market to non-subscribers, so they see it as a reason to join Netflix, continuing to have great word of mouth on the show, so that people would tell their friends that if you want to see the show you could only watch it on Netflix. So it’s a combination of all those things.

And also a constant improvement of the product itself, I mean if you get a chance to if you have the 4K television it streamed, on December 12 Marco Polo streams in 4K and it looks amazing, I mean its gorgeous and it’s actually a higher visual quality level than you can get on cable TV, it’s probably even better than you can get in the movie theater on 4K. And I think it’s a complete kind of juxtaposition of the quality expectation of internet content and that it is literally streaming in the highest possible visual quality. So I think that that’s kind of continuing to invest in the experience, continue to invest in the content and refining the marketing proposition of the shows and the service.

Brian P. Fitzgerald

I mean are you willing to share any thoughts around like as other particular genres or holes that you think you could use bulking up; I mean you sort of think about the widening of Netflix and probably not correctly. I think bids where the serialized dramas and certainly I’ve spent a lot of time doing that on Netflix. Middle America is more into what you might think of still are procedurals; is there areas of focus going forward where you think you need to bulk up?

Theodore A. Sarandos

No I mean you asked the question about as you get to the next phase of U.S. subscribers. I think the taste runs slightly differently right the more you get, the more broad you get, but also payment methodologies are different depending on the social economics of the next wave customers. I think the people have really a very similar appetite for great story telling. So we under perform I think in the kind of unscripted reality kind of Kardashians of it all viewing and we over perform in that kind of script in the higher profiles script to dramas because it’s a better viewing experience then it would be watching it day to day to day or week to week to week.

And I do think is the - as we get broader and broader I don’t think that means kind of dummying down of content I think what it means is that we can bring a long in audience into shows if they otherwise you’d have not thought will be mainstream. And we started seeing these years ago in the DVD business that were you offer a better distribution model for content that that of the mainstream and now certainly becomes really mainstream.

The reason why people then watch foreign language films and documentaries and other things because there was no place to watch them. So when you start having choice no matter where you live the taste actually becomes gets even more broad, but I don’t mean broad like come down I mean broad like the people who never since watch the documentary in their life are watching them on Netflix.

Brian P. Fitzgerald

So I mean how you started as a company how much to spend on programming and maybe the simple answer but I imagine it’s complex we understand that there is a syndication pipeline you have to figure out what’s coming out in the future and what you might want and not want in originals versus others. But the programming spending is unprecedented for a company that is just really gotten into acquiring content.

Theodore A. Sarandos

Well keep in mind original spend is within the forecasted spend. So we are buying probably less in that kind of deep catalog kind of from the early legacy deals and more moving some of that money into more original programming and more now to the original movie side too. In our earliest deals came with a lot of kind of tonnage just being honest that when we are first starting the business it was a great way to get the deals done, it was look we will take the good stuff we will take some of the best up to the best of underperforms and the deals come up here and we knew it. So most of the spend I think its concentrating on more and more active inventory and less and less on the kind of added tonnage that would come with the deal in the earliest days of our business.

Brian P. Fitzgerald

And something in strategically just you know what drives you - I mean if you look at how many subs might have and just sort of spend per sub or percentage of future revenue or how do you go to the past developing? How much Netflix can afford to spend?

Theodore A. Sarandos

Well, I mean it’s baked into the margin. We don’t know want to do is grow the margin and then got the expense of growing subscriber base. So it’s signing the delegate balance of where you can grow spending and grow subscribers and grow subscribers faster than spending. All right so…

Brian P. Fitzgerald

So it’s going to keep giving your money until something else happened.

Theodore A. Sarandos

Look here, right now the metric that’s powerful is the viewing hours. So our subscribers are watching more and more viewing hours, we keep throwing money and they are not watching more that would be a bad return on - either we're picking the stuff or we have plenty. And I think that’s right now we've not - as we've been growing the subscriber base, it has afforded us the ability to buy more and to keep putting more high quality programming into the mix ,which is growing the subscriber base. So to kind of - so far been a very - really great virtue of cycle of growth.

Brian P. Fitzgerald

And when you stratify that do you find that really the offers of Netflix are still also growing their viewing hours or is it viewing hours in aggregate that you connect.

Theodore A. Sarandos

Yes, viewing hours in the first 30-days, viewing hours in the first 90-days, viewing hours in the first two years. Still finding more and more great things to watch which is great.

Brian P. Fitzgerald

So if we have came in one day and said I changed my mind. We don’t want anymore subscribers too much work right.

Theodore A. Sarandos

What would cause that morning - what would happen that morning that that would cause that to happen?

Brian P. Fitzgerald

Well these are the analysis Netflix there is always going to be obviously on the leverage side, but in the margin side how much of the programming investment is to grow the business versus maintain what you already have, its what we're always trying to figure out the dynamics.

Theodore A. Sarandos

It’s all net growth, right so it’s a component of retention in new subscriber additions. So both of those things have to be working for us to grow. And every investments, like we don’t have a VP of retention. Right is retention is everybody’s job and I think that those are the - I think by continuing to invest in the programming, we keep improving retention constantly and I think the good leading indicator of it is viewing hours per sub, which we have seen growth constantly.

Brian P. Fitzgerald

Makes sense. We've talked about programmings being a little being already into the efficiencies that you are getting in the renewals as you get data’s as to what’s working and what’s not working and decide what you want to buy. Is there a sort of scale level, globally at which point you think the conversations change when it comes to pricing where you are writing such a big check to Disney and CBS and Broadcom everybody else well not Broadcom in this case but that all of a sudden - well so there is a dynamic change in the price that you are able to pass.

Theodore A. Sarandos

To look at the competitive marketplace. So log as there is other people bidding for content you know that keeps things interesting, I do think that’s a lot more like - its like sports, so the superstar athlete could command an ever growing price, but the cost of player talent is not really risen that much. So if you have got hottest hand, if you have got the hottest show, you might have a nice advantage on price, but overall the content spend is you know it a year in advance. So we've got to make it work in that budget.

Brian P. Fitzgerald

Makes sense. So the international markets really are interesting right, so historically, correct me if I’m wrong. I think a lot of the buyers of programming cross platform right. Many of them already offer the content online and it’s really been watching what you’ve been doing here the last bunch of years. So do you look at the international market, what’s the international challenge and opportunity?

Theodore A. Sarandos

In the UK is a good example, BBC iPlayer is very widely adopted and everybody has access to the content. So typically on the shorter catch-up windows and we’ve been able to come in and license after these catch-up windows by the time it gets to our window it’s not also on the demand service. In some cases it is and we pay our lower fee that’s available On-Demand on those services, but like 4OD is a really great service and we license from Channel 4 very aggressively, we co-produce the Derek all over the world together and they have their products on 4OD kind of you - you might say they’re indirectly competitive, but they’re maybe not competitive it at all because they are ad supported and they are tied to pay television subscriptions and all these things.

So as I think that it is true that On-Demand and catch-up was better developed outside of the U.S., so it’s not unusual for our show in the UK to premier or a show in France to premier with the first two episodes On-Demand. So it’s not I guess so they’ve been a head of the curve in that way, but overall access to On-Demand services have been suppressed. So people aren’t using a much of that I get BBC iPlayer probably the most mainstream in use On-Demand service outside of Netflix in our territories.

Brian P. Fitzgerald

Can you talk a little bit about Germany and what you’ve learned so far?

Theodore A. Sarandos

Yes, the interesting thing is I don’t - I’m always assassinated by how similar all these markets are. So what they - and at least for the first wave of Netflix subscribers in these markets they really want to show us that they’ve been hearing about that they can have access to. So when we launched in France and Germany where people are really excited about was Orange Is the New Black they’ve been hearing about for two years. And they’re really excited about forgo that was been on TV for a year and not available on France and Germany and Penny Dreadful that we premier has an original series in those territories as well.

So there is a big access issue outside of the U.S. for television because of this kind of historical model of let’s wait to see what’s hidden in the U.S. and then we’ll buy it. And in the meantime the Internet came along and is telling everybody all around the world about these shows and they’re reading about it and they’re watching the Emmy Awards and they know that it’s the shows exit and they’ve to wait a year sometimes two, sometimes three.

When we launched in the Nordics they were two years behind on walking that and so if you have the hardest show in a country with the fastest Internet and no access to it they are going to feel it, so the great thing I think for us was that we keep being going and enforcing these windows earlier-and-earlier the consumers in those territories have loved it and have been really excited about watching those shows.

So France and Germany was a interesting one both because we didn’t have House of Cards in those markets because they’ve been pre-sold to Canal Plus in France and Sky in Germany and but it was cool that everybody there readily recognized that they were Netflix shows, even though Netflix doesn’t appear on any of the branding, they said its a Netflix show on Canal Plus, so those shows actually acted as great brand ambassadors for us in those countries, where we didn’t have to spend much energy explaining what Netflix was. So they said look what is Netflix, before they would say I never heard that word and France and Germany said “oh that’s about great, original, exclusive shows” so.

Brian P. Fitzgerald

And I think the best you talked about the international content of 80% U.S., 20% local?

Theodore A. Sarandos

Yes, yes.

Brian P. Fitzgerald

And is that mix shifting at all. I think you’ve also mentioned that we start the market you obviously are still early in how much country you are acquiring for that market?

Theodore A. Sarandos

Well, if anything it’s become more U.S. centric as these markets mature a little bit. Mostly because it’s been due to lack of access. So they know about these shows and not watching them. So the reflection of how big the U.S. content is in one market versus another is mostly a reflection of the business models in those markets, not in local taste.

So there are - it might be that - next the territories in Asia turn out to be more local centric, but what's true is, is that the size of the U.S. media market is such that you can so much more invest in an hour of television in the U.S. than you can in any other market that $5 million or $6 million an hour show competing with $800,000 an hour show in Europe. People are going to want to see the $5 million show.

Brian P. Fitzgerald

Perfect. Do you - I mean are you finding, so you’ve talked about some of the things are the same. Is there anything that you found different in the markets that you have launched so far?

Theodore A. Sarandos

Not that much yet, I mean honestly I think the viewing behavior is very similar, the shows that people are watching are very similar, they are choosing - there is a believe that France and Germany had to be dubbed, had to be dubbed, had to be dubbed. In all of our markets we offer most of the content in both subtitles and dubs and consumers can choose and a remarkably surprisingly high levels people are choosing our original language with subtitles in France and Germany and if you don’t speak French and German, frustrating is to go there and try to watch TV, because everything is dubbed and I don’t think that reflect the local taste as much as it reelects the desired local outcome.

Brian P. Fitzgerald

And I know you haven’t - I believe you haven’t say anything unless I missed it in Southern Europe, but is there anything you have to do prepare yourself, so if you think about markets like the next biggest ones in Europe like Italy, Spain?

Theodore A. Sarandos

No I think it will be a very similar to what we're doing. I think like I said you can learn a lot about a market, there are some things that you can take from market-to-market in our - the tactics of opening a new territory, we get better and better at them every time. There are some things about consumer behavior that are really unique to that country and it doesn’t help you in any way to the next one, but for the most part the ability to launch has been much aided by just doing it over and over again and I think with the things that we learn that turn out to be valuable, you doubled out on them and that they don’t you ignore them next time.

Brian P. Fitzgerald

So at this point, I’ve got plenty why I can keep going but I do want…

Theodore A. Sarandos

Take some - two hours with the questions.

Brian P. Fitzgerald

I wanted to expand the session to two hours but you know unfortunately we couldn’t do it. So I do want to give you all specially given uncomfortable circumstances your chance to ask bunch of questions. So we will get a mic up here if they can work through the crowd. Start here with Tom.

Question-and-Answer Session

Unidentified Analyst

So I guess there has been a few things in the press release about Google and what them taking more initiatives using the YouTube platform. You got – agreed to the common a little bit about what you think they may be doing and whether there are looking at an S5 option?

Theodore A. Sarandos

I don’t know I mean I am reading the same things you are I think that there they’ve got a really unique platform kind of a unique universal stars that have been able to monetize their YouTube fame in other ways that have been pretty impressive. My bet is that they would should be they are going to be probably hopefully going to reinvest in those YouTube stars on YouTube.

So they have got a platform that people are you know getting famous and itching to get off of. Hopefully they are trying to figure out ways to shore up that business and I would guess that anything they do would be deeply embedded in the advertising revenue model because that is our core business.

Unidentified Analyst

[Question inaudible]

Theodore A. Sarandos

Not as of yet.

Unidentified Analyst

Yes, I had three questions the first one was a big [indiscernible] of research came out last Friday in the media industry but its very influenced with analysts and one of the things he observed in research was that about 80% of the viewing is at 20% of your viewers. So if you were to look at time spend versus histogram how shifted our biased is that – is your viewing to a certain select number of viewers.

Theodore A. Sarandos

I can’t comment on the report or the methodology because I don’t know how they did…

Unidentified Analyst

Of that overall…

Theodore A. Sarandos

I never heard of it, but I am sorry had you finished the question?

Unidentified Analyst

Yes, just so how secured is that histogram of viewers – viewing hours by viewers so is that view or 80% by 20% viewers you know an accurate representation or could you characterize it.

Theodore A. Sarandos

I don’t view it – I’ve not looked at that in that lens before and we don’t really looking at that as before we do something internally is kind of weighted view share so that content that is viewed by light viewers is more valuable than content that is viewed by heavier viewers if they retain higher. So that adds actually a lot of additional value to a things like original programming. So light viewers who typically retain less than heavy viewers. If they watch original program they retain higher than if they don’t.

Unidentified Analyst

Got it.

Theodore A. Sarandos

So there is a lot of those kind of things we look at - but the overall history – the overall viewgram that you are talking about the overall view what you are talking about I am not sure.

Unidentified Analyst

Okay and then second question I had its in the last quarter you had said that you came in light on revenue and subs domestic as a sensitivity to the price increase is that still your view or is that being kind of shifted?

Theodore A. Sarandos

We said there are lot of moving parts, the timing of original series, the price changes there is lot of moving parts there and it’s still the case.

Brian P. Fitzgerald

Okay and lastly how would you characterize your brand and your viewer versus Amazon Prime viewer and that brand, how do you look at that brand versus the Netflix brand?

Theodore A. Sarandos

I don’t know that there is much - I mean I don’t know how to characterize their brands and their user. And I think there is probably a lot of crossover, meaning that imagine that social economics of our subscribers probably tend to be prime subscribers. So there is probably lots and lots of crossover, I don’t know that the Prime brand has anything to do really with watching.

Brian P. Fitzgerald

Yes.

Theodore A. Sarandos

Yes, so and we have one product which is watching. Any other questions from the audience. Or do you want to stand it forward oh you’ve got one.

Unidentified Analyst

Just you mentioned the $90 million Marco Polo outlooks preempt 4K. I believe you’ve also mentioned...

Theodore A. Sarandos

I didn’t characterize it as $90 million.

Brian P. Fitzgerald

Okay, 78% people watching Netflix on television. Do you find that number changing, and dictated the type of program you do that goes to [indiscernible] throughout the forms of...

Theodore A. Sarandos

I don’t think so, I mean I think most people really - the people are watching, the reason they are watching on TV is because they are enjoying the scale of the programming. It’s we’re professional programming, they are not user generated. So I think the step that we - but depending on how old you are, watching a Lawrence of Arabia on an iPhone makes sense. And for us I do think that it will - the rapid adoptions of Smart TV is only going to make that grow I think over time.

But I think what people do is they use devices like tablets and phones to sometimes they get introduced to a show or a movie and then they get home and pickup the viewing at home. So it’s always going to be kind of wed into one another, but it doesn’t influence a programming choices. I don’t think, we try to do big bold shows and trust that people are going to watch them on different size screens. I did see its interesting watching the premier for Marco Polo last week and last ten minutes of the second episode is so big, it was beautiful to see it on a big screen like that. Imagine it will look great at home television too, but it was really spectacular to see. Everybody get your 4K TV.

Brian P. Fitzgerald

We’ll go back to the growing the next 10 million and 20 million subs in the U.S. Could you envision a point at some point in the future here, where your programming gets a little bit more a broad beyond the edge of your House of Cards, Orange is the New Black 2 actually putting that program, selling it another window, as a sampling if you will for the audience, it’s not subscribing.

Theodore A. Sarandos

We have the ultimate sample which is we have a 30-day free trial. So if you are anxious to see the show, just signup and try it for free, and then to sell it to another channel to sample Netflix, we might try this sample Netflix as a free trial.

Brian P. Fitzgerald

Well the only reason I ask is I mean not to date myself, I can’t say how many people in my demographic are completely bumbled up by actually putting screen content under their television.

Theodore A. Sarandos

Yes.

Brian P. Fitzgerald

I mean i.e if it was on a cable network and that incentives them to say wow this is unbelievable and now assuming like this and then they would make the effort to find out.

Theodore A. Sarandos

Yes, I think we’ve got to do a good job of getting them out there and I think for different demographics House of Cards definitely was a show for grownups right and so people did gave that feedback that I don’t know how not to do this, but everyday a couple of years ago they were said that about email, so they’ve got a - if the value proposition is great enough they figure it out and we think that we’ll do better-and-better having shows that are not shows that are so enough shows that are so compiling that you’ll figure out how to get it to your TV. I mean I manage to get the 50 plus million households in its way, so I think its keep growing that way.

Brian P. Fitzgerald

So one last question and then I’ll wrap up.

Unidentified Analyst

Do you find the dealerships somewhat different say for people watch online versus the linear TV in terms of that what kind of shows are popular if you find that…

Theodore A. Sarandos

I mean many shows are more popular for Netflix then they were on the networks. I think a) because a time slots and b) because of the serialized natures of the show it just people will enjoy watching multiple episodes on the most serialized shows.

Unidentified Analyst

And how could you capitalize it in a more broad way?

Theodore A. Sarandos

I think for serialized drama better and On-Demand in terms of attracting a larger audience and then they’re more then its live that’s something live and disposable much better for linear. Peter Pan live is not very - is a great success for MBC, but probably wouldn’t be very interesting for us.

Unidentified Analyst

And this would stay the same you wouldn’t evolve all the time as small the viewers go online?

Theodore A. Sarandos

The more that the On-Demand part as the people love the more that we’ll strong in that space and we think there is plenty of room in the kind of filmed entertainment space for that.

Brian P. Fitzgerald

Now that’s playing around so the - a few things international launches are growing at a pretty equipped last year was obviously a big year and maybe that pace of launch is won’t be any different going forward just a lot each year, but is there an accumulative execution risk that takes place either buying content, gain on the screen given you’ve got so many more countries so quickly.

Theodore A. Sarandos

No, I mean I think like there is a doing things I got them installed and other kind of global deals, what happens is every time we launch a new territory, bigger-and-bigger chunks of the content and already programs. So that makes the launches can launch much more - add that to our growing original series that we are launching with them and you’ve got a pretty robust offering before we can get there.

Brian P. Fitzgerald

And you start talking about competition, you think about I mean Netflix markets obviously growing rapidly is going to evolve over time, you could see niche services sort of come into play where they really concentrate on something in particular and start to eek away at the market. Is that something you guys think about, do you want to niche yourself?

Theodore A. Sarandos

No I don’t think so, I mean I don’t know what kind of - I think it’s going to be one of those things where there are niches like in areas of programming like anime, where there is people who only like the native language Japanese with subtitles and that’s kind of one kind of more extreme flavor of anime where the kind of mainstream anime watchers are trying to watch the dubbed and they come out in different windows. So there is always going to be a business I think for the kind of extreme edge cases of one flavor of content and we have to serve that demographic, but not their every need you know what I mean.

So in the case of like we have some Korean dramas on our service in the U.S., but if that’s all you watch you probably have a bigger appetite for Korean drama and you may signup for Korean drama subscription service to enhance what we offer, but I don’t think we want to need to be the end-all be-all of Korean drama to serve that niche.

Brian P. Fitzgerald

There has been some discussion with senior management about potentially tiering the service in the future, the price for the service in the future. What's the programming strategy if anything at all underlying the potential for future tiering, is there milestones that we all should look at to say okay Ted is making progress towards a point in time which we can offer the service different prices?

Theodore A. Sarandos

I don’t think, I don’t envision this and we are not ruling it out, it don’t envision us kind of doing tiering on by content, so we do tier today on number of streams and for access to 4K high-def and I think that that’s probably for the foreseeable future it’s a better route, but I think having different tiers of content is difficult, because people value content completely differently. So and they see, you can have these movies, but not these movies, or this show and not this show or these kids shows and not these adult shows. I think it’s a very difficult thing to wrap around - wrap your head around, but we did introduce tiering to at least introduce the concepts of different ways to tier the service.

Brian P. Fitzgerald

And so last question, how much should we expect you to grow your programming expense next year?

Theodore A. Sarandos

I think in our guidance, in terms of within our margin guidance and I think I would look at this kind of very aggressive rollout of original shows this year, I think we launched - that came out of the gate two years ago very high kind of high profile, rest of developments, House of Cards, or Orange Is the New Black, Hemlock Grove and then the kind of the level of the shows that we are releasing in 2015 throughout 2015 are all kind of on that par with those large scale shows, but all within the kind of our current margin guidance and what's been great about it and I think these shows have all proven to be incredibly global.

People ask about Marco Polo is it an attempt to be more global, so for Asia House of Cards and Orange Is the New Black are enormously popular in China and there is nothing Chinese about them, and it’s been great to say, so I think what happens is, there is great story telling travels and there is great scale and content that travels. And that’s what we're trying to do with our global expansion.

Brian P. Fitzgerald

Thanks so much for being here Ted.

Theodore A. Sarandos

Thank you.

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