Netflix's (NFLX) Management at UBS 44th Annual Global Media and Communications Conference Transcript

| About: Netflix, Inc. (NFLX)
This article is now exclusive for PRO subscribers.

Netflix, Inc. (NASDAQ:NFLX) UBS 44th Annual Global Media and Communications Conference Call December 5, 2016 ET

Executive

Ted Sarandos - Chief Content Officer

Analyst

Question-and-Answer Session

Q - Unidentified Analyst

Hi everybody. I think it’s notable just of the start as we sort of talk about 2016. And you’re at the point where you’re putting up videos like that, right. I mean things have really changed over the last couple of years.

Ted Sarandos

And there’s enough to fill a reel now.

Unidentified Analyst

You can actually fill a reel. So, the pace here’s going by next year, you’re not going have anytime to talk because the reel is going to be so long, right.

Ted Sarandos

We have 30 original scripted series now in different stages of production, which is a doubling on last year, which is a doubling on the year before.

Unidentified Analyst

And it continues. Why don’t we talk about 2016 at first? And since it’s winding down and so we’ll start with at this conference. What were the important dynamics from your perspective? What was better or worse than expected?

Ted Sarandos

Well like I said, we were able to wrap our original production and original spend on a pretty dramatic basis, and manage through the scale and the volume of that. And across the big variety of programing, so comedies, dramas, kid shows, documentaries, then in comedy specials, and maintain a really excellent level of quality.

So in that doubling a lot of things could have done poorly, but instead we doubled our presence at the things like the Emmy Awards both in nominations and wins, Time Magazine gave three Net Flicks episodes, the Best 10 Episodes of Television of the Year.

Of all there must be 4,000 plus episodes of television and the top number one was an episode of BoJack Horseman, then an episode of Black Mirror, an episode of Orange Is The New Black, and certainly from a consumer receptiveness standpoint. So they are loving the content even in higher and higher volumes.

And probably a big milestone for us was launching Stranger Things, which was a Netflix Studio title that was developed inside of Netflix and produced by Netflix entirely, and then kind of the international success we’ve seen with two projects like The Crown.

Late in the year just last week, we launched a show called the 3%, which is a Portuguese language, Brazilian sci-fi series that people are watching in enormous numbers all over the world. And I don’t think there’s ever been any history of Portuguese language, Brazilian television being watched anywhere outside of Brazil and Portugal. So we’re really excited about.

Unidentified Analyst

Do you know Stranger Things was going to be a big hit?

Ted Sarandos

I knew it was something special. The pitch and the Duffer Brothers who created this show, they said they pitched it 19 times before they came to Netflix. And the pitch was great and they had never really done anything expect for a small movie and a couple of episodes of a show called Wayward Pines. So there wasn’t a lot to go in terms of their track record. But this movie they made for Warner Brothers never really got released.

We took a look at it and said, look that vision against that execution this is worth taking a flyer with. And as the episodes were coming in, the one thing that was unique about Stranger Things was everyone in the office who access to them was chopping a bit for the next episodes to come. And that was really - I mean across from the admins all the way up to the most senior creative executives. So we knew that it was going to be a broad appeal show.

I was surprised at the level of social media engagement and excitement that the show created and continues to create and now we’re production on season two right now.

Unidentified Analyst

And The Crown is something you’ve highlighted in the Wall Street. I think partly because may be the Wall Street was further right demo for it. But how is that performing?

Ted Sarandos

Really great, and exactly how we’d hoped, which is that Queen Elizabeth is probably the most famous human being on the planet right now, living human being known around the world and people who know the history of her or don’t and just know the history of the monarchies around the world are really fascinated by this family and the story.

And I think the show really works because it is a story of a family. If it was just about history and cold events, I don’t think it would have gone over the way it has. But I think people have really been taken with Claire Foy as the Queen. Her performance, the way that she’s really put flesh on the bone of Queen Elizabeth as a woman, a mother or a daughter and how she wrestles with the things that people would wrestle with every day. So oddly she is relatable.

Unidentified Analyst

Right. Certainly it’s a beautiful looking show.

Ted Sarandos

Peter Morgan wrote every word of every script, which is very unusual for US television to have big writers room. Peter obviously has an incredible track record writing some of the greatest movies ever. But he really knows this world inside and out, and he is an incredible writer and really has given a meticulous tone to the details of the show.

Now some of them are very well known factual data points in terms of how you tell the story. But a lot of those conversations, you have that kind of a unique privy to people who lived around the royals to know those conversations and they are based on all that. So instead of having a big room full of writers, he has a big research room, and he turns those in to words. And John Lithgow’s performance as Winston Churchill and nobody expected a six foot plus guy like John Lithgow to be able to pull off Churchill like that, but he sure did.

Unidentified Analyst

So when you think about 2017, what do you think the original concept of play looks like and will it take any quantification in addition to qualification?

Ted Sarandos

Well we said we’re going to grow out to a 1000 hours. I think that’s a conservative measure as of right now. You see we’re another doubling of our series output and very high profit shows. In January we’re releasing Lemony Snicket in The Unfortunate Series Of Events, which is also produced in Netflix Studio from a right sale that we purchased from the book series, and are doing are great series based on with Neil Patrick Harris in lead, and it’s this is the kind of - and if it was a movie, it’d be a big movie. One of those kinds of projects.

We’re in various stages of production on some shows like Santa Clarita Diet, where Drew Barrymore and Timothy Olyphant. We have new series from David Fincher, Mindhunter that is the story of the early days of serial killer profiling in the FBI. So a big more ambitious slate of big ticket events, but also rolling out about 20 unscripted shows for the first time, including one of our more high profile shows called Ultimate Beastmaster which is global competition show executive producers by Sylvester Stallone and it will feature athletes and announcers from six different countries.

So when the show appears in Korea, it will be in Korean with Korean appears and when it appears in Mexico it will be with Mexican announcers and Mexican contestants, and in US it will be purely American product. So it’s a new product for a model for us of simultaneous international co-production versus formatting, but we think we could successful in this space.

Unidentified Analyst

That’s strange. I think the one way you asked us to sort of judge you over time is, well if you continue to make a series that must have been successful and must have sort of hit all the IRI metrics. So when you start to look at the 30 originals that you’ve done this last year, are they mostly continuing?

Ted Sarandos

Yeah, I mean the hard thing for people to wrap their head around is when we produce these shows. And one of the reasons why we don’t want to talk about the ratings and the typical format we will talk about ratings is, they are on every show not designed for the same audience. Some of these shows are very expensive and very broad and meant for big broad audience and indeed attract tens of millions of people.

Some of the other shows are smaller, really targeting for a couple of million to watch, and when they turn out and the show meets all the other milestones that we want that show to meet, it is successful. And in fact it is equally successful at 2 million or 30 million viewers, because of the economic investment that went in to it. And we’re trying to make sure that we have something for everyone in the house and we’re using the personalization tool to make sure that there’s time to reflect to your case.

So we are doing a lot of - your show and your wife’s favorite are probably different and your kid’s favorite show is probably different. The fact that we can program to that all under one roof is something that makes us very unique and our ability to personalize the site is what makes internet television super unique.

Unidentified Analyst

So can you talk about building that up internally? The execution of scaling original (inaudible) was something we talked about last year. how do you do it, how do you do so many shows, its unprecedented and obviously Netflix feels like it’s on a roll on the content side, but doubling volume again off of 30 is still - have you fully built a studio with inside Netflix and now it’s just a question of putting everybody to work or is there actually still an ongoing scale and it is taking place?

Ted Sarandos

It still continues. I mean the one thing that makes us a bit different than the other network studios is that typically, probably most of the folks will be if they’re talking are, they primarily make content for themselves and license a few shows. Their business models come kind of dependent on them producing and owning all their own content.

For us, what I don’t want to do is get trapped in that model of only producing content that we can own outright, because sometimes someone owns great IP and we have to figure out the right business models of how to bring great IP to our subscribers.

So Gilmore Girls is a project I’m thrilled that we did. People love it all over the world, but Warner Brothers own the IP. So there was no model where I could have made it myself. And I think it’s the reason why nobody else did it. And we had a kind of unique ability to bring that to consumers and they love it.

And mothers and daughters watch that show together and I know people talk about this as a really unique American show. I ran it for seven years on the CW and kind of disappeared from the culture, so we thought. But DVD and Netflix and piracy in some places in the world really kept that show alive all this time and then we come back 10 years later with the new shows and people flipped out for it. The online searches of Wikipedia and Google for Gilmore Girls are 40% not in English. So it’s a very global experience.

Unidentified Analyst

And you know I’m financial analyst I’ve to think about margins every now and then. Have you scaled the studio up enough that as the cost of growing that starts to blend in or is that something that we should think is still farther on the future?

Ted Sarandos

No, mostly it’s baked in to content cost today and our infrastructure. There’s not that much infrastructure cost around it, its people cost around managing right to managing the physical production than we otherwise are shopping out to folks with production deals with Netflix versus us building studio space out and all those kinds of things.

As an example, I think most physical production for content is very, very rentable and very, very competitive. So there’s no need for us to go and build it, but build the infrastructure. Like in our current facilities that we’re moving to in LA in January, we’re situated on a studio back lot, where we have access to all the stages. But I don’t want to operate a lumber mill to do that. So we have the ability to take advantage of their back bone or their infrastructure to produce all of our content.

Unidentified Analyst

So there are two areas of content that I wanted to touch on that is certainly related. The first is, seems to be an increasing focus on sort of premium content. I think The Crown for you, Westworld for HBO, Grand Tour for Amazon. As I think how many tables take now or audiences, is fragmentation so great that audiences really need something big to capture their attention?

Ted Sarandos

It’s possible. How do you rise above the clutter and there’s a lot of clutter. And what’s been defined as clutter is getting bigger and bigger. So I think that there’s some temptation for that I’m sure. But there’s equal excitement around the world for something on the scale of The Crown or The Get Down, as there is for something like the Gilmore Girls or Fuller House, where people just want content that they love.

I think people try to hedge their bets a little bit by going, swinging for the fences every time. What we try to do is take really measured swings for the fences if that’s possible, which is with known creators with a great idea, in many cases with a great script. So in the case of The Crown, I think betting on Stephen Daldry and Peter Morgan to make a story about the royal family was a pretty proven bet. And the fact that we would do it on the scale that we are able to actually increased the odds of success versus raise the risk on that.

So I think that that’s the kind of mentality around movies and television is that small stuff seams riskier in an odd way. And I think they probably have their own different flavors of risk.

Unidentified Analyst

So in addition to quality which now sort of pushes for everything that you do, there’s also sort of quantity. You mentioned doing 20 unscripted, like how big an opportunity do you see in the unscripted?

Ted Sarandos

I think you’ve had some discussion here about the space. I think that unscripted television is a very interesting business. The content itself appears to be largely interchangeable, meaning that if you want to watch a show about hoarding, there’s three different shows about hoarding that you can watch, and people watch it with seemingly equal passion when you swamp them out. And what we could do by producing our own is focus on the shows that are more likely to travel internationally because we have seen that from the thing that we licensed.

We can do things that are slightly more elevated and more event-driven like we just talked about with Ultimate Beastmaster, where we’re able to take a format, but add something different to it by being able to bring the global scale and global production to it. By bringing people that you k now, sites you haven’t seen before.

When Beastmaster hits in Korea and feels like local Korean television show, they’ve never seen anything like that in that country in terms of the scale of production. So that’s the kind of thing that we’re trying to do with our scripture. We have a factual show on the rise and fall of the Roman Empire that just started last month on Netflix, it’s been hugely successful for us. So that’s one of the first ones coming out of the 20 that are going.

Unidentified Analyst

I think we’re already trying to figure out, what genre is on the margin you could invest more in to drive more growth. And whether we think about that in United States, you’re doing fantastic and you’re an elite and you’ve got half the market but that means you don’t half the market, and then you sort of thing around that, you talk about programming globally and you think around the world sort of each market with a rule, a bit of a different dynamic. So are there genres in particular where you think you guys should be leaning in more aggressively to program to broaden the service?

Ted Sarandos

Well it depends, and there are different life cycles in all these different countries, right. So I think in the US where you’re trying to get things a little more mainstream and broad, but not at the expense of your core base. So we’re not doing any fewer crowns or mind hunters or shows like that, but we’re adding in to it. Shows that are a little more like the multi-camera sitcoms that are - and Les is going to be up here talking after me, he’ll talk to you about that business. It’s a great business, but man is it risky. Meaning it’s a - one in every couple of dozen will actually connect and there’s a lot of development cost that go in to making them.

We’ve been very successful with Fuller House, we have a new one coming up with One Day At A Time, Chuck Lorre has been so hugely successful for CBS and Warner Brothers is making a new show for us called Disjointed that’s a four primary sitcom that is kind of perceived to be more mainstream television. But we are able to put a little bit more of an edge on it.

If you see the Ranch one of our other multi-cams, but it doesn’t look or feel like a multi-cam but it’s shot in front of a live audience, its lit different, the patterns and the jokes different. It feels a lot more like a single - the things that people love about a single camera show but with the energy of a multi-cam.

Unidentified Analyst

Are the kid’s categories still growing for us on per home basis?

Ted Sarandos

Yeah, on a per home basis and the hours within each of those categories is growing. So kids are finding things on the real areas shows the second of Trollhunters. This is Guillermo Del Toro’s new animates series for us.

A lot of the scale that we talked about in our re-scripted series, it’s actually that on steroids on the kids face. We’re near to 40 original shows now on the kids originals for Netflix, and again as we’ve kind of ramp them up, we just did yesterday the Emmy Awards where nominations came out and we had 11 different shows nominated for 18 Emmies. It was 34 day time Emmy nominations for our kid’s shows. So we went from nothing to really leading that market place in the last three years.

Unidentified Analyst

Any issues about the DreamWorks Animation being acquired by ComCast?

Ted Sarandos

I don’t think so. I think it actually gives them the opportunity to use some of that IP from Universal to make different shows. We’re growing our in-house production a lot more, so less and less depended on those deals. But we’ve had great success with that DreamWorks deal, and I think we’ll continue to.

Unidentified Analyst

At the risk again, the same answer we always get, but I still feel like I have to ask once again about sports and live programing. What would have to change in the market place for you to consider those types of programs?

Ted Sarandos

And at the risk of being repetitive, I think that to the extent that the liveness is the selling point, we’re not a great solution, right. So broadcasting cable is great for the live sports, meaning that the whole aliveness is the selling point.

If things that are not as outcome oriented. Like this competition show during Beastmaster hits athletes on a course competing against one another. We’ll you’ve seeing in things like American Ninja Warrior, the repeat viewing is as high as the live viewing, even though people know who won, its knowable who won. But people come back and it’s about the story and the drama and the cinematic quality of the production, and less so about who won. And I think a live football game or a live baseball game is all about who won.

So maybe I’m talking ahead of myself, because maybe a decade from now near live is different and people will be less focused on sports coverage changes. But from where I’m at today, don’t look to us to be bidding for the league rights. But there’s something that this might be educational for us in a way that heads us in to different alternative sports and league might be interesting. But getting in to an already very crowded and very competitive league bidding for NFL and HL and NBA, very unlikely.

Unidentified Analyst

The league bidding, that’s new twist. So now we’ve opened the pandora’s box and I like that.

Ted Sarandos

Every year I come just so we could keep that sports going.

Unidentified Analyst

What are the big thrust for you over the, sort of, year and a half you’ll correct me, you were scuffing worldwide rights. How do you feel like you’ve down with that initiative.

Ted Sarandos

So far so good. We’re orienting a bunch of sellers who are oriented around selling regionally around selling to Netflix globally. So we had our work cut out for us going in to it. We’re spending most of our licensing dollars now on global rights only. And we’ve seen we’ve been able to do global right deals in the first and second window with every major US network and most of the top cable channels as well to where we are either premiering a US show everywhere outside of the US like we are with Designated Survivor with the Shooter right now, with Expanse, shows that are premiering on US Networks and they are premiering on Netflix everywhere outside of the US.

We’re doing it in reverse with movies that are or TV shows that are premiering in Canada and then on Netflix everywhere outside of Canada. So we are doing that in all different combinations all over the world right now and those are global deals, and those shows then we have in the country of origin a season after. In some cases it’s global, fully second season like with Fox on American Crime Story and (inaudible).

Unidentified Analyst

I think besides there’s always wondering whether my company is either trying to reinforce Pay-tv bundle or getting nervous about your growth globally will start to sell less to you. Any signs of that from your end?

Ted Sarandos

No, we’re following a path that we set out on a few years ago, which is to kind of move up the food chain in those productions. So be less likely to be an aftermarket buyer at many screening and more likely to be a co-production partner with the networks. Again when Les comes up in a few minutes, he can talk to you about the Star Trek series that he is premiering - they’re producing, they’re going to have the first one on CBS and then the show will air on all access in the US only and then it will premiere on Netflix everywhere else in the world. And our co-production dollars help make that a much bigger and better show for us and for CBS.

Unidentified Analyst

So mergers in the US AT&T-Time Warner foreign collaboration of course, potential for Les to have interest in Viacom we’ll see later. But obviously tectonic plates are shifting in media. Would you expect more M&A to take place in 2017 and would you expect any impact on Netflix from a consolidating sector?

Ted Sarandos

I don’t know about our impact to us, I could tell you that in a world where carriage fees are shrinking and ad rates are shrinking, consolidation would probably be a necessary outcome.

Unidentified Analyst

So even if there’s consolidation it’s hard to imagine too many of the big studious getting together. So maybe it doesn’t shift that much from your standpoint.

Ted Sarandos

Just being a lone cable operator, a lone general operator of one or a few of a handful of channels to leverage is probably just immense.

Unidentified Analyst

Why are we (inaudible) how would you articulate the film strategy at this point?

Ted Sarandos

In its early beginning the things we’ve released so far have been about two films from Adam Sandler and recently a film from Kevin James that are kind of comfort food comedy that people really lover all over the world. So we’ve been really happy with the results in terms of people watching. The Adam Sandler films they’ve premiered number one in every territory we operate everywhere in the world. Even in places where his movies haven’t opened theatrically. So we’re really thrilled with the reception of those films.

What we’re trying to do is make the movies that people would go see, movies that you would go see in the theaters if that’s where they were on Friday night. I think the kind of first real test of that would be a movie that were in production right we’d call Bright, it Will Smith’s next movie. David Ayer is directing it, Joel Edgerton co-stars. So basically the cast and director of Suicide Squad between Suicide Squad 1 and 2, making this movie which is another franchise world building kind of film project that will premiere on Netflix, and that’s the kind of projects that we try to steer the model towards, which is the way we’ve been able to create television events, can we do that in the movie is best, and can those movies be subscription drivers and retention builders the way our [result] for television has.

Unidentified Analyst

Yes, it’s hard for us to figure out because obviously partly the lack of audience (inaudible) think about, some of the feedback we get from HBO and the other traditional premiums and they have huge movie viewing on linear or a little bit less on their sort of streaming services. But I think there’s a perception by some that you’re still a little bit light in terms of sort of volume of movie content on Netflix, don’t know if you agree with that or not?

Ted Sarandos

What’s interesting is no matter what we end up with about a third of our watching these movies. So in some places we have more pay one output deal coverage than HBO has here, places like Canada where we have five major studio output deals, and movie viewing is about a third of the watching and we have basically no major studio output deal here with the exception of Disney deal that just started and in the US it’s about 30% of the viewing.

So I think that there is a behavior that people like to watch movies and like to watch TV in some combination. But sometimes they look for an old movie that they like, sometimes they’re looking for something exciting.

What I’m trying to just say, how does Netflix satisfy their customer. So HBO’s output strategy say, you have a movie that’s big in the box office and 7 to 10 months later it’s on your service. If you were really passionate to watch that movie, you would have. You would have seen in in the theater, you would have bought the DVD, you would have downloaded on iTunes. And so really what you’re last word, there’s a kind of a more dispassionate audience and so that viewing is likely not to differentiate you from everybody else.

It’s fine to have, I’m happy to have it, and I think the rare exception of that is Disney, because Disney makes big franchise films. The movies that people like to watch over and over again. But we see that as kids we were watching the animated features, we see what the families were watching, things like Jungle Book. But it just started for us that deal. So far we have Zootopia and Jungle Book and Finest Hour, and on Christmas Day we’ll launch Captain American - Civil War and in January, Finding Dory.

So we’ll have their biggest film property on Netflix only, but it’s in that window where it’s not terribly exclusive, but it’s a great way for people to watch and enjoy those films.

Unidentified Analyst

Stars management said that those weren’t very strong performers for them --.

Ted Sarandos

I bet they weren’t. I bet you’re right because most of Pay-tv channels make very adult programing and they don’t differentiate. So the kids weren’t sitting around watching Spartacus waiting for cartoon to come on. I’ll see I hope. And there’s things that probably showed in HBO too where they really hadn’t programed very kid-friendly programing all day and they are very linear businesses.

So for us it appear on-demand world, there are kids with their iPads that’s all they are watching as kids on Netflix. So we can distinguish that way by user and personalization and really have a big business around the kids viewing in a way that a linear television network that is adult at one time of the day and kids on another part of the day would be very difficult.

Unidentified Analyst

So, World 1.0 will be your first pay-one Star Wars film.

Ted Sarandos

Yes.

Unidentified Analyst

Have you see it yet?

Ted Sarandos

No, I haven’t seen it yet. I’m very excited to.

Unidentified Analyst

They didn’t let you see it.

Ted Sarandos

No, no. This is like business, those are secrets.

Unidentified Analyst

Let’s talk about sort of programing internationally. I know you have a global perspective. I think as Amazon went global, it seemed from some of their activity they were more focused on being aggressive, acquiring local right around the world, I’m not sure if you would agree with that. You’ve talked to the past about having about 80% of the content being US based, 20% being local. But you’ve launched globally and I assume you’ve had some learnings over the last 11 months since you’ve done that. Is there going to be a strategy shift where you start getting more aggressive in to international local productions?

Ted Sarandos

We’re being pretty aggressive in local productions right now. In 12 different countries we’re producing original series in local language. The beauty of them is most of them get watched outside of the country of origin. So show like [Marseille] that we produced in France, gets watched widely all over Europe.

I mentioned 3% of the Brazilian show which is getting watched all over the world including in the US. And we’ve released them with subtitles and dubs so and we’re working with great film makers who are making great product. And people who like foreign language films probably like foreign language television.

We’ve had great success with licensing television shows from all over the world in to the US and in to Latin America and they’ve played some times as big as local television. So I like the globalness of it, because I think that we could do is we can differentially give a global footprint to very local story tellers and people always worry that the volume of original programing that we are doing are we going to run out of great stories and great story tellers and that would be the case if we were only looking to America to do that.

But we are finding as you’ll see if you check the 3% really interesting talented voices from around the world and giving them a global footprint which makes them want to do business with us, rather than a local broadcaster or a local entry like Amazon.

Unidentified Analyst

I think if our announcement was right, Germany and France have been seeing some traction, conversion of Poland and Turkey to full markets has gone really well. Anything notable in Europe in terms of programing driving, any improvements in trends or there are other factors in those?

Ted Sarandos

Well we’ve produced the really interesting, but very small independent film in Spain recently called the Seven Years. And the movie was kind of a breakthrough point for us with the Spanish entertainment press. It was the first time we got our talent booked on the big Spanish talk shows and going to get it back out more on to the mainstream of the Spanish entertainment press. So it’s all really a matter of little breakthroughs that become big things. So that’s an example of that.

In Germany, the Gilmore Girls was hugely popular in Germany, they’ve loved that show. It’s just kind of a David Hassellhoff phenomenon of some kind. But big in Germany and big in Italy. So these shows have pocket of fandom that we see in the data that people that are really intuitive. So I think we have a unique insight in to our ability to get there, and we have that data because we licensed Gilmore Girls in every country about a year before we put on the new show.

Unidentified Analyst

Why don’t we talk about competition a little bit? I think you’ll love this one, I think when you announced the Download & Go last week, some of the inbound calls from investors was, oh, Amazon must be having some competitive impact for them to go out and do Download & Go since that’s something that Amazon has had for a while.

Ted Sarandos

No, it’s not the case at all. I think in fact we still continue to believe in the US. It will be a pretty small used case as exciting and it’s a fun add-on for our users. But for the most part we developed it for our entry in to emerging markets that have much slower broadband and very little access to Wi-Fi. So places like India where because they are used to that their behavior, the way that they use the internet is different, so the way they use Netflix is different. And that you download things at night and watch them the next day and so the ability to do that - once we unlock that for emerging markets, there was no marginal cost in to offering that to the rest of our subscribers around the world. So it’s much easier for us to scale if we launch the products globally. So that’s why we did it globally.

Unidentified Analyst

And any competitive concerns with Amazon they’re both ramping investment original content, I think, so right in behind you in terms of --.

Ted Sarandos

Spending a lot of money.

Unidentified Analyst

Yeah, spending a lot of money.

Ted Sarandos

If you look at the buzz of any of these shows or if you look at the data consumption on the Sandvine and other reports at Shack Track this kind of thing. It doesn’t appear they are gaining much traction against all those spending, but may be it sells prime memberships and some things that I don’t have any privileges to know about. But in terms of, as of now, it looks like they are spending a lot of money.

Unidentified Analyst

So another numbers questions, still on track for the guidance of 5 billion in 2016 and 6 billion in 2017 in terms of programing and amortization at Netflix?

Ted Sarandos

Yeah.

Unidentified Analyst

Well one question we get asked every now and then just the size of the programing dependence on the balance sheet. Is there a point at which you become nervous?

Ted Sarandos

No, the way we looked at it, as we’ve increased the spend on content it is also growing that subscribers and hours of watching than we have not reached the point of diminishing returns on the investment and we haven’t seen that yet. So at some point when you’re up in the investment and you see kind of a flattening of either subs or watching you realize that one will be a leading indicator of the other that you’ve to hit the point of diminishing returns and you can back off of it. But we haven’t seen that yet.

Unidentified Analyst

So the (inaudible) on the original programing are still good?

Ted Sarandos

Yeah, absolutely. And by the way efficient, meaning they’re roughly the same percentage of spend that’s going to originals is about the percentage of watching that’s going on, even though they are obviously more expensive to produce and they would be the license in the second and third windows.

Unidentified Analyst

So not going to finally backing down much, you know originals have been watched. Are you willing to update us on any viewing statistics on Netflix?

Ted Sarandos

Not at this point. We do kind of milestone releases so imagine we’ll have one coming over at some point.

Unidentified Analyst

Anything that you learned with the process of grand fathering both in the US and around the world this year, where prices were increased by a little bit more than normal for some of the longer tenured subscribers?

Ted Sarandos

It followed the models that we had built for it in terms of - it’s always an uncomfortable saying, playing with price in any direction and we want to do it infrequently.

Unidentified Analyst

Any thoughts on future opportunities beyond with the core streaming service sort of stranger things (inaudible) caged t-shirts are everywhere. Do you want to get any consumer products or other ways to modify this content beyond the cost for human service?

Ted Sarandos

Down the road there might be some real business there. I think for right now things like, you’ll see some stranger things, materials that are out there. Mostly because it’s such a huge consumer phenomena that there’s huge demand for people who want t-shirt with 11 on it. The tip is there’s a lot of that going on. We’re doing a test of some things right now, but we don’t look at it as revenue sources as much as the marketing driver to build the content brands.

Unidentified Analyst

I wanted to ask you a question on - as the content guide you might not exactly want to be the spokesperson for the company on net neutrality.

Ted Sarandos

I’ll give you the talking point.

Unidentified Analyst

Yeah, I’d love that because I think your job is to drive more consumption and more usage and net neutrality regulations if they are eliminated in the United States and as well as a couple of other countries that are looking at it, could cause consumption become more expensive. So how do you think about that as a company?

Ted Sarandos

Well it’s not disconnected from the content, because I think part of the whole thing is you want the content to be so desirable that everyone treats a bit equally which I think that’s all we’ve been asking for from the beginning is that the bits get treated equally across all carriers. And as long as that’s happening than that meets our objective. Again as we built more and more compelling content, the idea of making it more expensive or more difficult to get to that there will be consumer reaction to that as well.

Unidentified Analyst

Do you think Netflix would thrive as well as it has already inside a larger company?

Ted Sarandos

I don’t know. It was very cryptic.

Unidentified Analyst

It could then happen.

Ted Sarandos

One thing I got to tell you is that we have been maniacally focused on building a great erstwhile product. We don’t sell a lot of products, we don’t sell a lot of products, we have one product. We sell customer satisfaction in a way that big companies are able to because they have so many competing interest.

Just think about a company that has one division of the company buying programing another division making programing and they can’t sell to each other. That happens a lot. We don’t have any of that conflict. Even as we build Netflix Studios I have no intention of building it and selling product content to other people. I wanted it as a production entity for Netflix.

I do think there are some other multi-company conflicts that emerge in those big companies that would make it difficult to stay as discipline as we’ve been. And I think that’s why the product has been so differentially successful.

Unidentified Analyst

I think we’ll just close on - as you sort of look out to 2017 and beyond, what’s your confidence in continued growth of Netflix?

Ted Sarandos

Huge. I really feel like we’re at the early innings of this business of internet television. We’re getting the early innings domestically and internationally. Definitely internationally where I think some places are just getting a taste for this, just having the ability to disconnect from the linear grid is a novel and in of itself having television without commercials and in and of itself is great.

Having access to shows that everyone in the world is talking about in and of itself is just great. And we’ve put all those together at a very low price for consumers around the world and we are barely scratching the surface of how many people can do this.

Unidentified Analyst

Ted, thanks so much for being here.

Ted Sarandos

Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!