Netflix Long Term View
The following webcasts contain forward-looking statements relating to future events or future financial performance of the Company that involve risks and uncertainties. Actual results may differ materially from those anticipated in these statements based on a number of factors, including those identified in the company's annual report on Form 10-K filed with the SEC on February 3, 2014. These presentations may also contain references to non-GAAP financial measures. A presentation of and reconciliation to the most directly comparable GAAP financial measure, where such can be done without unreasonable effort, can be found on our Web site at http://ir.netflix.com. The forward looking statements are made as of the date of broadcast and the Company undertakes no obligation to update such forward-looking statements.
Internet TV is replacing linear TV.
Apps are replacing channels,
and screens are proliferating.
As Internet TV grows from millions to billions,
Netflix is leading the way around the world.
Linear TV is popular, but ripe for replacement
People love TV content and still watch over a billion hours a day of linear TV.
But people don’t love the linear TV experience, where channels present programs at particular times on non-portable screens with complicated remote controls. Consumers have to navigate through a grid, or use DVRs which add an on-demand layer at the cost of storage and complexity. Finding good things to watch isn't easy or enjoyable. While still popular, the linear TV channel model is ripe for replacement.
The evolution to Internet TV apps has begun
The world’s leading linear TV networks, such as HBO, ESPN, Canal+ and BBC, are moving into Internet TV. The ESPN app runs on many Internet platforms and is specifically designed to showcase sports, both real-time and catch up. ESPN will keep improving its app to try to stay ahead of MLB, which offers another terrific Internet TV sports app. HBO’s app makes its films and series more accessible than on HBO’s linear channel. The BBC app in the UK provides a rich and popular on-demand interface for a wide range of BBC programming. CBS now offers CBS All Access app for its content. The other major linear networks are not far behind.
Internet TV is more desirable than linear TV in ways consumers care about. While Internet TV represents only a small percentage of video viewing today, it will grow to replace linear TV because:
- The Internet is getting faster, more reliable and more available;
- Smart TV sales are increasing and eventually every TV will have Wi-Fi and apps;
- Smart TV adapters are getting better and cheaper;
- Tablet and smartphone viewing is increasing;
- Internet TV apps get frequent improvement updates;
- Streaming is the leading source for Ultra HD 4k video;
- TV Everywhere provides an economic transition for existing networks;
- New entrants like Netflix are innovating rapidly and driving improvements.
Eventually, as linear TV is viewed less, the spectrum it now uses on cable, fiber, and over-the-air will be reallocated to expand Internet data transmission. Satellite TV subscribers will be fewer and more rural. The value of high-speed Internet will increase.
This transformation is occurring at different speeds in different nations. In the UK, for example, the BBC is already for its iPlayer app as well as its linear channels, highlighting the large and growing viewership on iPlayer. In most countries, the conversion to Ultra HD video is being led by Internet video because Internet services can efficiently serve just the homes with Ultra HD televisions, while linear would have to convert entire markets channel by channel
For most existing networks, this economic transition to Internet TV will occur through TV Everywhere. If a consumer continues to subscribe to linear TV from a multi-channel video program distributor (MVPD), they will get a password to use the Internet apps for the networks to which they subscribe on linear TV. The more networks successfully keep their prime-time programming behind this authentication wall, the less “cord cutting” will occur. The same consumer who today finds it worthwhile to pay for a linear TV package will likely pay for a “linear plus apps” package.
Existing linear networks that offer compelling apps will get more viewing and become more valuable. Those that fail to develop first-class apps will lose viewing and revenue.
In addition to creating opportunity for linear networks, the emergence of Internet TV enables new apps like Netflix, YouTube, Hulu, MLB.tv, and iTunes to build large-scale direct-to-consumer services that are independent of the existing MVPD bundle.
Netflix is a global Internet TV network offering movies and TV series commercial-free, with unlimited viewing on any Internet-connected screen for an affordable no-commitment monthly fee.
We don’t and can’t compete on breadth of entertainment with Comcast, Sky, Amazon, Apple, Microsoft, Sony, or Google. For us to be hugely successful we have to be a focused passion brand. Starbucks, not 7-Eleven. Southwest, not United. HBO, not Dish.
We don’t offer pay-per-view or ad-supported content. Those are fine business models that other firms do well. We are about flat fee unlimited viewing commercial-free.
We are not a generic “video” company that streams all types of video such as news, user-generated, sports, porn, music video, or reality. We are a movie and TV series entertainment network.
We are a relief from the complexity and frustration that embody most MVPD relationships with their customers. We strive to be extremely straightforward. There is no better example of this than our no-hassle online cancellation. Members can leave when they want and come back when they want.
We are about the freedom of on-demand and the fun of indulgent viewing. We are about the flexibility of any screen any time. We are about fantastic content that is only available on Netflix.
In 2015 we'll spend over $600M in marketing to attract people around the world to try Netflix.
Winning moments of truth
We strive to win more of our members’ “moments of truth”. Those decision points are, say, at 7:15 pm when a member wants to relax, enjoy a shared experience with friends and family, or is bored. They could play a video game, surf the web, read a magazine, channel surf their MVPD/DVR system, buy a pay-per-view movie, put on a DVD, use a piracy service, turn on Hulu, or launch Netflix. We want our members to choose Netflix in these moments of truth.
We win those moments of truth when members expect Netflix to be more pleasurable than their other options, based upon their prior experiences. The pleasure comes from easy choosing, total control over when to play/pause/resume a video, and content that suits the taste and mood of everyone in the household.
In 2015, we’ll invest over $500M on technology development to continue to improve our service and our app on the very broad range of platforms we support.
Content people love
We plan on spending over $3B in 2015 on content for our members.
People’s tastes are very broad, even in a single market. The Internet allows us to offer a wide selection, and to have our user-interface quickly learn and make recommendations based upon each individual's tastes. Those members who love action blockbusters, Korean soaps, anime, sci-fi, Sundance films, zombie shows, or kids’ cartoons will find that Netflix fills their homepage with relevant and interesting titles.
As we’ve gained experience, we’ve found that the 20th documentary about bicycling will mostly just take away viewing from the other 19 such docs, and instead of trying to have everything, we should strive to have the best in each category. As such, we are actively curating our service rather than carrying as many titles as we can.
Our licensing is generally time-based, so that we might pay for a multi-year exclusive subscription video-on-demand (SVOD) license for a given title. At the time of renewal, we evaluate how much the title is getting viewed as well as member rating feedback to determine how much we are willing to pay. How many similar titles we have is also a consideration.
In each market, we license content from multiple suppliers, mirroring the fragmentation of the content industry. Typically our bids are for exclusive access to the SVOD rights, and we are up against various cable and broadcast networks, as well as online competitors. As a rule, content owners always want another bidder, and never want one bidder to become too strong.
We’re now at the scale where we can economically create original content that debuts exclusively on Netflix. We’ll continue to grow our original content offering as we gain scale and confidence. With each original, we learn more about what our members want, about how to produce and promote effectively, and about the positive impact of originals on our brand.
We believe we have a major advantage over our linear competitors when it comes to launching a show. The networks need to attract an audience on a given night at a given time. We can be much more flexible. Because each show on Netflix is not competing for scarce prime-time slots like on linear TV, a show that is taking a long time to find its audience is one we can keep nurturing. This allows us to prudently commit to a whole season, rather than just a pilot episode. In addition, we are able to provide a platform for more creative storytelling (varying run times per episode based on storyline, no need for week to week recaps, no fixed notion of what constitutes a “season”). We believe this makes it easier for us to attract creative talent.
By personalizing promotion of the right content to the right member, we have a large opportunity to promote our original content, one that’s effectively unlimited in duration. Long after the premiere of House of Cards, large numbers of members are just starting the series each week. The improved economics from full season, and the improved storytelling that comes from giving creators more scope, are big advantages for Netflix.
One material difference is that original content production requires cash to be front loaded relative to the P&L. The expansion of original content will consume cash. Since we are otherwise using domestic profits to fund international markets, we intend to raise long term debt as needed to fund the growth of original content.
We’ve had a great start with our initial slate of original series. Any linear network would be proud to show them. Our success is due in part to great creative execution by our team as well as the power of our large on-demand platform.
We’ll steadily grow our original content spending, and pace ourselves so that we have a high percentage of hits and stay efficient in terms of what we spend relative to licensed content.
Today our offering is only in about 50 nations. By the end of 2016 we intend to be available pretty much everywhere in world. The group of markets we entered first (Canada, Latin America, the UK, Ireland, the Nordic countries and the Netherlands) are growing fast and have already become contribution-positive.
We compete very broadly for a share of members’ time and spending, against linear networks, pay-per-view content, DVD watching, other Internet networks, video games, web browsing, magazine reading, video piracy, and much more. Over the coming years, most of these forms of entertainment will improve.
Linear networks have mostly exclusive content against each other, and this is increasingly true for Internet networks. Piracy and pay-per-view are the only two competitors that offer a nearly full set of TV show and movie content.
We call competitors for entertainment time and spending “competitors-for-time”. We call the narrower set of firms that do bid against us for content “competitors-for-content”.
The network that we think is likely to be our biggest long-term competitor-for-content is HBO. In the US for example, HBO won long-term exclusive domestic movie output deals with Universal and Fox and Warner Bros. HBO bids against us on many original content projects though is not currently a bidder against us for prior-season television from other networks. HBO has global reach and was early with their HBO GO app. .
In addition to HBO, other competitors include Amazon Prime Instant Video, Hulu, Now TV, Viaplay, Clarovideo, and many other cable and broadcast networks in various territories. Many are commissioning their own original programming, presumably because they see the same exciting big picture for Internet TV that we do. Many consumers will subscribe to multiple services if each have unique compelling content. Success relative to these competitors-for-content would mean for us to have substantially larger revenue and therefore sustainably increasing content, tech and marketing spending, leading to further growth, and a virtuous cycle.
We have productive relationships with most ISPs, given our joint interest in making broadband work well for people. The more successful Netflix becomes, the more important we are to the ISPs’ subscribers.
Our Open Connect program allows ISPs to directly interconnect with the Netflix network for free, rather than go through a third-party transit provider.
Sometimes, the largest ISPs in a given market want to use their market power to extract interconnect fees from us. We try to insist on “settlement free interconnection” where neither side charges the other. We think Netflix and consumers are best served by strong network neutrality. We will continue to fight these battles as we have been.
Netflix margin structure and growth
Our domestic margin structure is mostly set top down. For any given future period, we estimate revenue, and decide what we want to spend, and how much margin we want in that period. Competitive pressures in bidding for content would lead us to have slightly less content than we would otherwise, rather than overspending. The same is true for our marketing budget. The output variable is membership growth that those spending choices influence.
The domestic margin structure we have chosen is to grow content spending plus marketing slightly slower than we grow revenue, and in the US to average 200 basis points of contribution margin improvement annually. Over five years (2015-2020), that would move us from about 30% contribution margin to about 40%. We think we can grow to 60-90 million members in the domestic market based upon our trajectory to date and continued growth of Internet video.
Our strategy is to expand internationally as fast as possible while staying profitable. We expect to complete this global expansion in 2016, and to return to growing global profits in 2017 and beyond.
The primary forces propelling our growth are our own service, content and marketing improvements, and the improvement of Internet networks and devices. The primary forces impeding our growth are market saturation and the broad set of competitors-for-time all improving their offerings.
If we could look into the future at the ways that people access entertainment, we would no doubt see a very different image than we see today - stunning video quality, a proliferation of screens, natural user interface, and an unbelievable range of choice.
But if we were to turn instead and look at the person watching that screen, we’d observe a number of similarities across generations. We'd see someone who is taking a moment to escape into a story - to simply relax and enjoy one of life's real pleasures with their friends and family.
People love TV shows & movies. We love being the best possible place to enjoy them. Ours is an amazing opportunity to grow, innovate and lead for several decades. We will face strong competition along the way, and we embrace the challenge.
[Updated January 20, 2015]
This document contains certain forward-looking statements within the meaning of the federal securities laws, including statements regarding our outlook concerning the development of Internet TV and the decline of linear TV; the scope, timing and players involved in this transformation to Internet TV; our approach to being an Internet TV network or “app”, including improvements to our service features and content licensing, development and financing; our international expansion; the impact of competition; our relationship with ISPs; our margin structure; contribution margin; and sustainability of profits. The forward-looking statements in this document are subject to risks and uncertainties that could cause actual results and events to differ, including, without limitation: our ability to attract new members and retain existing members; our ability to compete effectively; maintenance and expansion of device platforms for instant streaming; fluctuations in consumer usage of our service; competition; and widespread consumer adoption of different modes of viewing in-home filmed entertainment. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 3, 2014. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this document.