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spk00: Good afternoon and welcome to the Netflix Q2 2019 earnings interview. I'm Spencer Wong, VP of IR and Corporate Development. Joining me today are CEO Reed Hastings, CFO Spence Newman, Chief Content Officer Ted Sarandos, and Chief Product Officer Greg Peters. Our interviewer this quarter is Mike Morris from Guggenheim. As a reminder, we'll be making forward-looking statements and actual results may vary. With that, let me turn it over to Mike for his first question.
spk05: Thank you, Spencer. Good afternoon. Let's jump right into the results and the member variants from guidance in particular. What changed during the quarter versus the outlook that you provided that made such a significant impact this quarter? And you did mention the content being perhaps a factor. I think that's really something we haven't focused on in the past in terms of driving the cyclicality, so maybe if you could talk about those things.
spk03: You know, when we're forecasting, Mike, in the beginning of the quarter, we make our best estimate. And as you can see over the past three years, sometimes we forecast high, sometimes we forecast low. This is one where we forecasted high. There was no one thing. And if I think about three years ago, we were also light. And, you know, we never really were confident of the explanation. Then we were $2 billion in quarterly revenue. Now we're going $5 billion. And so, it's easy to over-interpret the quarter membership ads, which are a bit noisy. So, for the most part, we're just executing forward and trying to do the best forecasts we can. Do you want to add anything to that, Spence? Yeah.
spk04: Thanks, Reed. Maybe I'll just add the fact that, you know, when we think about those paid net ad forecasts, it's really about the marginal growth. Like, on a subscriber base, that's over 150 million members. We're talking about, you know, plus or minus 1%, 2%, 3% in growth rates on subscribers on an annual basis that are growing over 20%. So, you know, if we look at the trailing 12 months, we grew our member base by over 27 million members. If you take that forward to where we think we'll be at the end of Q3, we think we'll be on trailing 12-month basis over 28 million members. We're really playing for the sustained increase in growth in our membership over time, and there'll be some quarter-by-quarter choppiness along the way based on things like seasonality and content slate and so forth.
spk05: Can you provide a little more detail perhaps on the gross ad versus the churn dynamic in the quarter? And clearly there's the pricing dynamic I want to get to as well, but maybe we just back up and look at gross ads versus churn and how that resulted in the net.
spk04: Yeah, sure. I mean, generally when we looked at it, the slowdown in subscriber growth was across all of our regions. So when you talk about our kind of top of funnel or gross ads, we saw that slow down across the board, which indicates to us some level of seasonality and kind of the overall, as you say, the kind of timing of the content slate. And also, frankly, maybe a little bit more pull forward of our subscriber growth from Q1. to Q1 because we had such a strong Q1 with 9.7 million paid net ads. But we also did see in regions where we increased prices, we did see some elevated churn rates and lower retention. So it was a combination of those two things. We think the primary story was around seasonality and timing and nature of our content slate, but pricing played a factor. Now, the good news in all of that, as you saw, Mike, I think, in the letter, is that in the first couple weeks of Q3, that growth has reaccelerated again. We're seeing both that top-of-funnel growth in acquisitions. We're also seeing improvement in those churn rates and retention back down towards those pre-price change levels. So overall... you know, encouraged with the trends. And with regard to that pricing piece, too, it's worth, you know, kind of reminding ourselves. That's all very revenue accretive. So while there may be some short-term slowdown in subscriber growth because of pricing, that increased revenue is very good for our business and ultimately for our members because we reinvest the bulk of that back into great content and great product experience for our members.
spk05: Can we talk a little bit about that pricing cycle and where we are right now? So two things I guess specifically. In the U.S., by June, had the entire membership base seen that price increase such that there wouldn't be a lagging impact in the September quarter? And then internationally, obviously it's much broader. Can you highlight any particular markets, anything you can help us size the portion of your member base that is processing through those pricing increases. Greg, do you want to take that or do you want me to take it?
spk02: I'm happy to do that. So, I mean, in the U.S. situation, you know, we're through all those notifications. Obviously, in the international perspective, we've got different markets in different places. But I would say just in terms of helping you size that, I mean, we built obviously in that into our forecast for Q3. So, you know, those effects we've already tried to account for and categorize in that forecast.
spk05: Okay, great. And then, Spence, one other question with respect to the letter and the outlook. It's the second consecutive quarter you've come ahead in operating income relative to your guide. You're maintaining the same full year guidance. I know that you've referenced the marketing, but help us there with that. again, maybe why the timing, from your perspective, forecasting hasn't been as clear given that it feels that you would know when certain marketing was coming through.
spk04: Well, it's, you know, marketing, we have an intention to chime in, too, but we have some discretion as to when we choose to support titles, and so we're really, when you look at the back half content slate that we have, we're very excited about, you know, Stranger Things 3 already launching, but then shows like Casa de Papel and Crown and big movies in the fourth quarter and money, sorry, I already mentioned money, I'm sorry. But there's just, there's a lot of content to support, so I think it was just really discretion of the team to move some and shift some of that marketing spend into later, to the latter half of the year.
spk05: Okay, so with some of these pricing topics covered a bit, I'm going to read, usually we'll start with an overview question, and so I guess, you know, we're halfway through the year now, this dynamic perhaps aside, any change to your view of the business strategically overall? And I guess embedded in that is, you know, touching on that question of your confidence about the growth outlook going forward and why an investor shouldn't look at this quarter and say perhaps the business is approaching maturity more quickly than we anticipated.
spk03: Yeah, I mean, if you look over the past 12 years that we've been streaming, in the beginning there was Hulu and Amazon and YouTube and Netflix. And we've all been growing at tremendous rates over the last 12 years. And now it's really catching on in a big way around the world, and we're having a lot of new competitors enter over the next year. And I think our position is excellent. We're building amazing capacity for content. Our product's never been in better shape, and our rate of investment is extremely high. So if investors believe in Internet television, which I think is an easy one to get there, then our position in that market is very strong and, you know, all of the key things are coming our way in terms of, again, stronger content and a stronger service.
spk00: And, Mike, if I could just add on your topic of maturation, you know, I would just also point out that revenue growth did accelerate by 400 basis points in Q2 versus Q1. If you look at our guidance as well for Q3, I think you'll see that trend continue as well. So, financially, I think that's actually a sign that things are, you know, picking up or continue to grow very steadily.
spk01: Great. Thank you for that. I'd also just add, too, on a similar and the same vein as on a show-by-show or film-by-film basis, we're also seeing hitting new heights in terms of viewer penetration and audience reach as well. Okay.
spk05: Okay, great. Let's expand the discussion a little bit. You know, Greg, over the past year plus, we've talked about some of the partnerships that Netflix has struck with the traditional video and wireless providers. I understand each can be different. There can be different accounting treatments, but perhaps can you give us an overview right now where we are on partnerships, perhaps domestically in particular, how they're impacting the business? Did they have any impact during the quarter, of course, but just in general, what do we look like in terms of those impacting and where we might go from here?
spk02: Sure. So, you know, there's a long history of these partnerships starting back with sort of the simple device integrations, you know, back to the Xbox and PlayStation. But the latest incarnation is we've sort of added more capability to each partnership from just simple device integrations and being able to access the experience to sort of payment integration and things like that. is this bundling that we are doing with PTB operators, with mobile operators. And to characterize where we are, we're still fairly early in that process, I would say from a global perspective. But the bundles that we are doing are a nice incremental accelerant to our acquisition, especially into a user population. that may not be as tech-forward as the folks that sign up with us directly. They may not have a smart TV connected to the Internet in their home. They may not have an adapter product like a Roku or an Amazon Fire TV, but they do have a set-top box from their pay TV operator. And if we can put the Netflix application in a nice, seamless integration into that set-top box, If we can then include the actual subscription to Netflix as part of their pay TV, you know, offering as a bundle, then it makes it super simple for those folks to be able to get the same kind of experience that our subscribers who sign up with us directly do and get the same benefits. So we're going to continue to expand those. We've got tons of opportunity, I'd say, globally around the world to add more and more partnerships. So, you know, we're still fairly early stages there. But also, you know, our perspective is that, you know, anticipate that that bundle acquisition channel is a nice supplemental incremental component, but a minority component of our overall subscriber acquisition process.
spk05: Okay. Let's turn a little internationally as well, Ted. Prior to the results today, data that we had seen indicated some strength in particular markets. It seems content-driven strength in France and Germany, in particular in Europe. Japan, South Korea, and Asia. Curious if you could characterize any particular markets that I realize you mentioned the relative weakness to guide was across the board, but any particular markets seeing more of a tailwind right now, particularly a content-driven tailwind?
spk01: Well, one that we'll be looking for starting this week is going to be La Casa de Papel that Spence just mentioned. This is our largest non-English show that we shoot out of Spain that plays throughout the world at a very high level. We also have Elite and Chicas de Cable from Spain that are enormously popular shows and new seasons coming in the quarter. And Sacred Games from India, which was a big driver for us in its first season, dropping a new season this quarter as well. And in the past three months with the release out of Germany of How to Sell Drugs Online, The Rain Season 2 from Denmark, and Quickstand from Sweden. What's been amazing is they've been deeply relevant in the home country, traveled the region very, very well, and have found global audiences. So the three shows I just mentioned from Germany, Denmark, and Sweden have 12 to 15 million global watchers. So we're seeing some real locally, regionally, and globally relevant content coming from all over the world.
spk05: You mentioned India, always a topic we like to dig a bit more into because of the size of the market, of course. So I guess for Teddy and for Greg also, and this market in particular, as we approach the second season of Sacred Games, a bit of a milestone, where are we on the content offering? I think you referenced some other markets where you can start with an original and get some traction, but you really need a certain amount of bulk to offer there. So where are we in the content offering in India? I also know you've mentioned or I've seen reference to five other shows, particular series or projects over Greenlight. And then, Greg, perhaps tied in with the question about product pricing, you made a reference in the letter to some new pricing. Can you talk a little bit more about both the product and pricing in India in particular?
spk01: Before we get into pricing, Rick, the only thing I'd add is that our We announced five new originals for India. The one we're also really excited about later on this year is Bahubali, which is our first step into a really large-scale Indian original film. It's based on a film that was hugely popular a year ago, and this is a series, prequel, sequel, model that we think is going to be incredibly popular in India. And we've been seeing nice, steady increases in engagement with our Indian viewers. that we think we can keep building on. You know, growth in that country is a marathon. So we're in it for the long haul and we're seeing nice steady progress.
spk02: So, you know, we're expanding that content offering and seeing that engagement grow. We think that there's an opportunity then to be able to broaden the access to the service. And so, you know, more people can enjoy that increasingly relevant content offering. So that's um clearly the motivator behind adding this mobile uh tier offering which we think you know is going to be a lower price point and in a market where the you know typical pay tv package is under five dollars we think you know we need to have a lower price offering to improve the accessibility but also one that complements the existing uh cheering structure that we have so that's the primary motivator for that move so we can, you know, broaden the audience that can love that content, enjoy that content that Ted's team is making. And that's great because, like, when we launch Sacred Games Season 2 and we have a bigger audience for it, that means we can create more social buzz, you know, and more excitement about that show. So we're doing that. We're also working on the partnerships we have in the market because we think there are specific opportunities to improve accessibility via those partnerships as well.
spk05: Great. And, Reid, A broader question, how do you view your potential subscriber base globally? I think a lot of us use the sort of broadband, connected broadband marketplace, but how do you see it? I would imagine you see it as larger than that. And historically, you've given us the 60 to 90 million member outlook for the U.S. Would you be willing to put some parameters around what you think the global opportunity could be, or why wouldn't you?
spk03: Well, we do wonder in the fullness of time can we be as big as YouTube? You know, YouTube is seven times larger than us roughly in viewing hours and, you know, a phenomenal service. Of course, it's free. So the real question is can we produce enough content that people are willing to pay for? You know, if you look at benchmarks, you know, it's about 700 million households that pay for television outside of China. So that would be kind of the equivalent of the U.S. 100 million. So that's one established market. Now, you know, do we have enough content in each of those countries? Most of that is local content that gets consumed. But the Internet is capable of some very large customer bases, as you I'm sure well know. So we just take it year by year and try to have our net ads continue to grow. We still think our net ads this year will be larger than last year. We'll keep pushing on that. And what we want to do is just grow the net ads every year and then the future takes care of itself.
spk05: Great. I want to talk about a couple of broader strategic topics here. You know, in the past you've clearly stated that you view your competition for consumers' time pretty broadly, sleep, video games, et cetera. The financial press, though, loves this concept of streaming wars between Netflix and a number of existing and new platforms. So do you think that streaming wars is a fair characterization of what the future holds for Netflix and for video entertainment?
spk03: Yeah, I mean, high level it is. Certainly all of Ted's world is very competitive. It's never been a better world for talent. They get to bid themselves off between us, Disney, Amazon, et cetera. So there's a real battle for who will pay for content around the world. But it's not a zero sum competition. I think everybody gets that. People will subscribe to multiple shows. I'd wager that most Netflix employees are HBO subscribers. You know, we love the content they do. And that spurs us on to want to be, you know, even better. So, you know, it's a great competition that helps grow the industry. And the advantage of having something catchy like the streaming wars is it draws more attention. And because of that, people, consumers shift more quickly from linear TV to the streaming TV. Great.
spk05: Greg, over the past 12 months you've spent, the company spent approximately $1.5 billion on technology. I have a couple specific questions. First, can you help us understand sort of the scalable part of that spend versus the incremental part of that spend and maybe to the extent you can quantify grades, to the extent you can perhaps talk about the types of things that would fit into one of those two buckets, that would be great. And I think also a question that we get is really how your Technology spend can be a competitive advantage in this competition for subscribers So is there anything you can point to from the consumer perspective where you really feel like it's whether we see it or we just enjoy it That separates the Netflix platform from from the competition there Yeah, there's a lot there.
spk02: So let me try and take it piecewise I would say the majority of that spend we would say is a fixed cost investment which returns increasing benefits at scale so as we grow our business we get you know a higher leverage off that fixed cost investment. There's a small portion of that that I would say is sort of incremental to how we scale. You can think of that as, you know, either on the delivery cost side. We seek to invest, you know, on the content delivery side to make that more efficient, so that's a fixed cost. But then we obviously have certain elements of that cost which just scales as we grow the business, as we deliver more streams, right? But a couple of examples on this so you can see the benefits from a consumer perspective, just to pick a few. So one is when we think about sort of our ENCODE efficiency, and this is how we actually take the moving pictures that our creators produce and then reduce them into a digital form so that we can actually deliver them to a variety of different clients, a variety of different devices around the world in a wide, wide range of network conditions, back to gigabit plus, constantly reliable, all the way to super flaky networks that we see in markets, let's say, in a mobile environment. And so we try and make that encoding process so good that pretty much, you know, we're maximizing the capability that we have, the connection that we have to any given consumer in that wide range of environments at any point in time. So obviously that's the consumer benefit is realizing just a good quality, you know, picture experience and more engagement, more compelling immersiveness in the content. So that would be an example of that kind of fixed cost return.
spk03: And Greg, about how many A.V. tests do you guys have running, you know, currently?
spk02: So I would say, you know, in a year we'll run let's say 400 is a good benchmark. And these are situations where we have a theory, you know, a hypothesis where how do we present a better experience which is more compelling to our users, which, you know, gives them a better experience, more engagement. And we'll test it out. And then based on how the users actually use the service, we'll determine if that hypothesis was correct or not. And obviously the ones that work that are a better experience will roll out largely to our whole universe typically of users around the world.
spk05: Great. Another place you didn't quite mention was the user interface itself. We do get questions about discovery and particularly with all the content that's being invested in. There was a survey that I just read about from Nielsen. Two-thirds of streaming users know what they want to watch when they go to the service, but another third look and they spend eight to ten minutes, according to the survey, looking for something to watch. So that's my question for you. Does that seem right based on anything you've seen, but also is that a good thing or a bad thing? And where's the interface from your perspective to making that great?
spk02: Sure. I mean, we obviously track those numbers. We have our own metrics that we use around how our members engage with the service, how much time they spend in the discovery process. So we have our own view on that and I think the Nielsen numbers are, you know, they're a good sound bite but don't reflect the typical experience. And I would say generally I think we're doing a pretty good job as evidenced by sort of our growth and engagement and general growth in subscribers. Now having said that, you know, we, you know, we're bringing a tremendous number of titles to the service and many titles which people don't know. They haven't heard of before. So we have an opportunity to continually improve and get better and better in how we present the right titles to the right audience in a way which is meaningful to them, which explains to them why the show, you know, is relevant to them and gets them excited about watching that. And so, you know, a lot of those 400 call it A, B tests that we run in a year are around you know, trying to figure out how do we do a better job of that. And we have a, you know, a healthy roadmap of good ideas about how to make that better and better. And we're excited about that. And we think that that is a competitive advantage. So if we do a good job there, we can deliver a better service experience that unlocks the value of our content library in a more effective way. Great.
spk05: Great. Okay. So I want to talk about some key content-related items. And I think we know well-publicized topics that I want to get to. Can we just talk about your current strategic point of view on investing? And I'm thinking about allocation of resources across a couple of vectors, you know, global versus local market-focused content, films versus series, and I think Netflix branded versus licensed. Just if you could tell us sort of from a high level where you stand on how you're splitting your resources there.
spk01: Well, one of those three that cut across all of them is the original branded content versus license, which is producing the kind of programming that is locally relevant and globally important. And I think we've seen shows like Stranger Things right now that plays almost completely globally. performing off the charts in every country in the world. We saw similarly last quarter with Umbrella Academy, a show that is an incredibly global show. So there's plenty of content that is global, and there's a lot of content that's very, very specifically local. And we're balancing constantly between those two. And every once in a while you get something out of the, like La Casa de Papel from Spain that also becomes a global phenomenon that has nothing to do with what we've seen since the beginning of film and television that almost all content that travels the world is in English from America. And we're seeing those dynamics change pretty rapidly. But at the same time, it's a very large audience and about most of the English-speaking content travels. So we're constantly doing those tradeoffs between the two. The overarching strategy that we're, you know, continuing to drive toward is, you know, over six years ago we got into original programming, betting that the license program would be more and more difficult to come by and that maybe the sources of content to license for will be under different levels of strain. And that has paid off, we think. We think it's been very important to the business to continue pushing down that road so the more international, more global, more original film. We also have a large investment coming up in animation that will serve to see some of the fruits from early next year. So we think we're betting in all the areas of content that our consumers love.
spk05: Just as a follow-up, film has been something where clearly we've seen more volume and more focus, at least on a relative basis. Can you talk about why film is
spk01: know is incrementally important for the platform overall relative to the series and is it is it fair to say that more effort has gone there because it certainly feels like it from our perspective i would say more effort than in the past couple of years and i'd say more successful effort in the last than in the last couple of years so that's what i've been most excited about when you see a film like murder mystery hit an audience as large as it has um you start thinking we really aren't benchmarking against our ability to license pay one movies we're benchmarked against the consumer perception of what movie they want to see on Friday night. So that competition is for very large-scale films, for very intimate indie films, and everything in between. And I think the team has done an incredible job this year in punching those films out into the zeitgeist, becoming those real talkable moments like Bird Box, like Bird Mystery, we think in Q4 with Irishman and Six Underground, that these are the kind of films that people just think about when they want to watch a movie, and not when they want to watch a paid TV movie. Great.
spk05: So you mentioned this, Ted, and I'm happy to ask you and open it up more broadly, but really a big question about the high-profile content coming off the service over the course of the next year or so. I think the first question is about impact, and you addressed it a bit in the letter, but when we have the office, we have friends, we have the Disney branded content in particular coming off the platform. So, you know, again, you addressed it a bit. I'd love to hear any expansion on it. One is just how much of the viewing consumption does this make up? Either person by person, I think there'd be differences between the amount of viewing and the number of members that are viewing it for one thing. There's also a domestic and international dynamic. And then also just the sort of historical precedent. You have had content like Family Guy, X-Files, things like that that has come off. Help us with the precedent to how we should think about this.
spk01: Since we started streaming 12 years ago, the consistent dynamic is that content comes and goes. The licenses come on, they expire, they get competitive, they go somewhere else. That's been true. This is the kind of second round with the pay-one Disney films. Remember back in the day, we used to license them through Starz and had them on Netflix, and it was a big swing off, along with films from Sony at the same time. So we've seen the entire output from Fox. We've seen the entire Nickelodeon kids output come and go on the site. And we go through that by, we believe, by making these early investments in original programming and getting our consumer and our members much more attuned to the expectation that we're going to create their next favorite show, not that we're going to be the place where you can get anything every time. And we think there's more value in that proposition than there would be in the kind of low price aggregator.
spk04: Mike, the only thing I might add to that is just, you know, as Ted said, we've been planning for this for a long time, but when you look at our, you know, we don't have any, you know, over concentration in any single studio or any single show. We talked about it in the letter. Any single show, even the most viewed shows are single digit, low single digit percentages of viewing. And there's going to be as, you know, as content rolls off the service and when and if it rolls off the service, it's going to be over time. If you look out, you know, three, four, five years from now, that second-run license content, there's still a very meaningful portion of what's on the service today that will still be on the service, you know, four or five years from today. So we're just going to continue to focus on our strategy of developing more and more original programming. And obviously, as Ted said, if there's second-run license programming that's available, then that's still part of the business.
spk05: Understood. Before we talk about the allocation of budget there, The international versus domestic dynamic for some of that specific high-profile content that's coming up, is the consumption of it and the availability of it consistent on a global basis, or is this primarily a domestic phenomenon? How should we think about that?
spk01: It's primarily domestic now. Like, it's like, by way of example, we just recently added Big Bang Theory to a lot of our international territories. We've never had it available to our – in the U.S. So I think it's a It's more of a domestic-driven initiative today that, you know, in success we believe it will be an international one too.
spk05: Okay. And then, of course, you're spending money on this content, so it's not like it's just leaving. You have resources being freed up, if you will. Absolutely. When we talk about, though, the availability of product, if there's one thing to take a sort of iconic piece of content off the shelf and not have to have it recreated, when we think about redeploying that money and expanding your budget even further for originals, are there constraints on whether it be talent, Any types of resources available, or do you think that there's ample opportunity to go out and redeploy that?
spk01: We definitely think there's ample opportunity, particularly across film and television. Like I said, a couple of years ago we were not investing in animation at all, and today we're investing very aggressively. I also think that the emergence of the next global storyteller, being from anywhere in the world, certainly opens up that opportunity, and we're becoming much more seasoned producers all over the world to do that. Okay, great.
spk05: Now, you are investing more in your own capabilities, of course. And Greg, I think that one thing that we don't talk about much is the technology side of the studio and production. Is there an opportunity for Netflix as a technology company in addition to being a media company to take advantage of some opportunities to be a more efficient studio, a better studio in terms of what you're working with Ted on?
spk02: Yeah, so if you think about the number of titles that we are producing and, you know, the strength that we have in technology and analytics, we do think that there's an opportunity back to the discussion we just had around making a fixed cost investment. either in terms of efficiency benefits or outcome benefits, just the quality of the dollars that get to the screen that, you know, that impact the user, you know, across the range of titles that we are producing. Now, I would say it's early days here, so we're trying to – we're placing a bunch of bets, and we'll see sort of how those bets play out. But just to give you a sense of, you know, make it a little bit less abstract and more concrete, when you think about after a show or a movie's been made, you make a trailer to promote that. We use those on service. We use those off service, right? And typically the first step in that process is someone goes through and they look at all of the scenes in that show, for example, and they inventory, like, what are the characters, what's happening there. And that sort of provides this index so that they, you know, can actually take that material and then from that use that index to assemble, you know, in the creative process what's a compelling trailer. Well, we can increasingly use automation as a technology investment to basically do that indexing process so that our trailer creators can really focus their time and energy on the creative process, taking the results of that automated process and putting together something which is super compelling, tells the story of what the show is in an authentic way, and makes it more attractive to users. That's just one example of the kind of investments that we are making that we think have that kind of returning leverage against scale.
spk01: I would just add that being an efficient producer is a very good thing to do, obviously. But being an efficient distributor to being an efficient marketer is P&L changing. So those are the way to think about we're working on all three of those things at the same time.
spk05: Great. I want to move a little bit to the reporting and the granular reporting of data that you referenced on the last call. One of the places we're seeing it more clearly is in the UK with the top ten list. So my two questions are, number one, can you share any results from that UK top ten list? Number one and number two, what can we as consumers or members expect going forward? And then I have one follow-up with respect to what it means for the talent, of course.
spk01: Well, the one thing we are – we said this in the last call as well, that we are being much more transparent with the creators and increasingly with the public in terms of what's being viewed on Netflix, mostly because I think people use a lot of different inputs to figure out what they want to see. And popularity is definitely one of them. And we're trying to figure out how to balance off popularity against all the other full personalization tools to give people that opportunity that if they want to see what everyone else is watching in their country, in their city, in their town, that we could present that to them in a way that helps them make better choices. But in general, I think we're still testing the best application of that, and it's still very much in active testing mode.
spk02: Yeah, and I just want to comment. I think, you know, we feel like there's a great way to actually enable that personalization but enable popularity signaling for the users that want it. So it's basically looking at the folks that use that popularity as a factor in the decision making they take about what to watch next and making sure that those popularity signals are available and very present for those users. And for users who don't, you know, seem to want that, then we can sort of, you know, make those less present.
spk01: As an example of a very granular piece of data that we shared recently was, you know, in the first four days of Stranger Things 3, more than 18 million people watched the entire season. And why share that number? Because the very next follow-on to that was, wow, I'm one of those 18. I want to tell my friends about it. Or, oh, my God, I want to be one of those 18. Or, are you one of those 18? So it carries a lot of excitement in the fan base when you can give them some data to chew on.
spk05: So from a public perspective or from a member perspective, should we expect more consistency in that type of data or is it going to be a one-off on selected items that you feel are valuable?
spk01: Yeah, I think we'll be increasingly transparent with producers and over time more and more. I feel like it's important for us to help condition the market to understand what the viewing data is so it's not being compared apples to oranges against things that are not similar. And right now, if we start publishing tomorrow, we'd be the only streaming service doing it.
spk05: Right. Right. So the value of this data to your content partners, content creators, as you create more of these large budget films, you have actors or other talented historically perhaps were compensated on box office performance. How are you approaching that when you want to make these big budget films and you want to incentivize talent? And maybe the flip side to that is Perhaps you have a little protection if a film doesn't do as well. In the traditional model, you know, is there a way that this data starts giving you both the incentive and the protection?
spk01: Yeah. I think what we're trying to do is it's a very new model, particularly for, you know, box office-friendly talent to want to make their next big film on Netflix. So we have to figure out a model that in success, how would they be compensated? The fact that it's guaranteed, there's some discount applied for that. And the fact that it's paid out over a quicker period, there will be a discount applied for that. But ultimately, we want the economics to be pretty neutral or at least, you know, or similar to what they would be if they had a big hit film in the theaters. And that's what we negotiate film by film talent with, you know, actor by actor. Great.
spk05: I'll open this up to anyone, Reid perhaps. Looking at the product placement or rather product partnerships for Stranger Things. Certainly very high profile, a lot of buzz, very broad. In the letter you reference it as being more about building the product itself versus monetizing. Does it become a monetizable part of the business at some point or put differently, expand a bit on the benefit of doing that and how that might be broadened to other properties?
spk03: Well, we're monetizing it today in more membership growth. The focus is get more people excited about Stranger Things so they join Netflix, they tell their friends about it. So, you know, this year we'll add about $5 billion of incremental subscription revenue, which is almost all gross margin. And, you know, that's faster than any entertainment company has grown in the history of the world. So what we want to do is keep that engine going, keep that subscriber engine going, and not get distracted, you know, with alternative revenue sources, which just don't add up when you're growing 5 billion a year. So the core focus is create all these merchandising opportunities, tie-ins, touch points, so that you feel the Stranger Things energy so that more people join. So we do monetize all that. It's just we're monetizing it through our giant engine. rather than through little sidecar vehicles.
spk01: You should think about, particularly in the case of Stranger Things 3, you should think about all those product partnerships as a character in the film. Remember in the show, remember the show set in 1985 and it's set in the heart of when the big summer blockbuster movies were jammed with product placement. And it was really a creative choice when they talked about pitching that season out more than almost two years ago.
spk00: Mike, we have time for one last question, please.
spk05: Okay, great. Usually we like to do a big picture, but this is one very specific financial question that we get a lot, and it's really about the margin potential of the business over time. I think it ties together a lot of these different things that we just talked about. But, Spence, we've had the chance to hear your opinion on it a bit. I'd love to hear you expand on it. Because Netflix is a single revenue stream product, you're very clear in the letter that advertising is not part of your future, despite what we read in the press. Can Netflix ever achieve the type of margins that we've seen historically out of cable networks, be it an HBO, which is a unique single revenue model, or another network that was a dual revenue stream, or are we, you know, inherently going to be sub-historical average margins for Netflix on a global basis?
spk04: I mean, you take it or you read it? I can take it. You got to do it. Okay. Well, look, yeah, I think, you know, we've demonstrated over the last few years that we're focused on building a very healthy long-term business model and growing those margins, roughly 300 basis points for the last few years to a target of 13% this year. When we look forward in terms of the margin potential and scale of the business, you know, first, you know, Reid talked about it a bit earlier. Our aspiration for a business that's already 150 million paying members is is to be a multiple of our current size. So that is a network with a relative scale for a premium entertainment network that really hasn't been seen before for those comparables that you mentioned in terms of those historical margins. So that works in our favor. And we also think about the revenue per any individual subscriber and whether that's advantage with the dual revenue stream or a single revenue stream. And, you know, our calculus now for building a global network is that we're best served to focus on that single revenue stream, winning those moments of truth with a great member experience, and then continuing to, you know, price occasionally against that in a great value proposition. We start with great content, great experience, and then offer it at a reasonable price. We think we can do that in a way that obviously continues to scale margins in a very healthy way. We're not going to provide specific guidance, but when you look at those comparables, there's some things that work in our favor. and some things that don't. So, scale is in our favor. We think the subscription model is a terrific model for us. So, certainly, we believe that there's going to be more margin accretion over time. And, again, I'm going to kind of leave it at that, but you can assume that we have a long way to go.
spk01: And, Michael, if you don't want to end on something that dry, I could say two things really quickly. to congratulate HBO on an incredible, record-breaking year for Emmy nominations. They continue to be the gold standard that we chase, and we're really thrilled for them. And also to the end of this month, on July 26th, we're going to wrap up our seventh season, seventh and final season of Orange is the New Black. And I wanted to thank Gingie Cohen for her incredible vision that helped really drive this whole idea of Internet television to new heights. And the show wraps up in a really incredibly emotional high, and we hope the fans love it. Awesome. Great. Thank you for livening that up, Ted.
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