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Netflix Q3 Conference Call
October 15, 2014
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Michael Nathanson (an*lyst, MoffettNathanson):
I think the obvious question to ask is given the miss in subscribers this quarter in the U.S. and the slightly slower growth next quarter in the U.S. what gives you confidence that you're still on the middle part of the growth-curve and the s-curve, especially given the fact that you have a grandfather price increase a couple of years down the road? So anything on that.
Reed Hastings (Netflix CEO):
Sure, Michael. We added 3 million net subscribers in Q3, so about a million a month and then in Q4 we're forecasting 4 million. If you look just at the domestic side however, that's about 1 million and about 2 million in Q4. And we're hoping for big numbers, we're always working hard on that. But when you ask what's the confidence that were on the middle part we really have to feel our way along quarter-by-quarter as we improve the content.
And if you think about the general society all moving to Internet TV, like HBO's announcement today, there's a lot of feeling of just everyone is going there. Not exactly sure the rate of transfer, but Internet TV is going to be everything in a couple of years.
Douglas Anmuth (an*lyst, JPMorgan):
And Reed, just to follow-up on that, why is 60 million to 90 million still the right number in the U.S. given what we saw out here in 3Q and what you're looking at for the fourth quarter?
Reed Hastings (CEO):
Well, everything that we're seeing is completely consistent with the whole society, not only the U.S., but around the world, moving to Internet video and Internet television. So I think it's completely consistent with what we're seeing. And we're seeing – we saw Starz a week ago announced that they are doing an Internet video service; we saw HBO; perhaps all the other providers over the coming weeks. All the big networks are moving to Internet video and it's just becoming a very large opportunity.
Michael Nathanson (an*lyst, MoffettNathanson):
David, given that that revenues came in line, subscribers came in lighter in the U.S., was there a mix-shift amongst your pricing tiers in the third quarter?
David Wells (Netflix CFO):
In terms of really the revenue number, we sort of missed on the total subscriber line and there is a bit of a delay between the folks getting a 30-day free trial and the revenue coming in. So that would explain most of it. There is a little bit of a mix-shift in terms of ASP being slightly higher than we forecasted, but most of it was just because of the revenue having a little bit of a lag.
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Douglas Anmuth (JPMorgan):
And David, you called out in the letter basically that the increase in pricing may have had some impact in 3Q and perhaps a greater impact than you saw in the second quarter, perhaps, because Orange Is the New Black offset that. Beside pricing, is there anything else that you can point to in the U.S. in particular?
David Wells (CFO):
Any given quarter, there's a number of swing factors involved. We said that was our leading indicator or leading factor in the quarter. The Home Depot breach certainly brought down some of our – put a number of people on payment-hold. But we felt like if we provided three or four more swing factors it felt a little bit like an excuse, so we didn't do that. But there are certainly other factors at play.
We had a strong comp last year with releasing Orange in July versus in Q2 of this year and we talked a little bit about that. We certainly saw some effects from the Home Depot breach and then there's two or three more of those that we could talk about, but they are minor compared to what we think is the major one.
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Douglas Anmuth (JPMorgan):
All right. Let's shift a little bit more toward content, so Ted, a couple big announcements recently. Certainly Crouching Tiger, Hidden Dragon and then also the Adam Sandler deal, I'll just hit on the latter, but can you talk more about how data influenced the decision to do the four-movie deal with Adam Sandler. Can you talk about his global appeal as well, and do you think there are other actors or actresses that could have similar appeal for Netflix going forward?
Ted Sarandos (Netflix CCO):
Sure, Doug, the Adam Sandler decision was driven by following market after market, seeing Adam's films from his deepest catalog to his newest releases, performing --outperforming -- not only outperforming their box office, but performing wonderfully in every territory, defying conventional wisdom that American comedy doesn't travel.
And more importantly, he really performed well in the box office in our key markets like Brazil, like Germany, like the UK. And his last movie was 60% international. So Adam is not only a proven 20-year star, meaning he has a movie that performs well in the box office every summer for 20 years, he is a real global superstar. And we see that in the data, and the more international we get, the more access we have to those data points versus relying on conventional wisdom of generic thinking, like American comedians don't travel so well.
So we're really proud of the deal, and we think that our subscribers are going to love having access to those movies immediately through this new deal.
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Douglas Anmuth (JPMorgan):
And Reed, a question that we frequently get still is on pricing. We obviously saw the small, what we thought was a small pricing change in 2Q, but perhaps had a bigger impact in the third quarter. Does that mean really as we look out over the next couple of years that you may not do anything in, in terms of pricing or do you think, still think that you'd look to experiment potentially, do things around tiering?
Reed Hastings (CEO):
Well, we'd definitely be listening closely to our members and then as we add more and more great original content than I think were more valuable to consumers. So we're seeing an adjustment period that's this quarter, we're learning how to do that. But over the long time consumers pay for value and it's up to us to frontload that value. And boy, the slate of content that Ted has for next year, it's, it's really exciting and it kicks off with Marco Polo in early December.
With that, let me thank everybody for joining us on this call and look forward to catching up with all of you over the quarter. And special thanks to Doug for his year of service. So we'll continue.