Netflix, Inc. NFLX
Q2 2010 Earnings Call Transcript

Erin Kasenchak - Senior Manager, IR: Steve Frankel, Brigantine Advisors.

Steve Frankel - Brigantine Advisors: Does the recent content deal with Relativity Media signal a material increase in the overall content expenditures or a continuation of the trend of shifting investment from physical to digital?

Reed Hastings - Founder, Chairman and CEO: Steven, it's a little of both. We have been investing more in streaming content quarter after quarter, year after year as we get revenue growth and confirmation that the streaming content investment is a smart one. Relativity does indicate a material step up in that. Most of that doesn't come in until Relativity delivers the films. So that would be next year and beyond. So there's no material step up this year for Relativity, but we are out looking for more content. Unique to Relativity is that it's completely exclusive for Internet subscription to Netflix. So it's the first of essentially a slight shift in our strategy, which is to also be licensing exclusive content in addition to non-exclusive content. We don't see a big radical shift. It's a thing we're doing some of the content on movies and TV shows exclusively now, which as you know, opens new possible content availability because much of the content in the pay TV window is sold exclusively.

Steve Frankel - Brigantine Advisors: Second question is what is the percentage of subscribers on Blu-ray plans?

Reed Hastings - Founder, Chairman and CEO: It's a little over 10%.

Erin Kasenchak - Senior Manager, IR: Dave Miller, Caris & Company.

Dave Miller - Caris & Company: Can you confirm whether or not the introduction of the iPad app has resulted in additional subs beyond your expectations or whether the Netflix app has actually resulted in already existing subs acquiring iPad?

Reed Hastings - Founder, Chairman and CEO: Dave, every new platform, whether that's the Wii, the iPad, all of the platforms do both. They help us with existing subscribers getting more value from the Netflix service, and they help us attract new subscribers. The iPad was a big success for us as the Wii was, and as really all of our platforms have been.

Erin Kasenchak - Senior Manager, IR: Youssef Squali, Jefferies & Company.

Youssef Squali - Jefferies & Company: How is the rate of activations on the Wii versus what you have seen for the Xbox in the first 90 days?

Reed Hastings - Founder, Chairman and CEO: Youssef, we don't break out platform specifics, but I would say that we were very happy with Xbox when it came out and we've been very happy with the PS3 and now we're very happy with the Wii. They all have large installed bases and that's a meaningful way for our subscribers to get value from our service and watch great movies and TV shows.

Youssef Squali - Jefferies & Company: Is there a sub-segment of subscribers who only stream the service and stop ordering DVDs? If so, can you quantify?

Barry McCarthy - CFO: The majority of subscribers do both, stream and take DVDs.

Erin Kasenchak - Senior Manager, IR: Ryan Hunter, Wedge Partners.

Ryan Hunter - Wedge Partners: Are the marketing expenses associated with the Canadian expansion already factored into your operating margin guidance for 2010?

Barry McCarthy - CFO: Yes, it is.

Ryan Hunter - Wedge Partners: What percentage of your CDN partners will support Canadian subscribers?

Reed Hastings - Founder, Chairman and CEO: Assuming that you meant CDN there in which case there's no real issue. The Internet – our providers such as Akamai, Limelight and others work fine in Canada.

Erin Kasenchak - Senior Manager, IR: Ben Rose, Battle Road Research.

Ben Rose - Battle Road Research: As Netflix gears up to enter the Canadian market and presumably other foreign markets, what is the most significant content delivery challenge facing the Company? Do you expect higher content delivery unit costs than you have in the U.S.?