Netflix Inc NFLX
Q4 2010 Earnings Call Transcript
Transcript Call Date 01/26/2011

Operator: Good day, everyone and welcome to Netflix's Fourth Quarter 2010 Earnings Q&A Session. Today's call is being recorded. At this time, for opening remarks and introductions, I'll turn the call over to Deborah Crawford, Vice President of Investor Relations. Please go ahead.

Deborah Crawford - VP, IR: Thank you, and good afternoon. Welcome to the Netflix's Fourth Quarter 2010 Earnings Q&A Session. We announced our financial results for the fourth quarter at approximately 1.05 pm Pacific Time today. A shareholder letter and the Q4 financial results and the webcast of this Q&A session are all available at the Company's Investor Relations' website at

As is our standard practice, this call will consist solely of Q&A, and we are going to conduct the Q&A via e-mail. Please e-mail your questions to

We may make forward-looking statements during this call regarding the Company's future performance. Actual results may differ materially from these statements due to risks and uncertainties related to the business. A detailed discussion of such risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the Commission on February 22, 2010.

A rebroadcast of this Q&A session will be available at the Netflix website after 6.00 pm Pacific Time today. Before we begin the Q&A I would like to turn the call over to Reed.

Reed Hastings - Founder, Chairman and CEO: I'd just like to acknowledge that Barry McCarthy has been our CFO and my partner for the last 11 years and there is no way we would have gotten to 20 million subscribers as fast as we did without his incredible work and thrilled to be able to introduce to you, David Wells who is our new CFO.

David Wells - CFO: Thanks, Reed. This is David. I'm glad to be joining you on the earnings call this after. I've got quite a legacy to follow. I've been part of the Netflix team for seven years and in the background of this call for many of those years. So I look forward to speaking to many of you in the coming weeks. But I know that you're here for Q&A, so let's get to questions.

Transcript Call Date 01/26/2011

Deborah Crawford - VP, IR: Youssef Squali, Jeffries & Company

Youssef Squali - Jefferies & Company: How should we think about overall content spend in 2011 versus 2010, mix of international and domestic digital rates?

David Wells - CFO: This is David. I think you should mostly think of it as domestic. If you think about the guidance that we gave for Q1 and you scale that for Q2 and you think about the $50 million operating loss we talked about in Q3 and Q4, it's not hard to get a position where most of that spend is domestic.

Deborah Crawford - VP, IR: (Arthuros Mangriotis, Fox Point Capital Management).

Arthuros Mangriotis - Fox Point Capital Management: Please elaborate on your decision to reduce focus on churns, even though net additions are ultimately the important statistics, I would have thought that managing churn would be great way to make sure you are satisfying your customers?

Reed Hastings - Founder, Chairman and CEO: Arthuros, it's Reed here. I guess, I'd say, you don't really manage churn, you manage satisfaction and then from higher satisfaction comes more word of mouth driving SAC down and new starts up and churn down. What I've come to realize over the years is that net adds is really the best indicator of that and this evolution in our part reflects an internal evolution over the paste couple of years where I find myself not particularly paying attention to churn and SAC and much more to net adds, which again is the best indicator of those satisfaction. So, that's an underlying reason for the evolution.

Deborah Crawford - VP, IR: Heath Terry, Canacord Genuity.

Heath Terry - Canacord Genuity: How do marketing deals like Netflix on remote control compared to your existing subscriber acquisition cost levels?

Reed Hastings - Founder, Chairman and CEO: Heath, we don't know for sure yet, because I guess we would say, we don't know the effectiveness of the buttons. It feels like a great option and once they are in the market, which should be in the middle of this year and then more later in the year, we'll be able to study really how much consumers use them. So, we are optimistic on it. We think it's a great direction, but we don't have any hard evidence yet. We won't probably for a year.

Heath Terry - Canacord Genuity: Is the improvement market for online advertising impacting your online SAC levels?

Reed Hastings - Founder, Chairman and CEO: Not substantially, Heath, it has been pretty steady for us. The big thing that improved SAC is that we didn't spend that much on marketing in the quarter because we were spending so much on streaming and when you spend less on marketing, you can pick it as skimming the market or you can pick it as, we get flow over from the prior quarters' brand that carries us. When we go in Q1, we will spend a little more in marketing and SAC will be a little higher. So, it's generally in the right direction, but not as low as it was in Q4.

Deborah Crawford - VP, IR: Mark Mahaney, Citi Investment Research.

Mark Mahaney - Citi Investment Research: What can you disclose about the overall usage patterns of streaming only or streaming mostly subscribers versus your DVD rental subscribers? Do they end up consuming materially more video content or about the same?

David Wells - CFO: In general, we don't parse off the behavior, but you can imagine that people that are coming in streaming only or mostly interested in streaming, you can see more than the folks on a hybrid plan. I will say that across the board on both plans people do tend to consume more video and they do participate in streaming. So, for the folks that avail themselves of the streaming are offering their overall video consumption.

Mark Mahaney - Citi Investment Research: Can you provide more color on how you were able to drive down SAC and whether you believe the current level is sustainable?

Reed Hastings - Founder, Chairman and CEO: Mark, I just had the question before, so let's go to the next one.

Mark Mahaney - Citi Investment Research: Next question is, why would operating margins decline from 15% Q1 domestic guidance to 14% full year guidance.

David Wells - CFO: 14% is a target, so some quarters might be 13%, some might be 15%. I think we addressed in the earnings letter why we're going to be a little bit heavy in Q1. We've identified trends in our growth and shipments, a little bit too late to put that to work to streaming and so we put a lot of it to work in marketing and will be a little bit heavy on income in Q1.

Deborah Crawford - VP, IR: Ben Rose, Battle Road Research.

Ben Rose - Battle Road Research: The cable service providers dive in the real competitors or are there any scenarios under which you might partner with them?

Reed Hastings - Founder, Chairman and CEO: With a cable company we've got a natural partnership with the broadband services group which is highly profitable and wants to increase their reach and the speed at which their consumers by packages. So with the broadband side there is a complete natural partnership. With the video side, we are a channel, we are sort of tolerated, we're not a big threat, but it's hard to see why it makes sense for to help us grow.

Deborah Crawford - VP, IR: David Miller, Caris and Company.

David Miller - Caris and Company: We against the backdrop of other distribution services bidding up for the content in the streaming window, what is your feeling about either acquiring an equity interest in the studio or the very least starting one yourself, with creative financing you could produce script driven content on your own at very little cost relative to the size of your P&L?

Reed Hastings - Founder, Chairman and CEO: David, generally, I'm a believer in circle of competence, and it's really deeper companies as they grow to step out of that. In particular, when we start taking creative risks that is, that is, reading a script and guessing if it was going to be a hit and who might be good to cast in it. It's not something that as fundamentally a tech company or a company run by a tech CEO like myself, it is likely to build distinctive organizational competence in. So we think that we're better off and letting other people take creative risk, get the rewards for when they do that well and then what we do is focus on matching the different products that are made with the right consumers to sort of where a technological aspect of matching it and streaming it. So, I would say the scenario that you outlined would be quite a change in direction and quite unlikely.

Deborah Crawford - VP, IR: Ryan Hunter, Wedge Partners.

Ryan Hunter - Wedge Partners: The latest report from the HIS screen digested has some video content, DVD CD and VOD down about 4% to $18 billion in 2010 from 19.22 in 2009. This has been the trend for the past few years. At what point does the market opportunity contraction start to impact Netflix?

David Wells - CFO: I'd say in general Ryan that, VOD space, we've gotten this question time and time again. There is lot of competitors in the VOD space, we've seen it. In the fourth quarter it's actually being a benefit through our 28 day deals, we've been a year with the 28-day deals, we see record low churn, record low SAC and record growth for us. So, I think it's working for us, I'm sure you saw the Redbox announcement in the fourth quarter, get a little bit nearly centric. So, I think it hits on disproportionately, but I think what you're seeing is an increase in the VOD as a result of the dynamics of the marketplace today.

Ryan Hunter - Wedge Partners: How are gift recipients accounted for in the subscribe count? What was the impact from the gift subscription promotion during the holidays? What is expected churn rate for these subscribers?

David Wells - CFO: Gift subscribers are counted in the subscriber account at the point where they actually enter the service once they actually redeemed their certificate. The impact from gift subs relative to last year was relatively flat with 2009. So there's not a whole lot of impact. The majority of growth that we saw in this fourth quarter was not relative to gift subs and then expected churn rate for these subs. We don't generally comment on different segments of the business. As you can imagine, they retain a slightly lower rates than somebody who comes in and pays directly.

Deborah Crawford - VP, IR: Nat Schindler, BofA/Merrill Lynch.

Nat Schindler - BofA/Merrill Lynch: Has Amazon's acquisition of LOVEFiLM affected your plans to enter Europe? What competitive at what advantages do you have over Amazon-LOVEFiLM in the U.K. and Europe?

Reed Hastings - Founder, Chairman and CEO: We're not quite sure what to make of it. Obviously Amazon was in DVD rental before, sold that interest to LOVEFiLM and then bought back the whole company. I think we're just going to have to take couple of quarters to see what they plan to do with that. In the meantime, it doesn't directly affect our plan. There is vigorous competition in all these markets. So we're full steam ahead on our plans.

Deborah Crawford - VP, IR: Imran Khan, JPMorgan.

Imran Khan - JPMorgan: Could you please give us some color on what percentages of streaming content consumption is television shows versus movies?

Reed Hastings - Founder, Chairman and CEO: What we said before is it's roughly half and half now, and there's some variation quarter-to-quarter, but that's a rough range.

Deborah Crawford - VP, IR: Ingrid Chung, Goldman Sachs.

Ingrid Chung - Goldman Sachs: You've spoken about geographic expansion beyond Canada in the second half of this year. If you can tell us which countries specifically are most interesting to you? Could you tell us what some of the characteristics are of an attractive market other than high broadband penetration? Would you want to be in a market with high or low pay TV penetration or does that matter?

Reed Hastings - Founder, Chairman and CEO: Ingrid, it's a more complicated question as you probably understand than just pay TV or not. It's really the best use of the dollars for building a business in a country that is likely to a sustainable source of profit, and so that's a mix of how competitive it is and how good the broadband is, what content rights you can get, what's the economic growth rate, what's piracy, boy, there is a whole kind of factors underlying that. But what I would say is you know wherever we go next is just one building block and our hope is to be able to go country-by-country and to expand quite rapidly in 2012 and 2013 assuming we continue to see the kind of success that we've seen in Canada.

Deborah Crawford - VP, IR: Brian Fitzgerald, UBS.

Brian Fitzgerald - UBS: Can you give us a sense of how the newer free subs are converting to paying subs from Canada or from those free subs that are part of the extended 4-week offer. How does it differ from the historic conversion?

Reed Hastings - Founder, Chairman and CEO: I would say Brain as we grow, we would expect and with streaming only it's a little more casual relationship that is it's easy to get and easy to get out and that that is going to tend to inflate growth adds and inflate churn. Again the net adds come out to the same place, but you get – that's how it effects those two metrics.

Brian Fitzgerald - UBS: Then a second question. Any initial impact you are seeing to churn based on the recent pricing changes?

Reed Hastings - Founder, Chairman and CEO: No, nothing material.

Deborah Crawford - VP, IR: Jason Cheu, ABR Investment Strategy.

Jason Cheu - ABR Investment Strategy: Generally speaking, what percent of new sub adds in the quarter were driven by internet connected video game consoles versus mobile devices such as smartphones and tablets? How important are these devices for your international expansion?

Reed Hastings - Founder, Chairman and CEO: Jason, we don't break out which of those are driving our marketing, and I would say, they are all important in international expansion, proportional really to the size of their installed base in a given country.

Deborah Crawford - VP, IR: Daniel Ernst, Hudson Square Research.

Daniel Ernst - Hudson Square Research: In your letter to investors, you discussed the desire to work with studios that have content constant cash outlays, better matching expensing, which I presume would mean lower upfront costs and better scaling with usage and subscribers. Are there other examples in content licensing thing that you can model that plan after? On the flip side, TV syndication deals do require substantial upfront, therefore, what is the prospect for getting content owners to feed upfront payments?

Reed Hastings - Founder, Chairman and CEO: Almost all of our deals, Daniel, right now match cash with expense and you see that in our cash flow for Q4. So, it's really just a question of each of the two sides relative cost of capital and most of the studios and content owners they do with that lower cost of capital than we do. So, it's not that hard an issue.

David Wells - CFO: We have been able to get a number of deals where the payments terms are matching the expense, so it's not like there is not a precedent out there. As you pointed out, in the syndication market, we're evolving with that marketplace.

Deborah Crawford - VP, IR: Jason Helfstein, Oppenheimer & Company.

Jason Helfstein - Oppenheimer & Company: In your comments you talk about the current $7.99 per month plan, it's for one stream at a time. Even though today the Company does not limit concurrent stream. Is there any data you can share about what percentage of the households runs concurrent streams today? Secondly, if you were to think about family plan economics what type of price point seemed like a fair value to you?

Reed Hastings - Founder, Chairman and CEO: We don't have specifics on the number of concurrent streams, Jason and think of it has if there is one concurrent instance in a year that subscriber or that household is unlikely to spend to get a separate account. There has to be pretty frequent conflict until it's not a how many concurrent incidences it might be related to. For example, how many people have more than multi-concurrent stream per week or something that will affect? How well we can drive the evolution to individual accounts? When you talk about family economics, we'll test a range of scenarios and try to figure out the consumer's view of what's a fair and appropriate option, but that will be second half of this year at earliest and may flip into 2012 before we get into that.

Deborah Crawford - VP, IR: Steve Rubis, Stifel Nicolaus

Steve Rubis - Stifel Nicolaus: Can you provide details on how many subscribers streams do you watch instantly during the quarter? Can you provide any details regarding watch instantly utilization in the bay area as well as the rest of the country?

Reed Hastings - Founder, Chairman and CEO: We can tell you, Steve, it's continued to increase like it had in the prior quarters. There has been no real change in the trend and that it's great in the bay area, great in the rest of the country. Generally streamings continue its tremendous growth for us.

Steve Rubis - Stifel Nicolaus: Next question. Usually you provide the stock comp expense associated with several categories as a P&L. You did not provide this information this quarter, are you changing your reporting policies and if not can you provide that data?

David Wells - CFO: There is no cause for alarm. That information will be – continue to report in the Q and the K in a footnote. It's just a matter of cleaning up the earnings release, trying to gain from real estate.

Deborah Crawford - VP, IR: Douglas Anmuth, Barclays Capital.

Douglas Anmuth - Barclays: How would potentially implement a shift from a household service to that of an individual subscriber. Is there any data you can share with us on simultaneous streaming and is this a good strategic thing to do in the face of potentially more streaming competition? What do you view as the core benefit to individual subscriber?

Reed Hastings - Founder, Chairman and CEO: The question really Doug is, is video naturally because of the portable devices, the laptop, the pads, the phones and individual relationship like emails and individual relationship or mobile phone. Somewhat it is and somewhat it isn't because of the use of the shared screens also. So, what we have to do is try some things with subscribers to see how comfortable that notion of a personal subscription really is and what are the advantages in terms of increased personalization, better Facebook integration, simpler relationship, compared to the complexities of it, but we would certainly like to and we will be working towards having it evolved to be a individual relationship over time.

Douglas Anmuth - Barclays: I understand the business is changing in real-time, but can you explain in more detail why you are not guiding for the full year?

Reed Hastings - Founder, Chairman and CEO: I think in general, we found our guidance from last year was so far off, that I am not sure it's very relevant. The business is moving so quickly. So, we did give some guidance for the year that we expect net adds to continue to grow in margins. But how much it grows; I think from last year, you can clearly see that we are not a distinguished authority. So that's really the reasoning behind it.

Douglas Anmuth - Barclays: Do you believe usage space pricing among broadband providers in Canada is having any impact on Netflix subscriber count or overall usage. Do people fully understand that they might need to pay more for broadband when using Netflix?

Reed Hastings - Founder, Chairman and CEO: It is something that we are definitely worried about and my sense is that those Canadian's with caps in $1 to $2 per gigabyte overcharges. Many of them probably don't understand their plan and it will take a billing cycle or two them and that is potentially a significant negative for Netflix. The shame of it is that it has got the marginal cost as we wrote in the letter to deliver a marginal gigabyte, over a wired network is extremely small, well less than a penny. So hopefully, we can work with different consumer groups and providers and get a better costing structure where if there are gigabyte charges, they are in the one penny range or they are bundled with a much higher cap, like it exists in the U.S. and many other nations.

Deborah Crawford - VP, IR: Edward Williams, BMO Capital Markets.

Edward Williams - BMO Capital Markets: Regarding Canada, how long will it take to get to comparable penetration rates in Canada as compared to the U.S.?

David Wells - CFO: We don't talk specifics but it not hard to see from our guidance for Q1 that Canada is growing much faster than we did in the U.S. So, in terms of putting an actual number out there, I don't think we want to talk to that. But suffice to say is we are going much faster in Canada and in U.S.

Deborah Crawford - VP, IR: Zachary Turnage, Harbert Value Fund.

Zachary Turnage - Harbert Value Fund: Why did AP increase so much?

David Wells - CFO: Zachary, this is David. AP increased if you followed, if you look at the balance sheet and the cash flow statement, you'll notice that we had a significant increase in the investment in our streaming content library, and so couple of these large were payments that were just short of timing at the end of the quarter that should reverse themselves in Q1.

Deborah Crawford - VP, IR: Richard Greenfield, BTIG.

Richard Greenfield - BTIG: As you move away from your DVD (buy now) business, what do you foresee as your greatest competitive advantage in streaming as we presume at some point competition will actually materialize and it does not appear that the vast majority of your content is exclusive?

Reed Hastings - Founder, Chairman and CEO: Richard, it's Reed. I think our primary competitive advantage is the subscriber base and that allows us to get more content on a fixed cost basis to do more R&D, to market more. So there is a lot of virtuous cycles around the subscriber base size that we referred to in the letter. That's how I would look at the primary competitive advantages.

Deborah Crawford - VP, IR: Doug Mitchelson, Deutsche Bank.

Doug Mitchelson - Deutsche Bank: Do you believe that it will get harder to acquire incremental films and TV shows from major Hollywood studios? Where are you in quantity today and where we could hope to be in a few years?

Reed Hastings - Founder, Chairman and CEO: Doug, no, it's not gotten harder. It's gotten easier as we pay more. Three, four years ago when we couldn't pay much it was very hard. Now because we've got significant dollars to spend, we've got people coming to us, and that makes perfect sense. So, we're feeling great about both our ability to make content owners a lot of money and to get deals done and continue to fill out and improve our selection.

Deborah Crawford - VP, IR: Jason Helfstein, Oppenheimer.

Jason Helfstein - Oppenheimer & Company: Do you think NetFlix's success is what is hurting redbox? Are you willing to comment on what hurt consumer demand for that product in Q4? Does this make a redbox partnership more or less likely?

Reed Hastings - Founder, Chairman and CEO: Well, I'm pretty confident that our success is not what's hurting redbox, because DVDs were barely up for us, and I think for redbox it was up 30% or something. So, I think those are really unrelated issues. Of course our streaming content is not the newest DVD releases and that's what redbox focuses on is the newest DVD releases. I don't really have more to say than that about our redbox. You also asked then does this make a partnership more or less likely. I don't think it was ever that likely. We're super focused on streaming and unlimited streaming. They are focused on new release DVD and they do a great job at what they do.

Operator: Steven Frankel, Dougherty

Steven Frankel - Dougherty: What's the timing on introducing the Facebook integration?

David Wells - CFO: We will be rolling that out in phases over this year sort of quarter-by-quarter and month-by-month it will get better and better and better.

Steven Frankel - Dougherty: At $20 million subscribers and growing you have the scale to compete head-to-head with the traditional pay-TV services for first-run movies. As the studio deals with HBO and others expire, is it likely that Netflix competes for titles on an exclusive basis?

Reed Hastings - Founder, Chairman and CEO: It certainly is possible that we would compete on an exclusive basis. We're willing to do that if we have to, but we think it could make more economic sense for us and pay television to share windows conceptually each paying two-thirds and the studio getting one and a third of what they were getting in the past. So, we tend to try to look for deals like that to make the content owners more money and allow the other aggregators to pay a little less, but we are basically pretty flexible and just trying to find good ways to expand the content.

Deborah Crawford - VP, IR: Michael Olson, Piper Jaffray.

Michael Olson - Piper Jaffray: Where will most of the OpEx for international fall? Will it be in marketing for the Netflix brand that is well known?

David Wells - CFO: I'd say that you can roughly think what we said in the past is that each international investment split largely between marketing and streaming content and that will hold in the future.

Deborah Crawford - VP, IR: Barton Crockett, Lazard.

Barton Crockett - Lazard: When you look at countries to expand into, do you see any desirable countries with meaningful incumbent providers of online subscription streaming services that you have to compete with. How does competition and the risk of losing battles factor into your choice of countries to enter?

Reed Hastings - Founder, Chairman and CEO: Barton, as you would expect it's lot of the factors typically in the markets that are the biggest prize. There is already vigorous competition and so it's trade-off there. So we'll try a variety of things over the years, both in markets that already have competitors, also in markets that don't of the type that you're describing. So I'd say we tend to try to put our money in play where we think we've got the best chance of a big sustainable return, and as I mentioned earlier to Ingrid, there's a lot of factors that go into that.

Deborah Crawford - VP, IR: Jim Friedland, Cowen.

Jim Friedland - Cowen: Are you using AWS in Canada or you'd be able to use AWS in future international launches?

Reed Hastings - Founder, Chairman and CEO: AWS is very global already, and we'll continue to use AWS.

Deborah Crawford - VP, IR: Ken Johnson.

Ken Johnson: What is your perspective on international growth in non-English speaking market? Would Netflix consider licensing a significant amount of non-English content of streaming to countries like India and/or China, perhaps to the Spanish speaking world?

Reed Hastings - Founder, Chairman and CEO: Sure, we don't limit ourselves in terms of our circle of competence to English language content. In fact, we are a very big licensor of foreign content already for the U.S. market, and we feel very comfortable licensing content for a variety of cultures and taste and really it's our global process knowledge and our technology that's globally relevant and by technology, I mean both on the streaming side and on the merchandising or matching, which people tend to like which titles.

Deborah Crawford - VP, IR: Scott Devitt, Morgan Stanley.

Scott Devitt - Morgan Stanley: We estimate Netflix's domestic service will surpass HBO in 2012. Ted Sarandos, recently suggested that Netflix would aggressively bid for Warner Brothers content and Warner's current arrangement with HBO expires in 2014. Given that HBO and Warner Brothers are owned by the same parent, the parent then has made several negative public comments about your business. Could you explain the dynamics here and how it is possible that by bidding for the content you could either get it or force HBO to pay more for it?

Reed Hastings - Founder, Chairman and CEO: Well, I am not sure I agree on the negative comments aspect. The press makes a living out of blowing some things up, and we are nearly $100 million a year customer for Warner Brothers and both of us would like to expand that if it makes sense to. In terms of specifically bidding on Warner Brothers content that may be advantageous for us and maybe that we end up again doing a share where Warner Brothers makes more money than they would have otherwise in both HBO and us, of content. It could be a range of options in that. So, clearly they will make a strategic decision based upon the different interest of the different divisions, but they are quite comfortable having us bid on it. They are not trying to exclude us in anyway.

Deborah Crawford - VP, IR: Tony Wible, Janney Montgomery Scott.

Anthony Wible - Janney Montgomery Scott: Do you believe that the move to variable base distribution costs, i.e. the STC space (indiscernible) that has prompted some ISPs to consider towing website service companies and the push to price content on a variable basis will fundamentally change the way Netflix prices or shares its service.

Reed Hastings - Founder, Chairman and CEO: Tony, it's a risk, particularly if pay per gigabyte be a dollar per gigabyte type models for ISP to coupe. So we will be involved in that debate, and again since the costs of delivering a gigabyte are less than a penny and falling, we don't take it terribly likely, but we don't want to be asleep at the switch and just let it happen.

Anthony Wible - Janney Montgomery Scott: Would Google, Amazon and/our Apple to be a more formidable competitor in 2011?

Reed Hastings - Founder, Chairman and CEO: Definitely there is a lot of firms including the ones you mentioned that could be more direct competitor with us, even that's creating a ton of opportunity for a lot of firms and there is all different models between the pay-per-view model for new releases; the add supported models. So there are a lot of different companies with different strengths. But as you know we have been through a lot of competition in the past, we view that as a natural part of the process and we're just focused on building our business as best we can.

Deborah Crawford - VP, IR: John Blackledge, Credit Suisse.

John Blackledge - Credit Suisse: What was the decline in disc shipments to per subscriber commence in Q4 on a year-over-year basis? I think in Q3 disk shipments were down 24% year-over-year. Just wondering if the declines were around the same level or accelerating.

David Wells - CFO: John, we don't publish shipment information like that. I'm not sure where you got that, the Q3 quote. What we said in the letter and I will remind you, disc shipments did actually continue to grow. They just grew at a lower rate than we expected and going into the fourth quarter we already knew that we were going to offer a price change and a new plan offering on a streaming only plan, starting in late November. There was some uncertainty around the take rate on that plan and how that would affect our disk shipments and so we were a little bit conservative in terms of planning out the number of shipments and I think you see that reflected in lower shipments.

Deborah Crawford - VP, IR: Nat Schindler, BofA/Merrill Lynch

Nat Schindler - BofA/Merrill Lynch: The comments in the text about charging for multiple streams per account is somewhat confusing to me. Are you planning to only limit the 799 plan to a single stream, or are you expecting limit all plans to a single stream at a time?

Reed Hastings - Founder, Chairman and CEO: Both the 9.99, 1-DVD and the 7.99 are one stream at a time and the vast majority of subscribers are on one of those two plans. So you can think of it as the vast majority of subscribers are on a one stream at a time plan. So as we develop models around upgrades and how do you get either multiple streams on an account or multiple accounts or sub accounts, those are the kinds of things that we'll be testing and evolving over the coming quarters.

Deborah Crawford - VP, IR: Justin Patterson, Morgan Keegan

Justin Patterson - Morgan Keegan: With regards to your experience in Canada, how is the tracking versus your initial expectations? What's been your biggest challenge in the region? What lessons have you learned that you can take to additional international markets?

Reed Hastings - Founder, Chairman and CEO: I think the main lesson we've learned is confidence in the model. We were really unclear as to how well and aggressively price on demand internet service would work. Without all the DVD and brand history could we get a cost efficient marketing and get subscribers to sign up. In fact we've proven to ourselves that at least within the conditions in Canada that that is indeed very possible, and we've been very happy with the growth. So then, we will take on a little bit bigger challenge, and we've learned mostly to have confidence in the model of on-demand streaming.

Deborah Crawford - VP, IR: Michael Pachter, Wedbush Securities.

Michael Pachter - Wedbush Morgan Securities: How long do you expect fixed price contracts to be offered? Do you foresee a migration to a cost per subscribe model much as is used by the cable companies in dealing with content providers?

Reed Hastings - Founder, Chairman and CEO: Michael, that's a possibility, but it's not very likely. I think what is happening is the contracts – some of the contracts are short year or two, and so you can pick a fixed cost for a year or two. It's really just a high granularity variable contract based upon the size. So, I would guess that it would go that way. We definitely agree with the model that as we grow bigger any individual piece of content is more valuable to us, and we will end up paying more for it. I think the form will be upon renewals of shorter-term deals.

Deborah Crawford - VP, IR: Youssef Squali, Jeffries.

Youssef Squali - Jefferies & Company: Could you speak to net neutrality in Europe?

Reed Hastings - Founder, Chairman and CEO: Youssef, net neutrality is a pretty strong concept in Europe, so no significant risks there. The aspect of the open regional, no charges interchange, however, is less strongly accepted and that's probably the big issue, which is can ISPs charge content providers like YouTube and Netflix and Amazon a significant fee to serve their customers, and so that's probably where the interest and the friction will be.

Deborah Crawford - VP, IR: Peter Treadway, EMS Capital.

Peter Treadway - EMS Capital: What do you think the operating margin potential of the Company is at maturity? How do you think about the range of outcomes?

David Wells - CFO: Peter, in prior calls what I've said is the long-term, i.e. the maturity operating margins in an industry are really determined by the number of competitors. So, if there's three or four roughly equal-sized competitors at maturity, you'd expect pretty low operating margins. If there's one firm that's the leading firm in the market, you'd expect higher operating margins. So, it really depends upon the competitive climate as opposed to something inherent in the cost structure.

Deborah Crawford - VP, IR: Andy Hargreaves, Pacific Crest.

Andy Hargreaves - Pacific Crest: As your subscriber base grows and substream more content, are you concerned about running into the limits of total bandwidth availability in a given geography?

Reed Hastings - Founder, Chairman and CEO: Oh gosh, not at all. We recently did a calculation about fiber optics, and what we discovered is that a single fiber optic, the size of a human hair, because of the advances in dense wave division multiplexing can now carry all 100% of the Netflix's traffic. So if we had a single data center, where all the bits came out of, it could comfortably go out in a single fiber. Furthermore, the improvements in the next three years expected in fiber optics are increasing that number. So, I would say the rate of innovation in data transmission, especially on fiber is greatly outstripping any growth that we could possibly get to.

Deborah Crawford - VP, IR: Brian Fitzgerald, UBS.

Brian Fitzgerald - UBS: Following up on the declining disk shipment question. In the letter you say that you expect disk shipments to decline year-over-year in the coming quarters. Is this the first time you pointed to this? Did you move this inflection point forward?

David Wells - CFO: Yes, it is the first time that we've talked about this, and its largely a function of plan mix, the streaming offer, streaming-only plan offering and just the embrace of the streaming-only offering service in general.

Deborah Crawford - VP, IR: That's the last question I had. We'd like to thank everyone for your time and we look forward to talking to you again next quarter.

Operator: This concludes your conference. Have a great day.