Netflix, Inc. (NFLX) Earnings Call Transcript & Summary

Welcome back, everybody. Good afternoon on the East Coast. Good morning on the West Coast. A quick disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So we're really excited to welcome to the conference virtually -- for the first time, virtually or physically, Greg Peters from Netflix. Greg is the Chief Operating Officer and the Chief Product Officer at Netflix and actually has been there since all the way back in 2008. Greg, it's great to see you, and thanks for joining us today.

My pleasure to be here.

So listen, we often pest your colleagues at Netflix about the role of data. And I think as Netflix has sort of grown, there's been this mythology about the secret data machines you guys have to make all this great content. But maybe as the guy who actually lives that more on a day-to-day basis, we would love to hear from you at a starting level how we think about the role of data at Netflix? How much -- how important it is to you guys in what you do every day and making the product what it is?

Sure. Well, I expect, as you see with many businesses, so I don't think this is unusual, we use data to underpin and try to make better many of the decisions that we make. So for us, that's really about informing how we make the service better for our users. So really, the data is about our users telling us sort of what's working and what's not working. And that could be decision support for our content execs, and our content teams are making programming decisions and evaluating how well those are working. It could be -- it's really important in helping us evaluate the features or like the user interface changes that we're looking to make on product and understanding, are those beneficial for our members or not? It informs future hypotheses about like what could we change to try and create more value for members. And really, when I think about it, you talk about the mythology or the secret sauce, and it's really just about like if we're more effective at using that information to make better decisions, create more value for our members more quickly than our competitors, then that's the competitive advantage when it comes down to it.

Yes. And that's actually a good segue because we've been talking a lot about streaming. Everyone's got a streaming service. I don't know if you've heard about that, they're coming literally weekly. Does your -- does this now become kind of table stakes? Or do you think there's ways that Netflix can continue to stay ahead of the competition when it comes from taking data and putting it to work in the business?

Yes. I think I so often hear about this presented like as a binary condition, like you have it or you don't. And I think that that's a pretty simplistic way to look at it. And what we found again and again and again is that when we're trying something new, it might be like a new feature, let's say, right, we need to go through this whole process of establishing, okay, like what data is relevant to that feature? How much data do we need to inform how that feature presents or how it works for an individual user? What data do we even need to do -- new data do we need to evaluate, like how that is, I mean, that's a whole effort in and of itself. So really, our job, and I think this -- I have every reason to believe this applies to everyone, is to execute against figuring out what is that incremental need. What are the red herrings in data because there's always -- there's usually some things that feel like they should apply but you find out they really don't versus that data that you're really sensitive to that's really relevant. How do you build that up, how do you iterate on it, how do you build confidence in it. How do you refine that data, and how do you use that, then, of course, to really do what matters, which is create a compelling user experience, right? So ultimately, that data is not valuable unless it's manifesting itself in something better for the member. And that mini process, essentially, that I just described there, that's like happening in dozens of spaces simultaneously at Netflix today. And I have every expectation that if we were to have this conversation, let's say, 10 years from now. We would be talking about the same thing. Hopefully, we would be talking about it like 3, 4x in terms of scale because we're getting like more leverage and more fixed cost investment there. But it would be new spaces. It would just be like 12 new areas that we were talking about that we are trying -- to try and figure out how do we make a better experience for members.

Yes. We're going to get into some of the specifics around how you guys iterate and test across the business. But I was wondering, everybody wants to be global in streaming now. And you guys, I think you led rest of world, what was that, early '16, I believe it was?

Yes.

What -- give us a sense of the magnitude of the task in front of you to run this business. And I guess, you guys are in over 190 countries because that sounds like a massive undertaking. Can you just talk a little bit about what that entails?

Yes. I would say, I mean, at some level, just launching is maybe the easiest part of it, right? And that's the start of what is really the hard work and the journey. And I would say the crux of it, the real tension here is everybody -- these countries are different. And actually, more importantly, right, like not even in any given country, all users are not the same, right? All consumers are not the same. And so it's really even finding that after you launch in a country, maybe the first couple of million or depending on the size of the country, the first 10 million consumers want one thing, but then the next 10 million or the next couple of million want something different. And so it's a constant process of learning, but then you're also trying to manage this tension of being specific and optimizing for that country or for that segment, but also trying to do it in a way that leverages scale and whether that's regional scale or global scale. And so it starts with really, really mundane things like localization. Are you speaking the right language? That's obviously table stakes. But then you get into how do you feel, like maybe a local service or a natural service, how do you feel natural to consumers. It's the payment methods that you offer. What are your go-to-market partners? How are they presenting the service to folks? What are the product features, and how does the product feel like it's accessible, relatable to those group of people? And then obviously, there's the content offering and the hard work of trying to figure out how do we present the right content that's compelling to those sort of next ready set of members in a given country. But again, we're trying to do all of that with leverage, right? And so whether that's payment methods that use the same sort of rails or back-end systems, and we're leveraging what we're learning more and more about how to do recurring billing really, really effectively, but we're just expressing that through different payment methods. Or on the content side, something that I just -- I'm like super, super excited about is this idea that we can create shows in a local country, in a local language that are super popular and super effective in that country. But also, because of the way that our platform works, we can bring those shows to a global audience that a show from that country has never seen before, right? And obviously, that gives us leverage against that local investment, which is a really positive sort of feedback cycle where we can invest more than in great local programming, which really works in that country but then feeds into the global offering as well.

Yes. Is that an example of data in the programming decision-making process? Because I think, for a while, Hollywood was of the view that you guys had data and told you what show to make, which seems like it's oversimplifying the creative elements of it.

Yes. I think this is really more a structural effect. It's less about the data, but it's really just about breaking down those barriers, right? So if you think about all the things that have sort of inhibited that process from working, part of it is just being able to have a global distribution platform that operates in that way. But it's also how we actually connect that show, right? So it's presenting a show that, let's say, has certain features. It's a certain genre or a type of show that we know you're going to love, but maybe you've never watched a show from Korea or from Germany or from France or from Brazil before. But we know that if we present it in the right way, in a way that's compelling to you, you'll give it a shot. And then if it's localized well, it's dubbed well, it's subbed well, you'll just find yourself in the story. You won't even think about so much like where it came from, per se, and then you're off and running. And that's really a sort of structural benefit more than anything more specific than that.

Sure. And as you mentioned earlier about sort of getting the scale out of all of this, when you think about a certain market that you've been in for a while, has the business been able to scale from a tech and dev and product point of view? Do you need local people in those markets to execute as well as you would like to? Or how much can you use a centralized workforce to get where you want to go?

Oh, no. We're very much seeing -- in fact, I might argue it the opposite way. What we've -- we really are -- we started from a one-size-fits-all, which is obviously too simplistic but is sort of the default starting point, getting high, high leverage but sort cream skimming, if you will, right? And what we are finding is now we have to get increasingly sophisticated about how do we think about local sort of optimization, specific optimization, but then really thinking about them how do they fit into that scale program, right? And again, there's different levels at which you're going to get that scale advantage. Localization might be an example where, I guess, you're building off the scale of the whole product offering and really just offering this veneer of the language at it. But that specific work is, obviously, it's not leverageable beyond the people who speak that language, right? But there's a bunch of things that we're doing sort of deeper in the stack that you find have regional scale or global scale, and that's definitely panning out.

Got it. Let me ask you about how COVID has impacted the way people use Netflix and some of the viewing pattern changes you guys have seen. As you know, Greg, there's this debate in the market about pull-forward and sort of what reopening looks like in Netflix, and that's an unknowable, unanswerable question today. But from where you sit, what have you seen in the viewing and engagement data that might help us think about the COVID impact on the Netflix member?

Yes. The perhaps boring answer is that where -- every indication that we have is that the cohort of users, the sort of next incremental ready set of users that were really pulled forward by, unfortunately, people going into lockdown and really seeking some form of entertainment, they're behaving very much like the cohort of users that we added just before COVID, call it. And that's supported by also that as different segments of populations go out of lockdown in different places in the world, as COVID is impacting people differently, the behaviors that we see are very, very similar. Obviously, there's a boost in engagement that you get when people are in a lockdown situation and so you don't have that unless -- that they're available for them to do for entertainment. But other than that, device access, the kind of patterns, what they're watching, those things are all very, very similar. And so I mean, in some sense, that's good because it supports that we generally have to do the same work to delight those new members and to retain them as subscribers as the work we've been doing before.

Okay. Let me -- let's shift gears a little bit and talk about discovery and the user experience, which obviously is a huge focus for you and your team. Devices -- I mean, the number of devices with which we can consume and watch Netflix is more than I could possibly enumerate here. How much work is that to get your product to work consistently well across all of these connected devices around the world, given just how much it's growing?

Yes. And consistency is an interesting word to use there because I think I know the sense of what you mean in it. But let's -- I mean, first of all, it's a lot of work. I mean we have hundreds of people who do this work constantly. And I guess there's some sense of consistency, which we're -- it's back to sort of the scale component of it, right? We seek to essentially write an SDK that can be integrated into TV manufacturers and set-top box manufacturers. And then that allows us to deliver one application, and that gives us great leverage because we're putting more of our energy on thinking about delivering a new feature for users rather than writing it 100 times for across different devices. But having said that, across different device types, think about like Android or iOS versus a left, right, up, down remote control, operating a TV versus a game console. We don't seek necessarily to have consistent interaction patterns with those because those devices have different capabilities, different affordances. They've trained users to interact with them in different ways. And really, the art here is to leverage what's specific and unique about those devices, and the consumer expectation around interacting with that device. But then on top of that, we sort of have this consistent like expectation around how Netflix behaves. It could be simple things like you're watching an amazing show on your TV and then you left the house and you want to pick it up on mobile, and it should start right where you left off, to things like how do we present, whether it's metadata or ratings or tagging and all that stuff should look the same. So we're -- I guess the ideal state is that any device you interact on, it feels natural from the way that the device works, but it also feels like Netflix, and it feels like it's a part of the same family of interactions.

Yes. And so is there a sort of a constant, never-ending process of sort of optimizing by device? I mean I think of my experience using Netflix on the Apple TV versus the Samsung Smart TV. They're a little bit different, but both highly enjoyable.

Yes. You picked one outlier there may be in that. But yes, there is constant work. And it's mostly because we -- when you push on trying to have better experiences, right? You're pushing on sort of the device requirements and what the device can do. And so yes, there's this -- there -- yes, we're sort of constantly, I would say, building a better foundation, that's maybe the way to think about it, while we're changing the building that's on top of that foundation and we're sort of planning out a couple of years ahead, what kind of buildings do we want to build. And then we actually started like way back in the value chain. So we're talking to the silicon manufacturers who are thinking about like what is the capability in that silicon. We're saying like, "Okay, we want to land in these kinds of experiences 3 years, hence. What do we need to get built in into the road map when the next sort of generation of chips come out, so that when they show up in those TVs or the set-top boxes, that capability is there?" So that's just the -- that's an ever-going process to try and just make basically more compelling experiences.

Yes. No, those are great points as we think about all these new entrants, having to sort of chase you guys. This is not easy.

Yes. There's a lot of work. And I mean, it's -- yes, it's fun -- it will be fun to watch them go through that process.

Speaking of new entrants, I don't need to tell you, and this is probably more of a complement to where Netflix is today, but you guys get a lot of shots taken at you over the endless scroll, I think a paradox of choices, once again, used last week at a -- from a competitor. As the guy who's kind of in charge of the scroll, for lack of a better term, what's your perspective on discovery and this concept of just overload? And how do you think about things that you guys can do in Netflix to make the experience even better than it already is? Because obviously, there's a lot on the service. I'm not saying anything controversial.

No. I mean, in fact, I would say, let me put it out there even a stronger one, which is like we have created the most compelling collection of entertainment available at the click of a button that has ever existed in any kind. I think it's sort of that's the top line statement. That's amazing, right? That's incredible for consumers and for our members. It, for us, as sort of user experience designers and builders, it creates a challenge, right, because across that wide range of choice, our job is to try and distill that down into something that makes it easy and fun and exciting to pick what you want to watch next. And look, we're -- we wake up every day thinking about how to make this better, right? So we're far from content with where things are at. And there's like hundreds of tests that are being run, and they can -- and we're trying and trying to make it better. But I would say, just on the other side of that coin for a second, I mean, if you look at the numbers of people that we've been able to engage with shows, whether that's like 82 million watchers of Bridgerton in the first 4 weeks or 70 million from Lupin, and again, these are shows, like Lupin, a French show, that's getting 70 million viewers in the first 4 weeks, when does that ever happen before. There's something that we have that's working there, and we want to make it better and better. And we aspire to make those numbers even bigger over time. But it's a great challenge to have. I mean I wouldn't want a different problem, honestly.

Yes. No, of course. When you look at the things that you guys have been doing over the last -- the recent past, I think of the top 10 list and some of the other, anything that you would call out, Greg, that was a test in iterate and then launched that's really been impactful, just to give us a sense?

Well, I think, more, it's actually the 100 tests, right, that they're all incremental wins. And really, that's a better, I think, articulation of mostly how our process plays out. And then whether it's -- when I talk to folks externally or even new folks that join Netflix, and they're like, "Okay, what's the big silver bullet that's going to transform everything?" And I would say, like, "It's much, much more likely that it's 100 things that are nice incremental wins. But of course, the compounded effect for doing that 100 times every year is quite significant." And what I'm excited about really is that we're starting to get into -- we talked about countries and how to be specific for countries and optimization, right? But we're also really looking at this as how to be specific for different kinds of user needs across different populations, right? You mentioned top 10. Top 10 is a great example where some people in the world, they want -- they think about popularity as an important signal. They want to be part of that conversation. Top 10 is a great signal for that. Play -- watch something is a great example, where some people want to just like sidestep a lot of the process of choosing and just have us pick something for them, they can get into it and watch it, and that's great. Multigenerational, like is something we're seeing more and more internationally, too. What you need from Netflix when you're sitting down in front of a TV with 3 generations in your household, and you're trying to figure out what to pick, that's different. So pushing on this, trying to figure out like what is the specific need that different members have from us at a different moment is a really, really interesting and I think increasingly the space that we're going to explore.

Has the pretty substantial -- certainly substantial, but also somewhat rapid pivot towards original programming over the last few years. I mean, I think about how quickly Ted's team has stood up a global studio. I mean it's unbelievable, the amount of original programming. Does that make your job -- does it change your job? Or does the signals turn -- become different because now it's not known IP, for the most part, that we're looking at?

Yes. It definitely changes what we need to go do. And it's -- and you're right, I mean, it's been amazing, the speed at which that team has ramped up. And kudos to them, the guys did a great job. And it's put pressure on us to sort of be equally as quick and evolving how our product experiences work for this new type of firm. And I think you alluded to it, but you can imagine the difference in choosing and in discovery from a show that has got a lot of built-in awareness, where you're mostly about trying to pick the titles that are most relevant and how somebody recognized it and go versus when you're introducing something that's completely new, they've never heard about it before, and you have to explain to them why do you think -- what is the show, what is it, first of all. And then what's -- why is it going to be compelling to that user, right, why do we think it's going to be great for them. And you've seen that sort of evolve in the types of canvases we've had, right? And we've got increasingly into sort of different kinds of canvases, some of which are very heavyweight and are much more about more time-attention pixels to introducing new shows. But what's been interesting too is we've gone through just very quick the originals ramp. There are originals that were -- that we had that were in that challenge to -- for awareness state that are now in like completely recognized in this day, right? So you can imagine like Stranger Things is very much in that like ladder category, right, where Bridgerton was when we launched it in that former category, but now is transitioning out of that. So we got to keep both things sort of running in parallel, and it just adds another dimension of trying to think about how do we optimize a specific session of our user experience for a given user base on the shows that we've got.

How do we -- how does this impact your work with the marketing team at Netflix? Because marketing -- I remember when David was there, marketing took off, and I remember sort of half jokingly saying, "Well, doesn't the user interface just tell me what I want to watch? Why do you need to spend all of it in marketing?" And then in the last few years, you guys have had tremendous leverage on that line. So how do you guys think about the marketing spend in relationship to the work you do on the discovery side?

Yes. And I think that's been an evolving -- like most of the things we do, we kind of learn and understand more how this works, and that's been evolving, understanding. But to your point, one of the greatest advantages we have essentially is that millions of people show up at our front door, launching our applications or user bases on a daily basis and say, "Please entertain me." Right? And if we do a great job at giving them a good experience, helping them choose something great, that they really, really enjoy, that cycle just continued, right, because in the next night that they're looking to be entertained, since they had a good experience, they come back to us. And so that's hugely, hugely impactful, right? And if you think about it, relative to sort of more traditional forms of entertainment, take theatrical or even linear broadcast, the activation energy to get somebody to like plan their night out, get the babysitter, go find parking, all the things you have to do to get into a theater or even just show up in your couch at 8:00 p.m. exactly on Thursday, which was when that linear show launched, those are much higher activation energy that's, I think, required. And I think they require a different marketing kind of solution and investment, right? But with people showing up and ready to be entertained, we can present them with new content, make that connection and make it great. But we also found that we want to magnify the conversation that happens when we have one of those great shows. So back to Bridgerton, when people are really, really talking about it and having an exciting time watching that show, our marketing team can basically add fuel to that fire. And that's really effective at extending that conversation and having it influence a broader group of people, maybe who aren't even members at Netflix, and having them go, "Ah, I've heard about the show enough now. I really got to sign up to Netflix and check it out myself." And that's a really important engine for growth for us as well.

Yes. And that makes sense. Let's shift gears to -- I would love to ask you, Greg, about partnerships, which has been a big part of the Netflix story. I can remember when you guys announced your Comcast deal, it seems like a huge sort of coming together of 2 of the 5 families, so to speak. But now you do these all the time. And I'm just wondering, at this stage of Netflix, what are you looking for when you enter into new partnerships. Is that different than it used to be? What do they look like today? And what are the things you weigh in terms of whether you decide to go into a distribution deal or not in a market?

Yes. I mean, there's sort of a set of business criteria, which is probably what you would expect, which is when you think about the effect of the partnership all-in or the specific deal, let's say, all-in, and oftentimes, this comes to play like in bundles, our payments integration, we're looking at what's the acquisition benefit, how does it accelerate our growth, what are the economics specifically of that and all the factors that we have to make sure that really, it's additive, right? So obviously, that's sort of a top-level heuristic or top-level criteria that we're applying to it. We're also applying a sort of user-oriented kind of evaluation, but just the user experience is going to be great essentially. We know we see that in the metrics at the end of the day. So we have a sort of a loop to assess that. But we've learned enough about these partnerships and what sort of needs to be involved in them to have a great user experience, that we're coming with that information at the beginning. And we're able to more and more talk to those partners and convince them based on our experience. So this is what we need to do to make it work for users. So let's -- part of the user journey is a bit of it. But also, we're looking at it strategically too, which is a lot of these partnerships are great ways to talk to a population that we just haven't had a robust conversation with yet. And so you talked about Comcast, I think there was a group of people there that maybe just they weren't as tech forward or they just weren't -- they didn't know -- what is Internet TV, I don't know what that means. And by putting it on a set-top box that they were already using to watch TV, obviously, that's a way to just make that an easier conversation and get people set up. So we're just constantly pushing on those kind of components and really evaluating all of those to determine what partnerships should we do and then also retrospectively evaluate how partnerships are going and how do we need to shift them or evolve them or shut them down, in some cases, when they're not looking for those parts, too.

Any concern at all as you guys look out? I mean you guys are at such a scale. I'm guessing the answer is no. But there's a lot of focus on app store leverage in the marketplace, obviously, very focused on mobile, which you guys have managed to operate around. But even increasingly in the connected TV space, we see these fights between device makers and some of the media companies. So do you spend time worrying about this, something that investors should be focused on? Or do you see this as sort of happening below you?

Yes. I'm not particularly concerned about it. And what -- we talk about the hundreds of people that are focused basically on our device ecosystem. A lot of those folks are focused on how do we support the initiatives, and what our device manufacturing partners are going after, right, and whether that's new features or they have a specific initiative that they're going after. And I think we -- yes, we've developed decade-plus relationships with these manufacturers. There's always tensions in these things. We're trying to understand what they want, what we want. But we've been through those tensions so well at this point in time. Most of those partners, you could ask them to sort of represent our positions, and they would do it verbatim with high degree of accuracy. So mostly, I would say that we've explored all those spaces already, and we've really shifted out of that into sort of how do we have a win-win-win, value for them, value for us, value for the consumer, who's using a device and is a member of Netflix. And I have -- I'm quite confident that we'll be able to keep doing that for those partners.

So there's one more partnership that doesn't exist yet that I would love to ask you about, which is on the theatrical side. We were chatting with Bob Chapek last night about the future of the movie business and the likelihood we're not going back to what existed pre-COVID in terms of windowing and exclusivity. I think everybody would love to see Netflix' movies in the theaters. What's your take on the opportunity there as we see the world clearly changing?

Yes. Well, we are -- I think many of us in Netflix are huge fans of the theatrical experience. It's an amazing experience. It's great to be in a room with much of the people and watch incredible content presented in a high-quality way. But it's a different experience also than being able to watch it at home. And for different people in different moments in time, each of those is relevant. And mostly, the way we think about it is it should be consumer choice, right? So we've been supporting day and date release of movies in Netflix and on theaters for a long time or maybe short theatrical windows. So I would say we're enthusiastic to see sort of a shift in maybe enabling more and more of that for both us and for other entertainment options out there.

Are you optimistic or just enthusiastic?

I think I'm optimistic. And I'm mostly optimistic because it's what consumers want, I would say. And at the end of the day, I think the consumer -- that it's hard to buck that trend for too long, and I think that that's eventually where things go.

Let's finish up in our last few minutes, Greg, on pricing, which obviously investors care quite a bit about. Would you say that Netflix has gotten better at managing the price increase process in terms of retention and understanding timing and sort of what regions to implement at a given time, given that you've been through this now for a number of years?

Yes. I mean like everything we do, we seek to learn and get better at it. So I think that, that applies here as well. And mostly, it's in the case of is listening to members, right? And so they're sending us signals that could be engagement, churn, like a whole variety of signals. And we've gotten increasingly better at being able to interpret those signals and basically understand, okay, when did we -- through the process of investing in more content, more great titles, better product experiences, more conversation with marketing and have created more value for those members. And when is it the right time to go back and ask them to pay a little bit more based on that more value so that we can keep that virtuous cycle going. And so I think we interpret those signals better now, and we'll continue to try and make that better and better as we go through that process in the years to come.

Yes. And when we look out, I mean, I think most of -- a lot of your growth over the next 5 to 10 years will probably come from a member point of view from Asia, given it's the market with the massive population, still relatively low penetration. Do you think about the price dynamic in those markets fundamentally differently than the way you've approached things in the West?

I guess, yes and no. I mean fundamentally no in some sense, which is still about this idea of like value, right? And accessibility is so -- is important to us too because we really do -- we think we're an amazing entertainment value relative to other options that are out there. We want to maintain that like really extreme sense of value. But we also think about accessibility. And accessibility is different for different sort of populations, different affluents, et cetera. And so the part that's same is trying to think about how do we -- what's the right set of features, the plan offering at the right price that we have to go do. And we're consistently learning in this space, for sure, right? So -- and Asia -- I mean, it's not -- we're learning everywhere around the world, but Asia definitely represents some different dynamics that we're trying to figure out and engage in. And it's a fertile space to, really, to see different consumer experiences and try and get good at responding to those. The Mobile Plan is a great example, which we launched and tested in a variety of countries in Asia, and that's really sort of that was a stimulus to get good at that. And we may launch it in other places as well, but it's that kind of thing where we need to do more and more of.

Yes. Okay. And we can plug White Tiger while we're talking about Asia, which I think might have been my favorite original movie out of Netflix.

Well, we've got more coming. Actually, our India team later this week is going to share a new slate of film series, documentaries, reality, stand-up, a whole bunch of writing stuff from India. So there's a lot more to come there, and I think you'll enjoy some of those as well.

Okay. Awesome. Well, listen, Greg, it was great to see you. Thanks so much for your time.

Likewise. Great to see you as well.

Thanks, everybody. Thanks, everybody, for joining us today, and enjoy the rest of the conference.