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

So I'm going to start with you, Wayne, if I may. Obviously, you produced some amazing shows like The Crown, Sex Education and just landed Department Q (sic) [ Dept. Q ].

Have everyone watched Department Q yet?

To seeing...

Me and Larry, there, you should watch it.

on Netflix? So Kevin referred a little bit to the environment that we find ourselves in. And I was wondering, from your point of view, what -- how do you see the production world over the last 12 months?

Well, there's been a lot of gloom and people quite unhappy about the state of the production business, particularly in the U.K. And it's true, there was a -- there has been a period of turbulence. We found particularly in high-end drama getting American presales and sales in Americas has been particularly difficult as we came out of the strikes, et cetera. And there's also a tremendous shift in the industry because our industry was built on -- the British TV industry really was built on creating nonscripted formats for linear TV channels. And the fact is linear TV channels are in the past. And audiences don't want much of the content that we used to make in enormous numbers. So that is changing and people are having to adapt to it. We're having to adapt at Sony to the YouTube is the biggest TV market in the world. The ad money is hurtling towards that. We're probably at a tipping point. So our connection with a platform like YouTube and creators is interesting. But the overall market, I still see for me and my business, which is largely drama in the U.K., we're predicting for the next few years growth. Actually, we've got -- Netflix is a key partner to us. We love Sky. This is going to be a love-in, by the way. We love Sky because for Sky, of course, we retain distribution rights, and we can package that around the world, et cetera. But we're also going to see the likes of Disney, Amazon and Apple have all seen what Netflix have done with British content around the world, and they're all going to follow that. So I, as an optimist, I'm very optimistic about the future, particularly if you're British because British content, as we know, travels like no other content around the world.

And just sort of thinking about the YouTube aspect of it. Where do you think that -- we talked a little bit about viewing there. Where do you think that viewing is going for?

Well, I was quite interested about podcasting, et cetera. We've seen that. I mean I'm particularly interested in that. I'm also looking at territories around the world where YouTube is particularly important. I've got a global job. So for me, a country like Brazil, the biggest YouTube market in the world or India, that's really interesting. And learning, they are predicating what the future will be like in Britain. So we're trying to learn in those markets and working creators there actually.

Brilliant. And finally, before I move on to Cécile, Channel 4 has announced in-house production, good thing or bad thing from your point of view?

Ridiculous. It won't work. I mean those of us who run in-house production businesses or any production business know how difficult it is. And if you're starting where you don't own any IP, you have no institutional knowledge of how to run a production business, it could be potentially disastrous for Channel 4 because it's got limited resources. It's got to adapt to a change in broadcast market, which has been doing very, very well under Alex and it's very focused. This will take focus away. What are you going to be? Are you going to produce drama? Are you going to do nonscripted? If you -- everyone in this room who's done a business case for any production business will know, you lose money for the first 3 years and you probably -- if you've got really great people, you're going to start to making money in 5 years, but not the sizable money that will really dent and help Channel 4 to grow. It's preposterous. It will have a very difficult birth. It will probably struggle through its childhood, and I suspect won't last much longer than that.

So you're remaining equivocal on...

The real thing for Channel 4, frankly, is the government should stop thinking about that or off or whatever. And actually, how do we bring Channel 4 and the BBC together. We've got 5 public service broadcasters in Britain. The rest of the world doesn't have -- you might have one. Actually, it is unsustainable. And the future has got to be surely Channel 4 and the BBC coming together. And we should -- that should be the focus for a new Chair of Channel 4 and a new CEO, I would argue.

And on that bombshell, I'm going to shift gears a little. So Cécile, you've obviously seen some huge notable scripted successes recently with Jackal and very excited to see Mountainhead making a lot of waves. Do some of the points about Wayne's sort of cautious optimism on production in the commissioning market resonate with you?

Look, I love Wayne's optimism. I think it's -- we have to sort of stay optimistic. It's a force multiplier. But look, there's no question it's been really tough. And anybody who's been in the production business in the last few years sort of would echo that. I think it's been tough for a number of reasons. There's less has been commissioned. Although I think I haven't done the numbers, I think if you look back over a period of 10 years, I'm not sure there's less today than there was sort of 10 or 15 years ago. So we had an amazing bubble. Everybody got used to the bubble. And obviously, that is now -- we're sort of not coming back down to volumes that are more akin to those that we experienced 15 years ago. So there's less volume. There's pressure on the license fees. So even though the volumes are probably, again, probably similar to what they used to be, I think the license fees are probably lower. And then on scripted and Wayne sort of touched on that, there's been a funding issue because the U.S. hasn't been co-producing sort of British content nearly in the same way or actually not at all potentially. So all that sort of stays true. I think what we're seeing, I think, Europe is actually coming into some shows. So we've seen that on some of our own sort of programming. So you have to be very entrepreneurial these days and sort of look at how to sort of get things financed unless you're a global player like Netflix is. Having said that, at Sky, if I can sort of bring it back to Sky for a second, we never -- we were never a volume player. So actually, what we've been doing has been very consistent and sort of very steady. And because we're part of the Comcast Group, we're able to be flexible on the funding model. So we've been able to fully fund the scripted shows when we needed to. And equally, when we have a partner like Sony, who really want to retain the global rights on certain projects, we've made those accommodations. It's not the norm. It is the exception, but we've been able to make those exceptions. But sort of looking forward, I think things will settle again. Hopefully, the U.S. will start to come back online at some point sort of this year or next year. So I remain cautiously optimistic because ultimately, great shows will continue to get made, but you have to approach it differently. And I also sort of believe that the production costs need to also come under control because obviously, it's -- if the envelope stays the same, you sort of need to allocate sort of your funding, and it's about capital allocation. And so we need to sort of see the production costs come down and be contained again.

And have you observed any movement in production where the costs have been managed a bit more in the last year?

I mean look, there's kind of a piece of the answer there is also about adjusting the budget to the conceit of the show. Like if you're going to make The Day of the Jackal, that you need a certain level of budget to make that and to make that well. And so some of it also is about commissioning shows that are just fundamentally more contained. And so to you manage your envelope that way. And I've been in the production business for a very long time. You don't make an expensive show for cheap. You have to -- again, it's about sort of being creative about how you make things and to not cheat the audience, right? Because ultimately, you need to make a product that the audience sort of recognizes and of quality and quality, again, is -- has to be defined in relationship to the format that you're producing.

Thank you, Cécile. I'm going to move to Larry actually. So you've obviously had a huge amount of success with U.K. commission content. In fact, I think Ted Sarandos last year was saying that 4 out of your top 10 shows originated here, not to mention the recent global success of Adolescence. So what are your plans and interests in the U.K. market? Are you expecting to invest more here? How do you see it?

Yes, we are. I mean the creative community here is exceptional. And the storytelling that is coming out of the U.K. is just really amazing. So we've grown our investment here. It's our second largest production center outside of North America. We've invested $6 billion -- over $6 billion in the last 4 years on U.K. production. So for us, it's all about U.K. storytelling for the U.K., first and foremost. And what we've seen is when things work in the U.K., we're successful. And then things might also work outside of the U.K., but we're really commissioning with a local mindset for the U.K. audience. But we do expect to continue to grow. We're also not just relying on the creative community here, but developing the next set of creators. We put more than 5,000 creators and production talent through training programs here in the last 5 years, and we expect to continue that.

Which is terrific news for the U.K. There's often a debate where people will say, well, a streamer would never have commissioned debates. Is that something you would recognize or not particularly as Netflix?

You know what, it's great that you asked that question. Maybe this is finally my chance to just debunk this myth. And I understand that there might be people who have an interest in saying we're commissioning for international audiences. But we know and they all know it's just not true. We -- Anne Mensah and her team in the U.K. commissioned Adolescence and Baby Reindeer and Toxic Town for the U.K. audience first and foremost. And their huge success here in the U.K., just what you're describing, Wayne, is what sparked the interest, and we heard Kevin up here talking about Mr. Bates that huge success in the U.K. is what sparked the interest and success around the world. So we are absolutely focused. And that's also true if you're Tinny Andreatta in Italy, commissioning The Leopard or if you're Diego Avalos in Spain, commissioning Casa de Papel, we're focused on the local audience first and foremost. And that's our whole investment approach, which is about local audience. So maybe I can finally put that to rest here to say that we absolutely would have commissioned Mr. Bates if we had the opportunity, and we think our U.K. audience would have loved it.

So is that an interesting take where people feel that PSBs are doing things that are distinctively British when, in fact, you would argue that you might go for some of that same material.

I just want to say that -- am I happy and proud of Adolescence success around the world? Yes, of course. But does it make it any less British? I just don't think so. The same way Fawlty Towers or Planet Earth are no less British because they're globally successful and watched by hundreds of millions of people. And so one doesn't replace the other.

Also, I think what's brilliant, Adolescence, it's sort of a strange critique that somehow you would never commission a show like that where you did. You commissioned Adolescence because on the face of it is not a commercial title, and you give a platform for British talent around the world. I mean it's sort of -- I don't understand that.

We're all confused up here.

I think it's a good moment for you to go to Sarah and talk about you've got a commissioning sort of ticket, which is you make go incredibly well on 5 with some extraordinary successes. But you have a PSB remit. So you have a different set of cards played to you at 5. How do you see that? And how does it work for you?

Before I answer that question, can I just say these are very uncomfortable chairs and these are very bright lights. So far, Wayne said linear is dead, I run a linear channel. Cécile said you make good quality content expensively. I make good quality content quite inexpensively. When you have 6 billion, all that's taken seems to be British. So I'm glad to be forced to answer. Linear is not dead because linear is a means of distribution. It's about brands. It's about your editorial tone and your brand, and we are not linear first or streaming first, we are audience first, and we're very proud to have a brand that understands its audience and caters to it. I'm sorry, I'm not going to -- I can't remember your question, but I want to just respond to those 3 points. There is the most -- we are so lucky to live in this market, this nation that produces so much content and buys the other good stuff. And in foreign language as well as English speaking, we were to write subtitles on Netflix last night, which has educated all of us to watch content with foreign language. So aren't we lucky that we have everything we could possibly want, but it's not just about the big shiny dramas. I mean you surely expect me to say that, they're glorious and I watch them. But it's about so much more this cultural system that we operate in, and that's what public service is for. Now of course, we have dramas too, and we have big and shiny dramas, and we're very happy to put them on Netflix because it means it makes them more famous and has a nice brand on it. And every time we put one of our quite inexpensive dramas on Netflix, it gets the top 10. So the system is working. But we are there for so much more than that. You do distinctly British content, and I applaud what Netflix is there for. But you don't do documentaries about Shetland Isles and you don't do regional news and you never will, you never should. And you don't work with small indies, who are unproven and need to learn. And we do. We have a quote of a 10% regional production. But this year, we're tracking at 45 that we worked -- last year, there were 400 distinct U.K. commissions on our channel from 73 different producers. That's the market that fuels what we can talk about being big and shiny and expensive and successful. And we are such a critical part of it. We're the smallest, but we are noisy, and we should have been noisier over the years because we are helping fuel the funnel that we can celebrate alongside us. That is unique in the world.

So you've got to sustain a lot of genres. I was -- Wayne was talking about the challenge of unscripted, but 5 is doing a fair bit of that.

Yes. I mean, look, we acknowledge. I think one point I will take that the audience habits are changing. They are, and we need to work differently with different platforms and different types of content. But we -- our unscripted is a core part of our audience -- of the appeal to our audience, and it will always remain so. Six years ago, we had 8 hours of drama. This year, we'll have 100. So we are recognizing that you need box sets, you need to migrate audiences to streaming. But we work very creatively with small producers. We tend not to pay for development. We tend to go straight to commission. We tend not to commission. We tend to commission too. We work as much as we can with the various screen bodies around the country. And we're increasingly interested in getting into people that come in television for the first time to help them. So we have a new scheme on drama production, for example, with student writers and directors where we can give them a break that they don't have. When I was growing up, you had regional theater and you had regional franchises, and you don't have that anymore. So if we don't invest in smaller producers, scripted and unscripted, and I don't just mean on screen, I mean behind the screen. I mean the skills and talent, and we talk a lot with the new government, thankfully, about joining up skills, talent and creative ecology. So we still have these exports, then they simply won't be there for the bigger shows. It is sustainable. I'm a little bit sick, to be honest, 18 months into this role of being told that my model is unsustainable. We're profitable, and we're playing our part. It's just that we're only part of the ecosystem that the U.K. has. I've always call it tapestry today. I think I'll call it a mosaic. We're part of a mosaic. Yes.

And we had -- we heard a little bit from Wayne and Cécile about how there's some adaptation to the budgets available for -- to get some great shows out but for less money. How does 5 approach this conundrum? And what more do you think could be done in that area?

So we partner, partner, partner. I hope I don't suspect there aren't many small in this room, but I hope people find us easy and straightforward to deal with. We give quick answers. Our budgets are known. We don't pretend. We are very flexible on second windows and sharing. We like being to Alison earlier called YouTube a distribution platform. That's how we see it. I was amused on the way here, I was trying to work it out. When I was at Channel 4 in 2009, I was involved with the first YouTube deal, the one where Channel 4 always first put its long-form content on YouTube and YouTube took adverts on the side of buses saying YouTube's got telly and nobody watched it. It was brilliant for us because we took loads of money out of it. And Enders ever visionary wrote a report saying, this is the beginning of many broadcasters coming on to YouTube. Well, 16 years later, they were right. My point is it's taken the market a while to understand that you can't just hone your own service. That's not how the audiences operate. You have to take your content and go wherever it is. And that includes doing funding models that work with partners to get maximum distribution. The one call out I would like to do slightly on the inexpensive point actually is there's a lot of lobbying at the moment for drama and for tax credits to be applied to the high-end drama, but to a lower bracket because we are going to have to find a way of making drama less expensively. And the lobbying group, we're very active and very supportive of them have lobbied for the drama between 1 million and 3 million an hour tariff, which probably feels like the lower end of drama. We make it for less than that. So we, and I think I've already said this publicly, are lobbying to for exactly the same principle, but for it to be less than 1 million as well. So then when the dramas that really do fuel, and we've had the biggest streaming quarter ever on 5, when they fuel our growth and when they then go on to platforms like Netflix and others and help fuel their growth, they want to be shot in the U.K. And they're written by U.K. writers and they're directed by U.K. directors. So we can make -- we can pass the cultural test. We don't particularly want to have to go to Malta, Hungary, Spain, nice as those places are. We want to film them here, and we want to bring the skills and talent here. So I think that the role of PSB, and I'm afraid I missed what Tim said earlier, so I hope I'm not contradicting. I hope I'm supporting. We need to take our own fate in our hands and not expect anyone to give us an answer. But we do need the market to recognize what we're here for and to support us. So the Media Act is a brilliant example of that. Prominence is so important to discover our content. Partnership is important. But also things like tax credits that enable us to make content and fuel the skills and talent that then feeds the funnel that makes the mosaic we live in, we really need that support as well.

Thank you, Sarah. So I'm going to...

Feels like the bright lights now.

So I wanted to pick up on something that Wayne said and obviously something from the last panel as well on YouTube. I wanted to talk to Larry actually in the first instance. So YouTube, very interesting. I mean I think Ted Sarandos might have referred to it before as a worthy competitor, which is praise indeed. What's Netflix's approach to the creator economy? You've obviously got -- done some things in there with Jake Paul versus Mike Tyson and the Sidemen series. So how do you embrace or not embrace that creator economy from a Netflix point of view?

Very worthy competitor. I still look at the 80% of viewing on the TV that's still out there to compete for. So I'm optimistic about the landscape there. And look, we always have to earn our audience every single day, and it's no different vis-a-vis YouTube. And we're finding YouTube is a great place to discover talent. So we offer something to talent that YouTube doesn't. We are much better at helping them monetize. So we derisk that user-generated content investment, and we can guarantee them profit and cash flow upfront. We also give them access to a different audience and a really massive audience. And then for our members, we're bringing that content to them. So you mentioned the Sidemen. We've also worked Ms. Rachel or Killer Tony, and we've actually expanded their audiences in a different way. So it's not only a place to find new talent. And Sarah mentioned as local theater is getting less common. We need to go to film schools and festivals and local theater and Edinburgh. YouTube is an amazing place to find new voices and to find new creative talent. So we're using it for that as well.

And Cécile, you're in a really interesting position because you obviously ran YouTube as well and now at Sky. What are your observations? Is there a lot of crossover between the creator economy and TV in your view? Or does it work? Does it not work?

Yes. So I mean YouTube, there is a creator economy, of course, and it's the core of YouTube's how it started. But now it's much more than that, right? It's -- and I think Alison spoke about, it's a distribution platform. And so what we're seeing is Sarah was sort of mentioning your first sort of Channel 4 deal. There used to be a lot of reluctance from what we call the traditional media sector to engage sort of with YouTube. And then finally, it's realized actually it kind of needs YouTube and that YouTube is a mighty distribution platform and that has incredible sort of reach as we all know, and you can't ignore it. And you have to think of it as another window to your content. Now from a Sky standpoint, we're a pay service. So that brings sort of different kinds of options and challenges. But that's what it is, right? It's another sort of window into your content. That's one thing. We're at Sky, very successful on YouTube with Sky News. So we have a lot of audiences that engage with Sky News through YouTube, Same with sports. A lot of highlights, so huge, huge audiences. And the sports team has done an amazing job in sort of tapping into the under 35s through their sort of YouTube, both the highlights, but also sort of bespoke programming that they create for YouTube. And on the content side, it's a lot about including it in the marketing plans, but also starting to think of it as another platform, another distribution mechanism. And then with talent, yes, of course, there's great talent on YouTube. And to Larry's point, you look at it as you would sort of talent coming out of theater or other places. I think the notion that somebody has a huge audience on YouTube and you'll be able to tap into that by bringing them into a traditional kind of long-form format, it's more complicated than that. It doesn't necessarily follow. So you can't make that assumption. You have to kind of, again, think as any kind of casting exercise. So whether talent is right, whether that audience will actually like them doing something different in a different platforms in a different format. So I would caution against sort of making those sort of kind of those judgments as a rule. I think it's -- again, it's another interesting place to look at.

You can't bet on that audience coming over.

No. You can't. You can't. No.

Thank you. And now final question. So a quick fire round, starting with Wayne. I'd like one show on your slate that you -- this is for everyone. One show on your slate, you're watching love and one show on arrival slate, please.

Well, I'll put another plug out for Dept. Q or if you've already watched that and watch This City is Ours on iPlayer, the highest completion rate of any drama apparently on iPlayer ever apparently. It's brilliant. And I love Andor. I think Andor is a really clever show about middle management, which is...

Cécile, what's your vote?

So at the moment, I'm absolutely loving Billy Bob Thornton in Landman. He's -- I mean we have always -- he's absolutely spectacular in that series. And then on Sky, I'm going to -- the one I'm going to go to is a documentary series actually that we launched in 2 parts, Scott Frost Vs. And it's 6 episodes that use David Frost archive to sort of reexamine basically just a number of decades, starting with the 60s all the way to -- it includes -- there's a whole episode on his very famous interview with Nixon, which is incredibly relevant actually today. And then one on the Middle East because he had every single leader from the Middle East on his program from Arafat to Moshe Dayan, Rabin, et cetera. And again, a brilliant episode and quite devastating actually to see how close we got. It was all the way to [ Camp David ] to peace process. So I would -- it's a sort of different kind of series for Sky, but it's been very, very successful. And it's just brilliant to see somebody like David Frost. It's just amazing, amazing broadcaster and who just knew how to create the right environment for people to really open up in a way that I don't think that format exists today. Today, we're a lot more confrontational and polarized and there's a lot of lessons, I guess, in it. So enjoying it hugely.

Thank you. Larry, what's your two?

Well, Wayne mentioned Dept. Q. Thank you, by the way, for an incredible series. So I'll bring up Secrets We Keep from Denmark. If you like Adolescence, this is beautiful people in beautiful homes in a crime mystery, which is really wonderful. And then -- well, to have some fun, there's an Apple show called The Studio. And one of the later episodes, there's an actor playing Ted Sarandos who's just quite -- it's quite an incredible performance. So I've been watching that.

Thank you. And Sarah, the two?

The current favorite on arrival because he doesn't like a bit of Jon Hamm. It's Your Friends and Neighbors. That's great. And actually, I just realize there is a connection because the one I'm going to choose on my slate is also a very British version of British version of Neighbours, The Feud, where you build an extension and neighbors aren't so happy about it and all sorts of dark secrets get uncovered. And actually, it's remarkably addictive. Both of them are at the opposite end of the spectrum, which I occupy, high-end American and lower-end British.

Very addictive on your home life, I'm delighted to say. Great. Thank you so much for an absolutely stellar set of insights. Really enjoyed that. Thank you all very, very much.