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Netflix (NFLX)

Q1 2011 Earnings Call

April 25, 2011 6:00 pm ET

Executives

David Wells - Chief Financial Officer

Deborah Crawford - Vice President of Investor Relations

Reed Hastings - Founder, Chairman, Chief Executive Officer, President and Member of Stock Option Committee

Ellie Mertz -

Presentation

Operator

Good day, everyone, and welcome to the Netflix First Quarter 2011 Earnings Q&A Session. Today’s call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Ellie Mertz, Vice President of Finance and Investor Relations. Please go ahead.

Ellie Mertz

Thank you, and good afternoon. Welcome to the Netflix 2011 Earnings Q&A Session. We now start our financial results for the first quarter at approximately 1:05 p.m. Pacific Time today. The shareholder letter and the Q1 financial results and the webcast of this Q&A session are all available at the company's Investor Relations website at ir.netflix.com.

As is our standard practice, this call will consist solely of Q&A, and we're going to conduct the Q&A via e-mail. Please email your questions to ir@netflix.com.

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 18, 2011. A rebroadcast of this Q&A session will be available at the Netflix website after 6:00 p.m. Pacific Time today.

Now let's move directly to questions. We've organized the questions by topic design, and we'll start with content questions. Here we go.

Question-and-Answer Session

Ellie Mertz

As you acquire digital content rights, what level of competition are you seeing during the negotiation?

Reed Hastings

There's a substantial level of competition, as you would expect, not only amongst the online players but against cable networks and sometimes in partnership with cable networks in the window sharing. So content owners want to get the best price for their content as you would expect, and they're pretty sophisticated about making sure that they've got all the possible offers on the table.

Ellie Mertz

Related question, how much risk is there that Amazon will outbid for Netflix for digital rights to Starz content?

Reed Hastings

I'm not sure that Amazon specifically is a different risk. I would say, in general, Starz, like any other content provider wants to get the most money for their content. The Starz deal is non-exclusive today so it could be across a range of providers, it could be a single. But I don't think I'd particularly single out Amazon as a risk factor relative to, say, Hulu Plus or Dish or anybody else.

Ellie Mertz

In the past, Reed has commented about shutting down Red Envelope and Netflix’s lack of interest in producing content or licensing previously unreleased content, but they've bet on creativity and was outside of Netflix's circle of confidence. How can you reconcile these previous remarks with the recent move to invest in the House of Cards series?

Reed Hastings

Well, there is a slight shift there, which is we're willing to try a little bit more riskier work than we've done with a little bit of our budget, and then we're going to see how it goes. So sort of how we approach international, when we tried Canada first before getting too committed. And our theory is that with serialized content, we may be able to build an audience very effectively because if you -- with on-demand, you can get back to the first episode as momentum around the series builds. I don't know if it's anything we'd bet the farm on, but we're certainly willing to try it with a small percent of the budget in House of Cards and then 2 or 3 other smaller ones that we would look for. And if we're successful with it, then we would expand our circle of confidence a little bit more, a little bit more. So we'll take it step-by-step and year-by-year.

David Wells

To add to that, this is David. In the House of Cards deal, it was a prepackaged deal that came to us. We weren't looking for -- out there looking for creative talent or directors or a script. It's a small nuance, but it was an important one for us and the fact that we weren't having to manage the larger part of the creative process.

Ellie Mertz

An additional question on House of Cards. Are you seeking to buy domestic or global rights to House of Cards? Is your intent to keep House of Cards exclusive to Netflix? Or actually presenting the series on Netflix, will you look to sell subsequent lengths to other cable or broadcast networks or online services?

Reed Hastings

Well, House of Cards doesn't start until the fall of next year so it'll be a couple years out before we are faced with those decisions, and we've licensed it for multiple territories.

Ellie Mertz

Okay. Press speculation puts your spend on Mad Men at nearly $1 million per episode, which seems to be lower than recent syndication deals for procedurals, but higher than deals for some other low profile, serialized series. Why did you just decide to pay for exclusivity? And should we think of your Mad Men deal as typical of some other TV deals you may be doing going forward or was it the unique case?

Read the rest of this transcript for free on seekingalpha.com