Advertising mode is the new story for Netflix's future (Phone Transcript) ====== 海豚君前线报告：长桥汽车 5 月销量大涨 220% YoY，本田合作进展顺利 ====== Dolphin Analyst's frontline report: Longbridge Motors' May sales surged 220% YoY, and Honda cooperation progressed smoothly.
The following is the summary of Netflix's Q2 2022 meeting, and the financial report review can be found in "Netflix: No Thunderous Earnings, But No Need to Go Crazy Either."
Q: What drove the lower-than-expected user churn?
A: The key factor was the popularity of "Stranger Things" season four. We are extremely optimistic about streaming media in the next 5-10 years.
Q: Almost all regions have raised subscription prices in the past year. How does the price increase affect user churn?
A: Historically, whenever there is a price adjustment, there is a slight increase in churn rate in the short term. We will continue to optimize the content and provide better product experiences to help users accept such prices and return to our platform.
Therefore, the Q3 guidance for user growth mainly considers the impact of price increases on user churn gradually diminishing over time.
Q: Why was there only a 1 million increase in the third quarter? How do you view the growth in the second half of the year and the full year?
A: This is mainly due to recent unfavorable conditions, such as higher inflation, the Russia-Ukraine conflict, and chain reactions in Europe, China, and Africa.
However, as the impact of price increases declines, we enter the peak season, and we manage "account sharing," we will be able to counter unfavorable conditions and achieve growth.
Q: How will streaming media platforms like Netflix maintain growth during economic recessions and more severe macro situations?
A: In difficult economic times, we can force users to maintain subscriptions by providing higher-quality and more demand-driven content. For example, "Gray Man," a big-budget action movie, premiered on Netflix last Friday. Normally, consumers would go to offline movie theaters to watch it.
There are also new seasons of "Next 365 Days" and "Cobra Kai," among others. The impact of "Stranger Things" on us is huge, but this is just the tip of the iceberg in terms of the value we bring to consumers.
In addition, we will provide users with various price packages, such as ad-supported packages. Especially in the next few years, we will focus on solving these problems.
Q: Let's talk about the advertising cooperation with Microsoft. Was the advertising space exclusively sold by Microsoft in the early stages? Will you build your own advertising marketing team in the long-term future?
A: We have spoken with brand advertisers and advertising agencies. They want to connect their brand with our video content and place ads. In the future, the types of ads released, loading rates, and ad experiences will make me feel that this is a win-win solution for us.
In the early days, all ads placed on the platform will come from Microsoft agents. Our cooperation with them is complementary, and their technological capabilities are crucial for us.
The long-term cooperation will be very flexible and will be adjusted over time.
Q: When a user switches from a no-ad paid member to one with ads, what impact does it have on the company?
A: We know that users are sensitive to prices. However, some consumers have not yet registered for Netflix, or they have used it for a period of time and then canceled their subscriptions, or they use other users' accounts to watch. These are all our potential users, and sometimes, an advertising-based revenue model can be better than a pure payment-based revenue model.
Therefore, from the perspective of increasing user penetration (coverage) and the unit economic model, launching an advertising package is a relatively neutral to positive approach to us. Advertising-supported packages are therefore a good business model for us.
Q: Can the pricing be considered lower than the current "basic version pricing"?
A: The model is complex, still under calculation, and the pricing has not been decided yet. We will consider user spending habits and consumer experience.
Q: When can we see that the ARPU of the advertising version is better than the current version?
A: It is not certain yet, but we have received strong feedback from brand advertisers, so we are confident that we will launch it in relatively mature advertising markets. We believe that the advertising model can increase our income and profits at the same time.
Q: You mentioned earlier that under the advertising package, content costs may need to be renegotiated with content providers (previously disclosed as 15-20% premium). However, a lot of user views come from Netflix's self-made content. How much incremental cost will new licensed content bring to the overall cost?
A: Theoretically, the vast majority of content viewed by users on Netflix can be included in this advertising package. We are in communication with content studios about the specific details. In the future, we will create a new advertising ecosystem around TV advertising and network TV advertising innovations.
Q: Will the cooperation with Microsoft lead to cloud services or games in the future?
A: We currently cooperate with Amazon on cloud services and we are also an AWS cloud infrastructure partner. However, we will seek to collaborate with Microsoft on other businesses besides advertising.
Q: Let's talk about how to solve the problem of account sharing?
A: Currently, the "account sharing payment package" has been implemented in three countries in Latin America, and five more regions will be added.
There are mainly two ways, one is to allow users to pay to add some shared account family members, and the other is to allow users to pay to add new shared account families. (The second method has been implemented)
Our intention is not to stop users from sharing, but to pay a little more for different forms of sharing. Next year, we will continue to promote the first method.
Q: Will this method cause some users who leave home for travel or business unable to use the platform due to IP address changes?
A: We will try to adopt a user-friendly package model, which can ensure that users use the platform legally and also ensure our revenue generating ability.
Q: Will the advertising package and the account sharing package be launched at the same time in 2023?
A: These two products are independently developed. Users who share accounts from others are because they have not seen the value they want from Netflix's current content (so they choose not to pay), while the advertising package is to help us cover more people with lower payment levels. Q: How is the content performance?
A: Our production team is excellent, constantly producing high-quality content such as "Stranger Things", "Bridgerton", and "Squid Game". This year, 35 original contents were nominated for the Emmy Awards, including three Best Drama nominations ("Ozark," "Squid Game," and "Stranger Things"). These three series are also the most-watched on our platform.
This Thursday, Nielsen will announce that our viewing share is 7.7%, which is the highest level ever.
Q: How do you maintain high-quality content and scale?
A: I believe we must focus on working with great people. The expected content expenditure this year is 17 billion USD. In the past 5-10 years, we have gradually shifted to self-produced content, and currently, 60% is self-produced content.
We are gradually emerging from the impact of the epidemic, which has increased our production costs. For example, the fourth season of "Stranger Things" had a lot of additional costs due to continuous shutdowns and delays.
It can be said that 5%~10% of the total expenditure is the cost caused by the epidemic.
Q: Given multiple acquisitions and exchange rate fluctuations, is there an updated guidance on operating profit margin this year? Or is it still 19%-20%?
A: We spent 150 million US dollars on restructuring and do not expect any further increase. Assuming there are no significant changes in foreign exchange, the expected operating profit margin for this year is still maintained at 19%~20%, with the appreciation of the US dollar being a significant disturbance factor.
Q: In terms of cash flow, can we achieve 1 billion free cash flow this year, and will it increase next year?
A: It will continue to grow next year because we have some cash expenditures that have been advanced to 2021-2022.
Q: What is the most exciting movie and TV content for the second half of the year?
A: "Gray Man", "Knives Out 2", "Umbrella Academy"
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