Netflix Inc (NFLX) 2009 Q4 法說會逐字稿

Welcome to the Netflix fourth-quarter earnings conference call. Just a quick reminder, today's call is being recorded. At this time, I'll turn things over to Ms. Deborah Crawford, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you and good afternoon. Welcome to the Netflix fourth-quarter 2009 earnings call. We released earnings for the fourth quarter at approximately 1:05 PM Pacific time today. The earnings press release and the webcast of this conference call are available at the Company's Investor Relations website at IR.Netflix.com. In addition, as noted in the earnings press release, management's commentary on the quarter's results is also available at our Investor Relations website.

This conference call will consist solely of Q&A. As we have done for the past several quarters we are going to conduct Q&A via e-mail. Please e-mail your questions to me at Dcrawford@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 25, 2009.

00 PM Pacific time today.

Before moving into Q&A, I would like to turn the call over to Reed for some brief opening remarks.

Thanks, Deborah, and welcome, everyone, to today's call. As you can tell from our press release and from the commentary we posted on our website, Q4 was a great quarter. Over one million net new subscribers, strong earnings and a significant expansion in streaming. And as our guidance for 2010 indicates, we expect the momentum to continue.

So with that, let's go directly to Q&A.

The first question is from Steven Frankel at Brigantine Advisors. Is the bounty paid to the game platform manufacturers materially different than that paid to other customer acquisition channels? Is it higher or is it lower?

Steven, we don't disclose the individual deals, as you probably would expect, but what you can see is that as we've expanded with the various CE platforms, including the game platforms, that our subscriber acquisition cost has continued to come down nicely, so from that you can intuit that there's no significant model shift.

Next question also from Steven Frankel. Is the decline in fact driven by more declining ad rates, increased brand awareness or reduction in the bounties you are paying for customer acquisitions?

Again, it's Reed here. Mostly brand awareness and the improvement in the product. The products, fundamentally, the service is better than it was two or three years ago because of the streaming, so that increased attractiveness makes it easier to sell, if you will. That combined with the large scale that we're operating is what's driving down SAC as opposed to some change, say, in the display ad markets or outside factors.

Final question from Steven Frankel. With HBO, Starz and Showtime so focused on original programming do you expect that as their respective studio output deals come up for renewal that they will be less willing to lay out large amounts of cash potentially opening up content for you to acquire?

On the first part, they've had great success with episodic, first HBO, then Showtime and most recently Starz where Spartacus just launched and has been a huge success for Starz. It hasn't lowered their appetite for movies. As an example, HBO pioneered episodic probably seven, eight, nine years ago and they've continued to renew their deals and be very focused on movie content. And we're focused on being a distributer for those services. We are a distributer for Starz now and we would like to be for Showtime, HBO, and Epix. So that's the relationship that we want as opposed to trying to bid against them. It's just not necessary for us.

The next two questions are from Youssef Squali at Jefferies. Will you be renegotiating content rights with the studios along the lines with what you've done with Warner Brothers for day and date releases? Help us understand the cost benefit to you.

I'll broaden the question slightly to the general 28 day question, which is why did we do the Warner deal? I don't think it impacts the streaming directly, but with Warner Brothers they wanted to create a window to improve sell-through. As you all know, in the book industry there's hardcover books for sale for a while and then paperback, and that's a proper profit maximization strategy. Then they, quite reasonably, would like to have DVDs for sale at Amazon, Wal-Mart, Best Buy, etc., for some period of time before they're available for rental. We were willing to agree with them to work within that system which we hope and they hope will improve the DVD profits and the DVD ecosystem. And for us, most consumers, they're not sure if DVDs come 90 days after the theatrical release, 120 days, 150, 180. It's all over the map, it constantly changes not only between studios but also between specific releases, so there's not a high expectation of any perfect day when it's supposed to be out. There is potentially competitive risk if redbox and others continue to be able to have availability day and date. And it certainly appears that what Warner is going to try to do and the other studios is to have us and the kiosks fundamentally at the 28 day which creates the window for the studios.

Video stores, we're not sure what will happen there but they're closing so quickly it may not be that relevant in the next couple years and the kiosks and rental by mail together could create that window. The advantage to us in doing the deal is cost savings. Warner has given us a huge number of copies at the 29th day at a very attractive price so we're able to fulfill all of the consumer demand. And then we're able to use those savings to pour that into more streaming content so it's really a win all around in terms of what we're doing and that's why we're looking forward to expanding that with other studios over the next two years as our deals come up.

The next question is from Youssef Squali. On the Wii deal, what's the percentage of the total Wii install base that is actually addressable in that relationship? Arguably you need connectivity to stream content which many older devices don't have.

Actually that's one of the amazing things about the Wii is that 100% of the devices include Wi-Fi. So of the 26 million installed base, 100% are addressable by Netflix, so we're very excited about them.

The next two questions are from Ralph Scharkat at William Blair. Can you talk about Netflix digital content acquisition strategy as it relates to new content? In other words, is it possible to get digital content closer to DVD release or possibly longer term getting DVD windowing rights? What are the business model pros and cons for offering newer digital titles?

We're not terribly likely to have equivalent to DVD streaming content in newness, in the service. And that's true for, frankly, any subscription service including HBO, Starz, et cetera. So the big advantage that Netflix has competitively is we can offer this incredible subscription with the new releases on DVD and vast catalog is potentially available for streaming. We fit into the subscription TV window in studio parlance which is the same window with HBO and Starz and others. And within that there's a lot more content that we can get that we haven't yet licensed which is fundamentally us writing bigger and bigger checks to be able to purchase more and more content which is coming along nicely. So I would say the strategy's not particularly focused on how do we break through to get the newest new releases on streaming. It's much more how do we get every TV episode, every movie ever made, vast catalog, an incredibly rich catalog, and then to use our personalized merchandising to figure out which parts of that are relevant to each consumer so that when they turn on their TV or they go to the Netflix website, the 20 or so movies listed are 20 movies that consumer is just dying to watch.

Second question from Ralph. Can you talk about the subscribers that were added this quarter in terms of how many were purely streaming digital subscribers. Or perhaps more broadly, are you seeing any measurable mix shift to subscribers renting less DVDs and converting to streaming only?

Ralph, all of our subscribers pay for hybrid service, so they get both DVD and streaming and nearly all of them also take DVDs. So they really use both. And again, on DVD we've got over 100,000 titles so it's just incredibly comprehensive, so you can see why someone would do that.

In terms of the substitution question that you asked, our long-term model is to be able as a percentage of our cost to pay a little bit less each year on DVD and Blu-ray as a percentage and to put more and more money into streaming. And that's where you'll eventually see this substitution. We're not able at this point to be conclusive about any substitution that exists because we don't have a good control set of subscribers that don't get streaming. So when we look at it we're very happy with the effect streaming is having but it's mostly coming in terms of additional growth. That's the one we see directly which is it gets lower SAC and lower churn, more than it is a cost substitution. But as you can tell from our P&L and our margin structure, we're able to get enough digital content to have significant expansion in streaming and we're moving along each quarter and getting more and more content.

The next three questions are from Aaron Kessler of Kaufman Bros. It doesn't appear that you were as aggressive as you would have liked to have been in terms of purchasing digital content in 2009. What prevented you from acquiring the rights to more content in 2009? What is the outlook for availability of content in 2010? And any comments or concerns that the studios have on Starz licensing digital content to Netflix?

There's a couple key questions in there. We're very happy with the content we've been acquiring. It's a small part of the content for streaming we eventually want to have but it's enough content that the percentage of subscribers viewing or streaming has significantly increased. In one quarter we went from 41% to 48% of our subscribers. And remember the subscriber base is growing over that time also. So I know we don't have everything that we want but we got a ton of content for subscribers and they're super happy with it. And again as we write checks and are able with a larger P&L to write larger checks we'll get more and more content.

In terms of Starz specifically and Starz Disney we don't have any reason to believe there's going to be any change in that in the short-term. That's working well for us, we've got a good agreement in place. In terms of the long term, we're not dependent on any one content source particularly. The strength of Netflix is to have a very broad range of content so we're not particularly troubled by those press reports.

Let me supplement Reed's answer and say if with perfect foresight we had been able to forecast profit performance of the business and the subscriber growth, we would have landed within the range of guidance and we would have spent to acquire content roughly the amount of money we had forecast. The business outperformed and we weren't able to forecast that accurately and as a consequence we dropped more profit to the bottom line in Q4 than we had planned. If we planned for it we would have managed to the 10% number and spent more on content. So perhaps your question in part comes or is related to the outperformance in the quarter and that narrowly is a planning related issue.

And that's a great point, Barry. And for investors, typically, it's all a little variable, but it's at least six months from when we start to talk with the studio or network about a particular set of content to when a deal is signed and the content is flowing. So it's not stuff that you call up and 30 days later you spent more money on a P&L basis. These are long term deals and each one takes quite a while to negotiate and at any point in time, we're in negotiation on a very broad range of content.

Next question from Aaron. How did PS3 launch compare to Xbox 360 realizing you can't give any specific numbers?

Aaron, PS3 was a huge success for us. Its advantages are that it's Wi-Fi built into every unit and you can use Netflix without being part of an add-on subscription like LiveGold. Its disadvantages are that it's got a disc that we have to mail to the consumer. Once they got the disc it's very easy to use but that does introduce a delay. But we're super happy with the traction that the PS3 has had and then in the fall we'll be offering downloaded option directly in the PS3 for the PSN network.

Finally from Aaron, what data are you looking at that suggests streaming is the big reason for lower churn -- i.e., exit surveys?

No, we're actually looking at retention data, the inverse of churn, for specific cohorts of customers segmented by behavior. So there's some portion that don't stream, there's some portion that are engaged in hybrid behavior, there's some portion that stream only and I'm looking at year-over-year comparisons in Q4 of retention behavior by subscriber period. First month and individual months after that over their entire life.

The next question is from Daniel Ernst at Hudson Square Research. Roku said this week they had sold 500,000 boxes, an impressive number. I assume most of those have connected to Netflix. If I added up all of the direct to TV options you have, Roku, LG, Samsung, Sony, Xbox, etc. , can you give me a sense of how many direct to TV Netflix homes there are?

Daniel, I can't give you a direct sense. For one thing, there are many people who use a laptop and then use an HDMI cable to a TV and that shows up as laptop usage. Then there's the class of Mac minis where people do a similar thing which shows up to us as computer based usage and it goes to the TV. So you really don't want to think about it as the screen size. If the screen size is 12-inch it's one category and the screen size is 36-inch it's a different category. When we thought about this over the last year, it's where we came up with the metric for your benefit, for the benefit of investors, which is the percentage of subscribers that we're streaming in the quarter and taking advantage of it. And again, the actual screen size is not the main factor.

The next question is from Michael Pachter at Wedbush Securities. Subscribers grew by 2.88 million in 2009 yet guidance for subscriber growth ranges from 3.23 million to 4.03 million. Does guidance incorporate the introduction of a streaming only service during the year and if so, would you please break out by-mail subscribers expected compared to streaming only?

Michael, there's no formal plan nor is it included in our guidance to introduce streaming only but nor do I think it would change the forecast. In other words, if we thought it would open up an entire new market of course we would do it. We look at it and from our work with our subscribers and at $8.99 the hybrid is just so incredibly powerful that for now we're just going to ride that horse, concentrate the brand proposition on that.

Just one minor caveat, by way of clean up. The sub guidance is for domestic and international. International is very small. International will be streaming only, domestic will not have a streaming only product. And I want to emphasize international is very very small.

The next question is from Mario Cabelli at Marathon Partners. Could you break down at all where streaming is coming from, PC, Xbox, Blu-ray players, Roku, et cetera? If not are there any standouts in the mix that might be of interest in the next year?

Mario, all of the devices that you would think are significant that have big install bases which are laptops, Windows and Mackintosh, and game consoles are very big. Next big category are Blu-ray because we got started early and that's continuing to grow really well for us. When we look at the three- or five-year picture, being built into the TV is an obvious winner. We think that most TVs, well almost all Blu-ray players sold this year, 2010, will have Internet connectivity and Netflix. A substantial fraction of TVs will have Internet connectivity and almost all of those will have Netflix. And within two or three years, my sense is Wi-Fi is so inexpensive to add to TVs that they will be in every screen, and we believe that Netflix will be part of that. So long term picture really driven by TVs, Blu-rays, but in the short term video game and laptops are big contributors also.

The next question is from Ben Rose at Battle Road research. Will Netflix simply absorb the growth margin improvements that occur through a rising percentage of streaming versus DVD shipments or can we expect the purchase of new Hollywood production to offset such growth margin gains?

Hopefully we'll see it coming in which case we'll reinvest it in improving the quality of the user experience in more content.

And next, or at least this year, we're targeting 11% operating margins and we'll take it year by year. But there's a pretty big prize out there and if we can reinvest additional margins essentially saved in the more content, that seems the smarter thing for us to do in the next few years.

The next question is from Mary Ann Wolk at Susquehanna. The year-over-year decline in SAC was much lower than we've seen in the last few years. Should we anticipate positive growth in marketing spend per subscriber going forward and how does the marketing for Wii affect this?

If you look over the last three or four years, marketing has declined as a percentage of revenue each year. And as our revenue grows, we think that will continue to happen, including the special Wii marketing that we'll be doing, so that's included in our model.

And then linking back to Reed's comments earlier in the call, he observed that one of the drivers of declining SAC was organic growth which was tied to the quality of the service to the extent that we're able to improve the content offering and be a beneficiary of more platforms capable of streaming content to TV sets. And that should be a boost for organic growth which would be a plus for subscriber acquisition costs.

The next couple of questions are from Brian Fitzgerald at UBS. It looks like your DVD library is pretty consistent at about 100,000 titles, while streaming titles are up from roughly 12,000 in the summer to 17,000. How should we expect that to grow going forward? Would you expect 30,000 by year-end?

Brian, I should have avoided publishing the 17,000 update because it gets everyone focused on title count, and as you can imagine, we could quickly license if we wanted to 100,000 irrelevant titles. So you really don't want to use title count as a proxy for attractiveness of the service. If we had a thousand of the biggest titles, that would make a much bigger difference than 10,000 others. The substitute for title count that is more valid to think about is the percentage of our subs that are streaming. The way that increases is by adding more content, more platforms, better user interface, all of those coming together. And of course that metric moved up from 41% a quarter ago to 48% this quarter so we're really thrilled with the progress of that and we're going to continue to push content in. So think of it as, as we put in content, streaming content, as we get the user interface better, the platforms all of those drive that up and we're trying to back off of title count as a significant metric.

Second question from Brian. Regarding the outlook for content acquisition, are there discussions with Showtime, HBO, or Epix for their film content?

I guess the question is are there discussions ongoing, and we have discussions with everybody. So a very broad range but that doesn't imply that there's anything close on any of them. It's just ongoing set of conversations with a wide range of networks and studios.

The next question is from Imran Khan at JPMorgan. You bought back 7.4 million shares last year. Do you have any optimal numbers in your mind going forward?

I'm trying to think how I want to answer that. We're going to be active acquirers of stock this quarter and I anticipate that we'll continue to purchase shares throughout the year. I have in mind we as a management team and our board think about using cash like we would any other productive asset. There's some minimum amount of cash we want to keep on the balance sheet and then we want to smartly deploy all of the rest of it. And if we can't deploy it in the business then we will deploy it to repurchase shares provided that the share price at which we would repurchase makes sense from an IRR perspective. Now, if you're optimistic about our ability to grow the size of the market and the subscriber base and future profits, you've probably got some pretty aggressive price expectations for the stock. And if you don't, you probably don't. Obviously we're pretty bullish on our ability to continue to grow subscribers, revenue, profit, free cash flow, so we've got some pretty aggressive price points at which we're willing to acquire.

The next question is from Scott Devitt at Morgan Stanley. To what extent do you believe the ability to update ones queue via iFlix, Flixster, and most CE partner interfaces has or will change Netflix website traffic patterns as measured by third party services?

Scott, that's a nice oblique way to ask the comScore question. That's a credit to you. I'm not sure how much. We'll get more and more viewing from devices. There's not that much queue additions per se from devices but certainly your point is right which is if someone is only measuring Web interaction for Netflix they're going to miss more and more of the picture over time, and that may contribute to a difficulty for web measurement firms in terms of measuring Netflix accurately.

We're having some technical difficulties. My computer froze, I apologize. The next question is from Nat Schindler at BofA Merrill Lynch. What was the cause of the large Q-over-Q step up in capex and what are your expectations for capital expenditures in 2010?

It's Barry. Let me take the 2010 question first. I think they will be roughly flat. They were flat '08 to '09 and '09 to '10 I think they will be roughly flat. It depends a great deal on how successful we are in pushing some of our IT infrastructure into the cloud. The answer with respect to Q4 is, as I said in my comments, we're busy investing in rental return automation for our ops centers, our hubs, and that was the largest single capex expenditure in the quarter.

Second question. What do you expect for the quarterly interest expense going forward?

The interest expense is fixed and the yield on the bonds was 8.5% and we sold them at par.

There are three questions from Mark Mahaney at Citigroup. First, what kind of response, if any, have you sensed from your subscriber base with regards to the 28 day sales window, any complaints?

Mark, no material complaints. Again subscribers are just not that aware of when DVDs come out relative to theatrical. The first title that's so affected is "The Invention of Lying" which is just hitting. So we really, even if there were complaints, they wouldn't come up yet. But from everything we've done before deciding to do this and seeing the results afterwards we're very happy with the decision.

This is Barry. Let me just chime in and say we have frequently spoken about the rental mix of new release versus catalog, and in the most recent quarter I think catalog was 73%. So the new release was 27%. And some people have speculated that that's not a true measure of demand on the subscriber base, that if we released queue demand by street date we would see an entirely different picture. But in fact we see exactly the same picture. queue demand for new release in December was 27% which is the average disc shipments in the quarter. So you ought not imagine that somehow we're frustrating demand and that's the reason that we primarily ship back catalog. There is no data to support that conclusion.

Second question, currently what's the biggest obstacle to getting more streaming content?

Money.

Third question, what caused the bump up in free subscribers in the quarter?

Typically, each Q4, more than our other quarters, is back loaded and so there are more subscribers in their two week free trial at the end of the quarter. So it's just a timing thing that's true each Q4.

And then if you add on top of that the year-over-year accelerating growth, you'd see a shift towards free.

Great. Next question from Sandeep Aggarwall at Collins Stewart. As we get more subscribers signing up because of streaming can we see churn going down even further?

It certainly is possible that as consumers use the streaming more and more they end up having a more consistent relationship with Netflix rather than, say, turning it off in the summer and coming back in the fall. But it's also possible that it's the other way, that we get a broader demographic of subscribers that come in and then they're very comfortable going out for a few months, going on, going out. So I would advise you to try to really focus on the net additions in the growth rather than the SAC and churn because that combination isn't the most material part of the business. It's really the net additions that I focus on.

Second question from Sandeep. By when can you have streaming titles more than 35% of total titles you carry?

Sandeep, if we had chosen to we could have had that years ago because we would have taken the 35 smallest titles, "Such and Such Yoga Studio, blah," and had it. So again title count can be super misleading. What you really want to ask is when are we going to have two-thirds of our subscribers streaming? When is the content so good that two-thirds of our subscribers choose to stream. And to answer that question for you, I would guess about a year and a half just based on the current trends of what we've seen and growing.

And I would think you'd also, I've heard you observe in the past that it's not just about the content, it's also about the platforms. So it's about building the ecosystem around streaming, and we've made a tremendous amount of progress in 2009 and we'll continue to in 2010 with respect to platform growth. And so that makes a larger investment in content economical.

The next couple of questions are from Douglas Anmuth at Barclays Capital. Q4 content acquisition was the highest it's been in two years. Should we think about that as a one-time step up related to the new Warner deal or is that more of a run rate going forward?

More the latter than the former. It had a lot to do with moving out of rev share in Q4 and back into rev share in Q1, and timing of payables coming out of Q3.

Second question from Doug. Curious to know why there is no on-screen presence for the Wii. I assume this is for contractual reasons with Sony?

Probably means with Nintendo. But yes, that's their preference on the way the system is to operate, is will be like any other game and we'll go off and market the service as an incredible Internet video streaming on the Wii.

The next question is from Michael Olson at Piper Jaffrey also with regard to the Wii. Wii is certainly a larger installed base than the other consoles but how do you feel about the Wii demographic versus the Xbox and PS3?

We'll know a lot more after we launch, but I think it's certainly true that the PS3 and Xbox, because they're more expensive higher-end boxes that do high-def, has more video intensity. So the question is the Wii installed base is significantly larger then how do those wash out against each other. We look at all three as just great opportunities for us and we're continuing to push forward on all three.

The next two questions are from Jeetil Patel at Deutsche Bank Securities. What do the demographics of the new customers added in the past year look like relative to the existing subscriber base?

Jeetil, I don't think we know of any -- I'm looking to Barry -- of any big change in the demographics. It's people who love movies and TV episodes and that's pretty broad, so we're getting the benefit of that.

And do your newer customers have any different propensities? In other words higher streaming usage, lower/higher churn, two DVD rental plan, lower utilization?

I would say over the last three years, we've continued to gain confidence that there's great competitive moats in commercial value and profits in our lower-priced plans. So if you look at us four year ago we were only the $17 and $18, three out. We got into the $9 one out, we expanded and we've continued to do that, driving low prices, large subscriber base and substantial profits because it's, frankly, a more defensible way to hold onto those profits. So continuing with that trend, more and more new subscribers are taking the $8.99 hybrid to rent all of the DVDs you want, one at a time, and all of the streaming you want. And you see that reflected in ARPU. And again we see that as a competitive strength which is we can make money at these price points and it's hard for anyone else to attack us and be able to do the same thing, so it's a scale advantage that we're investing in.

And you see that advantage translate in terms of profit in the gross profit per average paying customer. I'm doing this from memory, I think it was 4.96 in the quarter, and you have to look back two years before you find profit-per-sub number that's actually higher. So notwithstanding the lower price points and the investment in streaming, the profit dynamics of the model, the scale advantages that Reed just spoke about, are clearly present.

The next question is from Jason Helfstein at Oppenheimer & Co. Have you started to negotiate with studios for international streaming rights and if so how are prices for streaming likely to compare to US prices?

Jason, it's unclear how the pricing will work out. It's something we're still experimenting in and looking at. So we'll be able to talk more about international in the second half of the year.

The next question is from Mark Harding at Maxim Group. Does full-year 2010 subscriber guidance include expectations from an international launch? If so can you provide any color about a likely country service offering or pricing?

The narrow question from modeling perspective is yes but it's really small.

And we don't plan on giving any more information about what country, what price plans, what timing until we launch in the second half of the year.

And we're doing that for competitive reasons, not to be difficult.

The next questions are from Tony Wible at Janney Montgomery Scott. How do you balance the need for cash for digital rights and repurchases? What is your willingness to increase leverage?

The first priority is to improve the service because that virtuous cycle drives all kinds of good things -- subscriber growth and revenue and profit and free cash flow. And after that, if there's surplus cash we think about repurchasing the stock. We are growing free cash flow by, in round numbers, sort of a third each year. And so we have ample opportunity over time to go back to the capital markets for more debt and maintain the same amount of leverage in the business as the business grows and the streaming -- I don't want to say the streaming service -- as the hybrid service becomes more mature, as we acquire more content, as we gain more scale and the business becomes more predictable, then we might think more aggressively about slightly increasing the amount of leverage on the business. So we're 1.3 times when we close the transaction; is 2 conceivable? Possibly, but I don't foresee a capital markets transaction in the foreseeable future.

And Tony your question implied some tension between digital content acquisition and repurchase, which doesn't exist. The digital content is not a big cash advance oriented so we're P&L constrained in terms of generating profit as opposed to cash constrained on the digital content.

Second question from Tony. Was the sale of Roku recorded as a gain this quarter?

It was recorded as a gain. You can see it in the statement of cash flows and you've seen it in our SEC disclosures. Investment was carried at $5.7 million. We booked a gain pre-tax of about $1.7 million after-tax. That translates to $1.035 million, on an EPS basis equates to roughly just shy of $0.02, rounds up to $0.02.

Next question is from Heath Terry at FBR Capital Markets. Are there any reasons -- legal, technological, et cetera -- that you couldn't develop a streaming application for the iPod? Would your current streaming service work on the device?

Heath, we haven't yet done or submitted an iPhone application, so we're optimistic that post the Google voice brouhaha it would be approved, but there's no way of knowing in advance what Apple's stance would be on that. And of course that application, if it works on the iPhone, would work on the iPad. It's not a huge priority for us because we're so focused on the larger screens. Until we get our TV ubiquity and our Blu-ray ubiquity -- and we're getting close on video game ubiquity -- then we would next turn to the small screen. It's just not a primary movie watching. So it's something we will get around to but it's not in the near term.

Second question from Heath. How many of your studio relationships come up for renewal this year?

Heath, think of it as there's a ton, I don't know, over 50 content deals so it's not one per studio.

Hundreds.

It's hundreds of content deals. There's individual sets of content that are negotiated and priced with varying durations. And of course we're careful to make sure that they are fairly distributed and staggered in their expirations so that we can manage it to a fairly steady flow of content coming in and us buying more and more content.

Next question is from Jim Friedland at Cowen & Company. The rate of decline in ARPU has slowed over the past four quarters. Is it reasonable to assume that as the streaming catalog and Watch Instantly usage grow, ARPU will trend towards $8.99 or will you introduce multiple pricing tiers for different usage levels of streaming content?

Jim, the thing to think about is the Blu-ray, so we're a little over 10% with Blu-ray and that's a $2 supplement. And so there's the trend towards the $8.99 but for those subs that want Blu-ray it's $2 more so $10.99, and that gives a little softening effect on the ARPU decline.

The next question is from Barton Crockett at Lazard Capital Markets. With regards to pay TV rights. Will Netflix seek to bid against pay TV networks such as Starz for exclusive rights to new movies in the pay TV window?

Barton, at this point we're looking to try to work with the existing pay TV services, Epix, Starz, HBO, and Showtime, and to be a distributer so that we're writing them big checks, partially because that includes all of their amazing original content. So that's our primary strategy at this point.

The next question is from John Blackledge at Credit Suisse. After console deals, where does growth come from in 2011 and beyond?

John, that's a great question that we ask ourselves too which is the incredible accelerating growth that we've seen in the past three years, is it mostly linked to the expansion first from streaming on laptops and then to the devices that have large installed bases. And we're frankly just not sure. That is one thesis. The other thesis is we're on the beginning of the streaming adoption S-curve and that we'll continue to grow into the installed bases. That is, all of our subscribers have laptops to watch movies on and many of them have Blu-ray -- Internet-enabled Blu-ray players -- so we may be able to string that together. We'll know more in the second half of the year as to the shape of those curves. But even in the more conservative case, we know in the mid point of our guidance for the year we're looking at about 30% subscriber growth annually which is phenomenal.

Just to supplement Reed's response, he made, I think, the most important point. A minor point links back to an earlier observation of his which is that Wi-Fi is becoming ubiquitously available in TV sets. And so game platforms and other devices, sort of Gen 1 of the technology, and it evolves into a more general purpose device, accessible by anyone in any competitive service, but also accessible by Netflix. So if every television set purchased in the United States in 2011 can connect to the Internet, they could all be Netflix subscribers.

It's a great point, Barry. In the optimistic case we'll ride the broadband to the TV market which will grow hugely year after year after year for the next ten plus years.

The next question is from Mark Mahaney at Citigroup with regards to household penetration. Can you give us the updated numbers for Q4 for San Francisco Bay Area and rest of country.

Bay Area in Q4 was 22.6%, up from 21.2%, and rest of country was 10.8% in Q4, up from 9.6% in Q3.

The next question is from Nat Schindler at Merrill Lynch. Long term, can you sustain unlimited streaming with an $8.99 price point?

We're not sure. It depends on how many subscribers one has because the content is mostly fixed cost to produce and to buy. But certainly, if you had enough subscribers you could make the content holders very happy by writing large checks and still have a big profit. So it's all a scale opportunity and we're focused on trying to be the largest scale of these Internet commercial-free subscription services.

The next question is from George Askew at Stifel Nicolaus. You state that 48% of subscribers viewed streaming content in the fourth quarter. What is the percentage if you look only at subscribers added in 2009 or in the last few quarters?

We don't have separate breakouts for each of the cohorts, at least that we're not doing for public disclosure. But it certainly is true that newer subscribers that are introduced to streaming right in the beginning as part of their Netflix service are using Netflix at slightly higher rates than someone whose been a DVD subscriber for us for six years and in their heads we are a DVD service. But that will change over time and those cohorts will come together.

The second question is with regards to the Wii advertising. What is the nature of the advertising online versus offline and what might be the range of your spend?

The spend is included in our marketing plans and I don't have a breakdown for you of the type of advertising. We'll do what we view as most effective.

The next question is from Guy Charles Savois (I apologize if I mispronounced your last name) at Galiant Capital. Would you expect operating margin to be higher or lower than current levels on a 100% streaming business model?

Guy, I think the long-term operating margins will be determined more by the amount of competition. If there's three or four fairly equal players in a large market you would expect the operating margins to be lower. If there's one or two you'd expect the operating margins to be higher, so the actual streaming costs are quite low. The content costs, there's no hard costs, it's just what we pay for it. So again, I think the way to think about it is what will be the likely competitive structure of the future market, and from that, you can get a model of what the long term operating margins will be.

But along the way, for competitive reasons, we're definitely playing a market share game and driving hard for growth. We could in the alternative pursue a skimming strategy and take operating margins up and it's a conscious decision to do the former and not the latter.

Correct, to deepen our competitive moats with large scale and low prices.

The next question is from Brian Fitzgerald at UBS. Any color or numbers you can share with us on the average number of Netflix streaming devices in the household? How has that penetration been trending?

The average number of laptops in a house in America is probably one and a half but I'm just making up numbers, I don't really know. So you've got every laptop, you've got the Rokus, you've got the video game consoles. I guess I don't have any value to add on that answer.

And the last question, which is a related question, are you seeing any substitution within the household from one device, say a Sony TV, over another, an Xbox or a TiVo?

No. Our main focus is on streaming per se and it doesn't really matter to us if it's streaming to a laptop, streaming to a laptop plugged into a TV, streaming to a Blu-ray plugged into a TV, streaming directly to the TV. It's all a great consumer experience, so we're just trying to make all of those experiences better and better.

Great. Operator, that was the last question that I have.

Thank you, everyone, for joining us on the call. Q4 was a record-setting quarter and it capped off a great year in which we saw accelerating subscriber growth powered by streaming. We expect the growth to continue which you'll see reflected in our guidance. And I look forward to reporting on our progress with you on our next quarter's call. Thank you very much.

Thank you. That will conclude today's conference call. We thank you all for joining us and have a good afternoon. Goodbye.