We conversely worry that ISPs may try to charge us for supplying the video data their broadband subscribers are requesting. The danger for either side is a negative precedent that leads to an ever expanding charge under threat of blackouts. Long-term stability is achieved when neither side charges each other for the interconnection necessary to both sides for pleasing consumers. Open Connect is free to ISPs, and we bring the data at our expense to wherever the ISP wants.
In the long-term, we think Netflix and consumers are best served by strong network neutrality across all networks, including wireless. To the degree that ISPs adhere to a meaningful voluntary code of conduct, less regulation is warranted. To the degree that some aggressive ISPs impede specific data flows, more regulation would be clearly needed.
Netflix margin structure and growth
Our domestic margin structure is mostly set top down. For any given future period, we estimate revenue, and decide what we want to spend, and how much margin we want in that period. Competitive pressures in bidding for content would lead us to have slightly less content than we would otherwise, rather than overspending. The same is true for our marketing budget. The output variable is membership growth that those spending choices influence.
The margin structure we have chosen is to grow content spending plus marketing slightly more slowly than we grow revenue, and in the USA to target for now about 400 basis points of contribution margin improvement compared to same quarter of the prior year. A 30% quarterly contribution margin may start being achievable in 2015. At 30%, we’ll re-evaluate the right margin growth target, given conditions at that time.
The primary forces propelling our growth are our own service, content and marketing improvements, and the improvement of Internet networks and devices. The primary forces impeding our growth are market saturation and the broad set of competitors-for-time all improving their offerings.
At a high-level, HBO-linear is our closest domestic comparison, with about 30 million domestic members. We currently have fewer original series and first window (“Pay1”) movies than HBO, but we have more content, more viewing per member, a broader brand proposition, are on-demand, on all devices, and are less expensive. We estimate that we can be 2 to 3 times larger than current linear-HBO, or 60-90 million domestic members. This estimate factors in that, as we grow, our content and service will continue to get better.
Conclusion
If we could look into the future at the ways that people access entertainment, we would no doubt see a very different image than we see today - stunning video quality, a proliferation of screens, yet-unimagined natural user interface, and an unbelievable range of choice.
But if we were to turn instead and look at the person watching that screen, we’d observe a number of similarities across generations. We'd see someone who is taking a moment to escape into a story - to simply relax and enjoy one of life's real pleasures with their friends and family.
People love TV shows & movies. We love being the best possible place to enjoy them. Ours is an amazing opportunity to grow, innovate and lead for several decades. We will face strong competition along the way, and we embrace the challenge.