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Netflix, Inc. (NASDAQ:NFLX)
Q1 2018 Earnings Conference Call
April 16, 2018, 6:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Spencer Wang -- VP of IR and Corporate Development

Good afternoon. Welcome to the Netflix Q1 2018 earnings interview. I'm Spencer Wang, VP of IR and Corporate Development. Joining me today are CEO, Reed Hastings; CFO, David Wells; Chief Content Officer, Ted Sarandos; and Chief Product Officer, Greg Peters. Our interviewer this quarter is Ben Swinburne from Morgan Stanley. Before we begin, a reminder that we will be making forward-looking statements, and actual results may vary. With that, let me turn it over to Ben for his first question.

Questions and Answers:

Ben Swinburne -- Morgan Stanley -- Analyst

Thank you. Reed, I want to ask you, given the strong results again this quarter, talk a little bit about what the company is doing today that may be different than what it did one to two years ago to scale the business, particularly as you're moving into markets that are maybe quite a bit different from the developed markets that you've scaled already.

Reed Hastings -- Founder and Chief Executive Officer

It's a lot more similar than it is different. We're continuing to invest in content, marketing, product, all the things we've been doing. There's certainly some secular shift toward internet viewing. Then we're seeing just the breadth of content that we've got going is really remarkable. Maybe, Ted, you want to talk about some of the local shows that we've been doing around the world that our U.S. investor base may know less of.

Ted Sarandos -- Chief Content Officer

Yeah, we've been able to launch original series in local language with local producers all over the world. We've shot in 17 different countries original programming to date, and we expect that to continue to grow. It's content that is for the country or for the region, but we've actually found great global success.

This season, we have a new season of 3% coming up, by way of example, which is a Brazilian sci-fi show that really scored well around the world well for us. People are super excited about the new season. Even though we've made it in Portuguese for Brazil. It may be one of the first examples of local-language Brazilian television working around the world. We're really thrilled to be part of that.

Ben Swinburne -- Morgan Stanley -- Analyst

Reed, how might the go-to-market strategy look in a market like India or some of these emerging markets where you might partner earlier in the lifecycle of Netflix than say what we've seen in other markets where you look at the U.S., you're now really working with Comcast quite a bit, but you've scaled this market. Could you move toward a distribution model with partners faster in emerging markets and what does that mean -- maybe for David -- financially, for the numbers we look at?

Reed Hastings -- Founder and Chief Executive Officer

Greg, I'll let you take that.

Greg Peters -- Chief Product Officer

Our partnering strategy, I'd say, is on an evolving trajectory across all the markets that we serve in. It started with a rich history with television manufacturers, CE manufacturers where we've integrated on their products and that's been hugely successful for us. But a new wave that you've started to see over the last several years is starting to partner now with operators. Sort of MVPDs, internet service providers, mobile operators.

We've evolved those partnerships and based on what we've seen with these new bundle models that we refer to with both Comcast and Sky announcing in the last quarter, we've seen the economics of those, taking the retention, the acquisition characteristics to be very beneficial. We love the fact that we can work with these partners to access whole new groups of consumers, make it easy for them to find out about Netflix, to sign up, and to have a great way to access the service and watch more and more.

You'll see us leverage that sort of evolving strategy, not only in the markets that we've been in for many years, but also in these new markets. But it's a consistent shift across all of our markets.

David Wells -- Chief Financial Officer

Then, Ben, financially or economically for Netflix, we wrote in the letter about international ASP. Prospectively, that might actually start occurring where this is affecting where we're adding subscribers on a net revenue basis. I would say that's all about prospective growth forward.

To date, Netflix is always, outside of gift cards, has added always on a gross revenue basis. I would say a technical point for investors, just around GAAP revenue accounting, is we're always in the principal position versus the agent position.

But for some of these deals prospectively going forward, where there's not a price visible to the consumer discreetly on Netflix and it needs a couple of other conditions, we may book these on a net revenue basis. But they're very immaterial today. If they grow, we'll call these out for you going forward.

Spencer Wang -- VP of IR and Corporate Development

Maybe, Ben, if I could just add on that front, in terms of the underlying economics, they're pretty consistent with our past partnerships. Obviously, what David is talking about is really more of a financial presentation difference. From an operating income perspective, it's really quite similar, the impact.

Ben Swinburne -- Morgan Stanley -- Analyst

What about taking a more aggressive approach in emerging markets with lower price points, either at a retail level or with whole partners? If you think about the mobile opportunity in a market like India, again, it's a lot larger than perhaps the pay TV TAM. So if you think about attacking that market differently from a pricing and distribution perspective, then for Greg, what do you do from a product perspective to make sure mobile is a place that Netflix can really thrive on?

Reed Hastings -- Founder and Chief Executive Officer

On pricing, we've been very happy with the results on our 500 to 800 rupees in India. Our pricing in the different countries. So, no near-term plans. Of course, we're always trying to learn more over time. Greg, over to you on mobile.

Greg Peters -- Chief Product Officer

Then we definitely want to have mobile experiences that allows us to access more of that market and access a group of consumers who basically only want to have their relationship with Netflix on a mobile device. So, whether that is making sure that our apps are lightweight enough so they load really quickly and they have a great experience there, to making sure that our end coding is very, very efficient, so that even if you have a less-than-great network connection, you can still get a really incredible video experience on that mobile phone. It's something that we've been able to drive down to, in my mind, remarkable efficiency where you can stream incredible video quality on even very, very sub-optimal network connections.

But ultimately, even if you want to do things like the download capability that we launch, where if you have no connection or it's a spotty connection, or you just want to save your data plan, save those data bits for something else, we allow you to download some shows and enjoy that even when you're offline. I think it's a great example of we're investing in a feature that's used differentially more in these emerging markets that you mentioned, but also fits our global product model where our members around the world are getting a benefit, whether that's hopping on a plane or in other various ways.

Ben Swinburne -- Morgan Stanley -- Analyst

What's next, Greg, on the product pipeline that we should be excited about?

Greg Peters -- Chief Product Officer

There's a bunch of different stuff that we're working on, but maybe a few to call out. One is a relatively new area for investment for us is building technology to support our content side. So, the programming choices that we make, how we can produce content efficiently. Obviously, as that amount grows and grows and grows, that's a super high leverage point for us to bring, and relatively, I think, a green field opportunity for us to bring technology to influence the outcomes even more.

But then we bring this amazing library of content and what we think almost every day about is how do we do an even better job innovating so that we can bring our members the perfect piece of content to watch whenever they access Netflix? So, you'll see us do a lot more to innovate around that. How do we launch new shows? How do we make them accessible to our members around the world, whatever language they're speaking, whatever territory they're in, and we're excited about all of those components.

David Wells -- Chief Financial Officer

Ben, before you go, Greg, you'd say the third area that is related to some of the G&A growth that investors see is our investments in studios, as well, Ben. So it's worth calling out that we are also investing in the technical side in our studio buildout.

Ben Swinburne -- Morgan Stanley -- Analyst

Let me come back to the quarter and the sort of financial commentary in the letter. David, for you, you've taken up the OI guidance a little bit for the year. Maybe you can just talk about what's changed in the budget or in what you're thinking about presenting to us relative to where we were say in January?

David Wells -- Chief Financial Officer

Well, really what's changed is we've outperformed the business in a way that we didn't predict. So, if you look at sort of our out-performance of the last three quarters, the business has grown faster than we've expected. We're able to redeploy that and reinvest some of that in content, but there's a long lead time to that. To some degree, some of that goes into marketing of that associated content.

But I think investors are benefiting from just the overall growth of the business. We're able to redeploy some of that toward it and some of it just shows up in higher operating margin. So, I think we posted 12% and 12% and we got a lot of content and marketing sort of back-end loaded to the second half of this year, but it's somewhat of the acknowledgment that the business is growing so well.

Ben Swinburne -- Morgan Stanley -- Analyst

Marketing in the back half of the year, or back-half weighting, I guess would be a better way to put it, is that just a function of the timing of content? Why is marketing particularly back-end weighted?

David Wells -- Chief Financial Officer

It's mostly just the timing of content. So, we've got a lot of great releases that I'm sure Ted can talk about coming up in Q3 and Q4.

Ben Swinburne -- Morgan Stanley -- Analyst

Yeah, let's move to Ted then. Talk about what is ahead of you from a content perspective that you think we should be focused on. Also, I'd love to hear how you think sort of the news category or news-like programming may be impacting the business today or your strategy going forward because it seems like you guys are actually spending a little more time thinking about and executing on some of those type of programs.

Ted Sarandos -- Chief Content Officer

As you know, we've been pretty successful with documentary, feature-length documentaries, both with critics and with audiences. But our move into news has been misreported over and over again, and we're not looking to expand into news, beyond the work that we're doing in short-form and long-form feature documentary.

The upcoming things that I think are particularly exciting in the quarter, we have a new season of 13 Reasons Why coming out this quarter. The first season of 13 Reasons Why was one of the most watched television shows of the year last year in the world, so we're really thrilled about that. Returning seasons of our hits like Luke Cage and Glow, Dear White People, Unbreakable Kimmy Schmidt. We have a great comedy feature film coming up with Adam Sandler and Chris Rock called The Week Of. We've already started this quarter with new seasons of Santa Clarita Diet, A Series of Unfortunate Events, and a lot of real fan favorites. Then we've got 3%, which I mentioned earlier from Brazil, for a new season, but also a brand-new original series from Denmark called The Rain, that we think is going to play really well all over the world.

Ben Swinburne -- Morgan Stanley -- Analyst

Ted, there's been some discussion about Netflix and the Obamas working together on a product that maybe it's not real, live news, but it's certainly topical. I look at the Letterman programming also as an example of stuff that's sort of moving into that direction. Do you see that playing a bigger role in the content slate over time?

Ted Sarandos -- Chief Content Officer

Topical interview shows like that, absolutely. But mostly keep in mind that they're entertainment. Those are a form of entertainment. David Letterman is a great talk show host, not a newscaster. So, we'll definitely do more of that. I can't comment on the Obamas or any other deals that would be in various stages of negotiations right now.

Ben Swinburne -- Morgan Stanley -- Analyst

I've got to ask you also about some of the controversy on the film festival side. You've been pretty outspoken as it relates to the Cannes situation. Can you talk about where this is all headed? Do you think it impacts Netflix's ability to attract talent, source film content, given there seems to be some industry pushback around the lack of theatrical releases and awards?

Ted Sarandos -- Chief Content Officer

Well, we've addressed Cannes in the letter, so that kind of speaks for itself. I'd say generally, we released 33 films in theaters last year. Just we released them day-in-day with Netflix. I think it's become more and more accepted as part of the distribution norm. Defining distribution by what room you see it in is not the business we want to be in. We want to be about making great films that people love.

Ben Swinburne -- Morgan Stanley -- Analyst

So no thought about wider releases in order to make sure that your talent gets a shot at awards that might be important to them?

Ted Sarandos -- Chief Content Officer

Well, keep in mind we had five projects nominated for the Oscars last year, all released in this model.

Ben Swinburne -- Morgan Stanley -- Analyst

Okay. David, back to you, just coming back to the financials. I think the cash burn in the first quarter was maybe $250 million? Something along those lines? You're still guiding to $3 to $4 billion? Is that something that you still think is the right range? Could you come in at the lower end of that?

David Wells -- Chief Financial Officer

Of course, we could. We're not projecting that we are. I think it is related to the back-end content loading that we just talked about. So, cash was modest in terms of relative to the content in Q1, but we anticipate the timing to be a little heavier in the back end. That shows you or points to the range still being $3 to $3.5 to $4 billion.

Ben Swinburne -- Morgan Stanley -- Analyst

Okay. And on the content obligations front, or contractual obligations, it was $17, I believe $9 at the end of the quarter. So taking a little bit of a second derivative slowdown there. As you move toward more original as a percentage of the total spend, that number I believe should start to plateau, maybe even decline. Are we there yet? Is that what we're starting to see in the numbers when we look at the obligations off balance sheet liability?

David Wells -- Chief Financial Officer

Well, I think most people, Ben, if they want to incorporate the component that we're shifting our mix to more produced assets or known assets for Netflix, I look at two components, or two easily externally verifiable components. One is that streaming content obligation, but the other is the film assets, so the produced asset value on our balance sheet. So, even taking both into account on a per-member basis, what you saw is a lower per-member year-over-year. I think that you are starting to see some of the second derivative take hold, but I don't want to hold us to that. It's not like we aim the business toward that or we try to grow the business toward that.

Spencer Wang -- VP of IR and Corporate Development

Just to add, Ben, to narrowly answer your question, the shift to self-produce will likely result in slower growth in the total obligations; however, there are components to self-produced content that also impact the content obligations and participations.

Ted Sarandos -- Chief Content Officer

Multiple season commitments to those, yeah.

David Wells -- Chief Financial Officer

The technical point, Ben, I would just annotate Spencer, being that those are modest relative to the whole in some of the other bigger components. That's right.

Ben Swinburne -- Morgan Stanley -- Analyst

Makes sense. Reed, any updates on your thinking on the China opportunity? I know you have a partner there, but that market is evolving rapidly. It's quite a dynamic market. Have you thought about shifting strategies at all on that in China?

Reed Hastings -- Founder and Chief Executive Officer

You mean now that iQIYI is public, we should enter late? No. We're very comfortable with our China strategy of licensing our shows in the way HBO does and so that's the strategy.

Ben Swinburne -- Morgan Stanley -- Analyst

Okay, makes sense. Coming back to the market like the U.S., just to take it as an example, that's pretty far along the OTT path, at least to some extent. Roku's got 5,000 channels on the platform. OTT is not new. Internet TV is not new here. Do you have a view on how many OTT services or television services a consumer is going to have as this business starts to mature? Do you think we have the equivalent of a fully distributed internet TV network long-term, the way we've had in the pay TV model or do you think fragmentation and choice will lead to a much more sort of fragmented marketplace?

Reed Hastings -- Founder and Chief Executive Officer

Well, the great thing now is it's easier to create a television network called an app. Think of all apps on your phone will have some form of video, or most apps will. So, you just see a very wide spread of entertainment options, some of which are movies and TV shows, some are more interactive. All of that mobile phone energy will spread to the television with operating systems like Rokus. I think you'll see a very long tail. Of course, we want to be one of the apps that nearly everybody has on their home screen, whether that's on the phone or on the television. But again, if you look at the mobile phone ecosystem, it's very rich and we see television getting close to that.

Ben Swinburne -- Morgan Stanley -- Analyst

What happens to engagement over the longer term in that scenario? Because what we saw in TV, you started with three large broadcast networks, pre-pay TV, then we just sort of fragmented our way through over the next kind of 40 to 50 years. Is Netflix sort of the NBC or CBS in 2017 of those networks in 1950 before the market started to evolve? Or do you think engagement continues to grow and it consolidates around the bigger players?

Reed Hastings -- Founder and Chief Executive Officer

Well, it's all up to us in execution. You're right that there are so many competitors, especially around the world. Some of which are really focused on a particular culture. Others, like Sky, are in many different cultures. The consumer has a lot of entertainment options. Then whether our share of that grows or shrinks is really up to do we produce great content, market it well, serve it up beautifully? If we do that really well, if we earn more of consumers' time, then we continue to grow. If we get lazy or slow, we'll be run over just like anybody else.

Ben Swinburne -- Morgan Stanley -- Analyst

So, what is the biggest challenge ahead for the company, Reed? I think you look at the stock up 60% year-to-date, and I'm sure and then some as we speak. There's probably a few out there that you guys have got it all figured out. How do you keep the organization from getting complacent, staying motivated, and maybe throw it over to Ted for managing the size of the output?

Reed Hastings -- Founder and Chief Executive Officer

We're a fraction of the hours of viewing of YouTube. We're a fraction of the hours of viewing of linear TV. We've got some great momentum and we're very excited about that, but we have a long way to go in terms of earning all of the viewing that we want to.

Ted Sarandos -- Chief Content Officer

I think in terms of scaling, the original production and the licensing of content around the world, it's mostly about picking great people, giving them a great place to work, trusting them and empowering them to continue to make great choices, which we've really been focused on, both producing original content in the U.S. and like I mentioned earlier, 17 countries around the world. Just figuring out what people like. Really, at the end of the day, I think the winners will be those who pick up those shows that people can't live without and they become associated with that kind of intense fandom that we can keep bringing to them day in and day out.

Ben Swinburne -- Morgan Stanley -- Analyst

Greg, when you look at the $1.3 billion or so tech and dev spend that you guys have this year, where is that money going from a priority perspective to make the product the best it can be for members around the world.

Greg Peters -- Chief Product Officer

Again, as I mentioned before, we're looking at it from a global product perspective. We think that there is significant leverage that we get by trying to provide one solution against what we see as a pretty consistent set of consumer needs around the world. Now, we're obviously trying to be mindful to these different use cases, how consumers in different markets react to our product, and learn things like downloads, that we say there's specific need in those markets. But they prompt, in many cases, a general solution that we can get that high leverage. We're really looking at the opportunity globally. The world is a place to learn, to understand from consumers, listen to them, but then react in a way that's scalable.

Ben Swinburne -- Morgan Stanley -- Analyst

Going over to Spencer, there's been a lot of press reports about potential M&A in a variety of areas from studio assets I think over in Europe, outdoor assets here in the States. I'm sure you can't comment specifically. It doesn't seem like Netflix may be more acquisitive looking forward than it's been in the past. Can you just talk about your philosophy on M&A and what might make sense, what might now as you guys think about growing the company?

Spencer Wang -- VP of IR and Corporate Development

Sure. If we look at that past, that bar is quite low since we've done very few transactions. We've only done one in our 20-year history. Based on that track record, I think the takeaway for investors is that we have a strong bias to build over buy. That being said, we do see M&A as a perfectly fine tool for us to help find interesting assets to help run the business. From our perspective, we continue to be on the lookout for new IP or other related assets that can help improve the service and help us grow faster.

Ted Sarandos -- Chief Content Officer

Spencer, I would just add by way of example, that the Millarworld acquisition -- we're already in production on our first production with Umbrella Academy and we just released our first comic book. So, in terms of using M&A to acquire meaningful IP, this could be a very useful tool.

Ben Swinburne -- Morgan Stanley -- Analyst

Sticking with you, Ted, could you talk a little bit about the market or licensed product and whether as Disney and others move closer to bringing their own product to market, the supply is drying up or you're thinking differently about acquiring third-party content?

Ted Sarandos -- Chief Content Officer

Well, you've seen us move pretty aggressively into our own original programming, which means we're doing less licensing in that same way. We're moving both dollars up in absolute, but as a percentage of our investment, we're investing more and more in original. That's both a product of it's been working for us, it's been helping us grow the business, grow view hours, but also the ecosystem that produces that content that we're buying in second windows and sometimes third windows isn't producing content at the level of demand and quality that it had been over the years.

So, the things that we're engaged in bidding on are more selective and there's less of them. So, when something shows up though that is great like The People vs. OJ, by way of example, we're in the mix and still licensing a lot of that content. We've certainly licensed a lot of great movies around the world, and television content from around the world for our other territories. But you should expect us to be moving more and more into license and produced original programming versus fishing in the secondary market.

Ben Swinburne -- Morgan Stanley -- Analyst

I think you guys just renewed or ordered a new season of Jessica Jones from Marvel. Is there any change in how you think about continuing to source content on the Marvel side, given all the changes that are happening and the strategy at Disney?

Ted Sarandos -- Chief Content Officer

No, we're thrilled with the Defenders universe -- Jessica, like I said, we have Luke Cage coming up this quarter for a new season. Those will continue as long as we want to keep making them. It could be a quite wonderfully expanding universe. We try not to let the business models get in the way of making programming for our customers.

Ben Swinburne -- Morgan Stanley -- Analyst

Any impact from Hulu, which has been more and more aggressive acquiring prior season content? I don't know if you're getting a look at that stuff or if it's just being kept away from you for maybe obvious reasons?

Ted Sarandos -- Chief Content Officer

No, we've been in the mix on some of them. Not many, but the ones, they have been in the mix too and I think that's closer to what they're doing on their business model -- going after the broadcast, with a select few originals, where we've gone much more the other way.

Ben Swinburne -- Morgan Stanley -- Analyst

For you and also for David, you guys are continuing to push into local originals. I think you had 30 on the slate for this year, I believe, local originals? Talk about where you source all that from locally. Is it hard to find local talent to develop that content and from an efficiency perspective for you and/or David, how do you think about the financial returns of those shows which are obviously typically not in English?

Ted Sarandos -- Chief Content Officer

What's been really great is we can bring our technology know-how to bring a great story from anywhere in the world to the rest of the world. Using our ability to subtitle and dub and getting better and better at doing that quickly and accurately and artfully can make a very local show at least pan regional and at best, global. We've seen that, like I mentioned with 3% earlier. We just saw it with Dark from Germany, which played really well. Those U.S. numbers for us on those foreign language shows would be big hits on cable with those numbers in the U.S.

We've been particularly pleased to see a show like La Casa de Papel or Money Heist were released in the U.S. So successful for us all around the world that we bought the series IP and we'll be producing sequels and spinoffs of La Casa de Papel as original content for years to come. The scale on it has been if it connects in the country, that's what it's built for. If it gets viewing outside of the country, that's great. If it gets global viewing, like we've seen with Dark and 3% recently, and Las Chicas del Cable from Spain, we're thrilled, and it scales wonderfully.

Reed Hastings -- Founder and Chief Executive Officer

Ben, we're also investing to support that work on the dubbing and subtitle and quality. So investors who check out The Rain, which is our Swedish/Danish film coming out, sorry, series coming out in a few weeks, just to look at the quality of what the dubbing can be, because we're really making a big investment there that we think will pay off in approachability of all these titles from the world to the world.

Ted Sarandos -- Chief Content Officer

I think, too, if you see it, one of the nice things is we're not trading off, we're not watering down the local aspect of the show at all to make it travel. These are local storytellers, telling stories for local audiences that are so good, they travel globally. There's nothing less German about Dark and there's nothing less Danish about Rain. 3% is, like I said, in Portuguese with a full Brazilian cast. You mentioned earlier is it hard to find? There's incredible storytellers and producers around the world that just have not had access to a global audience before and we've been able to find them pretty effectively.

David Wells -- Chief Financial Officer

Ben, just to connect on that last one for financially, what Ted and Reed have teed up is we're drafting off a world that's becoming more global and more connected. So, we're able to tell stories in non-English from local storytellers that are gripping for audiences outside their local market. In many ways, we're elevating the storytelling, which translates to increased cost, but still relative to a TV production in the U.S. or some other expensive developed market. It's a fraction of the cost.

So, it doesn't necessarily translate that more local television for Netflix equal lower margin for Netflix. We've made that point a couple times, but I'll make it again in the sense that we're really excited about the transportability of some of this content because it's really opening up new stories across the world and in a way that doesn't sacrifice margin.

Ben Swinburne -- Morgan Stanley -- Analyst

Maybe connecting those two points again, Ted, if the local original does connect locally, is popular locally, is that a fairly high correlation that it's going to connect globally?

Ted Sarandos -- Chief Content Officer

Not particularly.

Ben Swinburne -- Morgan Stanley -- Analyst

No?

Ted Sarandos -- Chief Content Officer

Not particularly. It's interesting, some shows, because they are hyper-local in the topic that don't travel, but do incredibly well, 40-50% penetration in a market that don't particularly travel. But for the most part, what we've found is on the large-scale production shows that they do travel quite well.

Ben Swinburne -- Morgan Stanley -- Analyst

David, how are you thinking about marketing versus content spend in terms of the incremental dollar? You guys are clearly pivoted, not pivoted necessarily, but you've leaned into the marketing budget this year. There's a phrase in the letter, "density of viewing," which I think is new for you. What does that mean and how are you thinking about marketing, investing on your marketing ahead relative to your content spend over the next couple of years?

David Wells -- Chief Financial Officer

I think in relation to density, I'll let Reed speak to it because I think it equates to public job, that it's maybe a little bit more of a precise term in terms of you don't need a title that 75% of the world is watching. You may love a title that 75% of a particular population of people is watching, and that speaks to density. But you're correct, we have definitely leaned more into marketing. I think some of it is very sort of common sense in the sense of as we create more and more of these titles that no one has heard of, we're going to need to lean a little bit more on promotion and the website can't do it all.

So, I think you're seeing some of that in terms of a nod toward maybe increasing that ratio of marketing spend to content spend. We don't know where the perfect point is. We're a company that leans on experimentation. We try things, we turn them over, and then we'll increase or decrease based on the results as we see going forward. I think that's the approach that you should expect from us.

Ben Swinburne -- Morgan Stanley -- Analyst

Does that lead maybe to a slower growth in content spend? Because if you're throwing a lot of marketing, there's only so much that you can really support for a given population, I would assume. We all have, at least I do, have somewhat of a limited attention span.

David Wells -- Chief Financial Officer

You're definitely seeing revenue grow faster than content already. That's where operating margin is coming from. I can't say for sure does it mean that marketing will go faster than content or content faster than marketing. I'm not sure. I think we're trying to feel our way along to the right point going forward, but I don't know if Ted or Reed, you have an annotation on that or not.

Reed Hastings -- Founder and Chief Executive Officer

We have big plans for content growth. You should expect that to continue. We're also, as David said, trying to learn if we put in more marketing versus less in different countries, what are the results. So that's part of what you're seeing is this realizing of this new opening and how it increases the value and the viewing of our new original franchises.

Ben Swinburne -- Morgan Stanley -- Analyst

David, do you have a view, now that the business is over 100 million members, you're contribution profit positive internationally and in the U.S., we already talked about marketing, do you have a view as for where long-term margins shake out for this business as you think about a "steady state"?

David Wells -- Chief Financial Officer

Well, I think you asked the question earlier about our only opportunities being in Asia. That presupposes, and to it puts in the bag all this other growth in Latin America and Europe that I can speak confidently on behalf of the team that we don't take for granted. So, we have a lot of opportunity and growth still in our core markets, the markets that we've been in for 5, 6, 7 years. I would say we're targeting 10 to 11 this year. We've been putting on a pace of about 300 basis points. It's hard to know for sure where that goes. It really depends on the scale of the business.

That we are, in 5 or 10 years, we think we're after a big opportunity and the bigger the business we are, the higher that margin could be. We're certainly not bound -- you've heard me say in the past that we're not bound by international growth being at a lower margin. It's somewhat dependent on the competition within that territory. It's somewhat dependent on the size and scale of the business as we grow. We think we've got a big market opportunity. So, I would leave it there.

Ben Swinburne -- Morgan Stanley -- Analyst

Makes sense. Reed, how do you think about ASP growth over time? You guys implemented a number of what I would call successful price adjustments or price increases. Is the way to think about ASP growth going forward sort of what we've seen over the last several years?

Reed Hastings -- Founder and Chief Executive Officer

Well, it really depends on the offering and the quality of our offering relative to others. So, you have to earn it first by doing spectacular content that everybody wants to see. But if you do that, you can get people to pay a little bit more because then we're able to invest more and further improve. But we always approach it on a have we earned more viewing from people basis first, rather than a price first basis.

Ben Swinburne -- Morgan Stanley -- Analyst

The letter talks about the strength in the quarter coming from, I think, higher additions or gross adds. So, maybe David, coming back to the business on churn, is there an opportunity to work churn lower from here or do you think you guys have hit, at least in some of your older markets, a retention level that's probably going to be tough to materially change?

David Wells -- Chief Financial Officer

Well, it's hard again. We've made this point before, but the noise in terms of who comes in and who stays and all that, we're mostly focused on having a member that pays us or feels good about paying us over time. We break it out in order to give some color commentary. I would say in the established markets, we're getting pretty close to asymptotic churn. We think we've got mild improvements, but we're so big that even a 10 or 20-basis point improvement can be meaningful. In the newer markets, it's really about increasing engagement because we do feel like there is a tight relationship between engagement and churn up to a certain point. Obviously, with diminishing marginal return. But we're still young enough in many of the newer markets that we're focused on that and growing that engagement to improve retention.

Spencer Wang -- VP of IR and Corporate Development

Ben, I think we have time for one last question.

Ben Swinburne -- Morgan Stanley -- Analyst

Sure. I didn't want to let this end, Reed, without coming back to you and given what's happened over the last couple months in the tech industry, just get a sense from you on what you think the implications are for Netflix, if any, from all of the focus by regulators, by consumers on data, privacy, the use of data to drive your business, GDPR. What does all this mean for Netflix, if anything, and are you making any changes?

Reed Hastings -- Founder and Chief Executive Officer

Well, I'm very glad that we built the business not to be ad-supported, but to be subscription. We're very different from the ad-supported businesses. We've always been very big on protecting all of our members' viewing. We don't sell advertising. I think we're substantially inoculated from the other issues that are happening in the industry. That's great.

Second, I'd point out that we'll spend over $10 billion on content and marketing and $1.3 billion on tech. So, just objectively, we're much more of a media company in that way than pure tech. Now, of course, we want to be great at both. But again, we're really pretty different from the pure tech companies.

Ben Swinburne -- Morgan Stanley -- Analyst

Great. Well, thank you, everybody.

Reed Hastings -- Founder and Chief Executive Officer

Great, thanks, Ben. Thanks to all our investors.

Duration: 35 minutes

Call participants:

Reed Hastings -- Founder and Chief Executive Officer

David Wells -- Chief Financial Officer

Ted Sarandos -- Chief Content Officer

Greg Peters -- Chief Product Officer

Spencer Wang -- VP of IR and Corporate Development

Ben Swinburne -- Morgan Stanley -- Analyst

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