Earnings call transcript: Netflix Q3 2025 earnings miss, stock edges up

Netflix Inc., now commanding a market capitalization of $527.29 billion, reported its third-quarter 2025 earnings on October 21, revealing a significant miss on earnings per share (EPS) expectations despite revenue meeting forecasts. The company’s EPS came in at $5.87, falling short of the anticipated $6.96, marking a 15.66% negative surprise. Revenue was reported at $11.51 billion, aligning with projections and maintaining a healthy growth rate of 14.84% over the last twelve months. Despite the earnings miss, Netflix’s stock rose slightly by 0.23% to $1,243.61 in aftermarket trading, buoyed by positive developments in advertising and innovative product launches. According to InvestingPro analysis, the stock appears to be trading near its Fair Value, with 18 additional exclusive insights available to subscribers.

Key Takeaways

• Netflix’s Q3 2025 EPS missed forecasts by 15.66%, but revenue met expectations.
• A Brazilian tax expense impacted operating income significantly.
• The company is on track to double its ad revenue in 2025.
• Stock rose 0.23% in aftermarket trading despite earnings miss.
• New product innovations include interactive live events and TV-based party games.

Company Performance

Netflix’s performance this quarter was mixed, with a notable miss in EPS but steady revenue figures. The company faced a significant one-time expense related to a Brazilian tax matter, which affected its operating income. However, Netflix continues to show strength in its core business areas, particularly in advertising, where it is expected to more than double its revenue by the end of the year. The company’s innovative product launches and strategic market positioning have helped maintain investor confidence despite the earnings miss.

Financial Highlights

• Revenue: $11.51 billion, in line with expectations.
• Earnings per share: $5.87, down from the forecasted $6.96.
• Significant one-time expense from a Brazilian tax matter affected income.

Earnings vs. Forecast

Netflix’s actual EPS of $5.87 was a significant miss from the forecasted $6.96, resulting in a 15.66% negative surprise. This marks a deviation from its usual performance, where the company has typically met or exceeded earnings expectations in previous quarters. The revenue, however, was on target at $11.51 billion, indicating stable top-line performance.

Market Reaction

Following the earnings announcement, Netflix’s stock experienced a modest increase of 0.23% in aftermarket trading, closing at $1,243.61. This movement contrasts with the earnings miss, suggesting that investors may be optimistic about the company’s future prospects, particularly in advertising and product innovation. The stock has delivered impressive returns, with a 55.34% gain over the past year and 21.4% over the last six months. Currently trading near its 52-week high of $1,341.15, the stock has maintained significant distance from its low of $736.23, demonstrating strong momentum despite high valuation multiples.

Outlook & Guidance

Netflix is poised for continued growth, with plans to issue full 2026 guidance in January. The company aims to sustain healthy revenue growth, expand margins, and increase free cash flow. An exciting content slate for 2026, including returning shows and new films, is expected to bolster its market position. Analyst consensus remains bullish, with a "Buy" recommendation and price targets ranging from $750 to $1,600. The company maintains an excellent overall financial health score of 3.21 according to InvestingPro’s comprehensive analysis, which includes detailed insights available in the Pro Research Report covering 1,400+ top stocks.

Executive Commentary

• "We’re here to entertain the world, and we’re delivering tremendous value to our members every day." - Ted Sarandos, Co-CEO
• "We’ve always faced significant competition. We still face it today." - Greg Peters, Co-CEO
• "We’re not worried about AI replacing creativity, but we’re very excited about AI creating tools to help creativity." - Ted Sarandos, Co-CEO

Risks and Challenges

• The Brazilian tax expense could have lingering effects on financials.
• Increased competition in the streaming market.
• Economic uncertainties that could affect consumer spending.
• Potential challenges in scaling advertising revenue globally.
• Technological advancements required to maintain competitive edge.

Q&A

During the earnings call, analysts focused on the impact of the Brazilian tax expense and the strong growth trajectory of advertising revenue. Questions also revolved around the potential for live events and interactive content, with Netflix expressing a cautious approach to mergers and acquisitions, emphasizing organic growth.

Full transcript - Netflix Inc (NFLX) Q3 2025:

Spencer Wang, VP of Finance, IR, and Corporate Development, Netflix: Good afternoon and welcome to the Netflix Q3 2025 earnings interview. I’m Spencer Wang, VP of Finance, IR, and Corporate Development. Joining me today are Co-CEOs Ted Sarandos and Greg Peters, and CFO Spence Neumann. As a reminder, we will be making forward-looking statements, and actual results may vary. We’ll now take questions submitted by the analyst community, and we will start with our results and outlook. Our first question comes from Ben Swinburne of Morgan Stanley, who asks, "As you begin to wrap up 2025 and look to 2026, can you talk broadly about the health of the business and how you would frame the opportunity ahead?

Greg Peters, Co-CEO, Netflix: Yeah, we think the business is very healthy. We feel good about our progress on our key initiatives. We’ve got also a lot of opportunity ahead of us, but we’ve got a lot of work we need to do to accomplish and fully realize those opportunities. What’s working? We had a good Q3. We had revenue in line with expectations. Our operating income would have exceeded our forecast absent the Brazilian tax matter. We’re also seeing good progress against our key priorities. Engagement remains healthy. We achieved record share TV time in Q3 in both the U.S. and the U.K. We recorded our best ad sales quarter ever. We are now on track to more than double ad revenue this year. We’re continuing to build out both live offerings and games using emerging capabilities. On the live side, we saw Canelo Crawford.

That was the most viewed men’s championship fight this century. We recently announced the ability to play Netflix games on TV with friends and family playing together at home using just that TV and the phone as the game controller. This progress in these areas is indicative of how we think we can best compete and grow the business over the long term. We focus on a few key areas that we think matter the most, and then we work hard to deliver continuous improvement in those areas. It sounds super simple, but building a real at-scale global streaming business is hard because you’ve got to combine great tech product and great content from all around the world, and we believe we can continue to improve in both those areas. Ted, maybe you want to comment on that?

Spencer Wang, VP of Finance, IR, and Corporate Development, Netflix: Yeah, I would just say, you know, looking ahead, we continue to have a massive opportunity since we’re only about 7% of the addressable market in terms of consumer spending and only about 10% of time spent on TV in our biggest market. There is enormous room for profitable growth in the core business. This is a very exciting time in terms of a lot of innovation, a lot of competition, but that’s been true for the last 25 years. One thing as a company, we’ve always embraced change. We thrive on competition. It pushes us to improve the service even faster for our members. Back at the beginning, in the early DVD days even, and now in streaming and global streaming of original content, we compete with the biggest players in the world, tech and media. As you see, we keep growing engagement, revenue, and profit.

Today we’re an entertainment company. We program for an audience that’s approaching a billion people around the world. We’re producing series and films for local audiences in multiple markets. Many of those films and series resonate around the world. A really great example of that, I think, is this summer’s K-pop, Demon Hunters. Obviously a smash hit, but it’s also emblematic of exactly what we’re trying to do every day. In fact, feature animation is an example of that, continuously improving the core. We’ve been grinding away at original feature animation for a few years now, and K-pop, Demon Hunters is our most popular film ever. It, again, proves our ability to create breakthrough hits and move the culture. Today, we announced Mattel and Hasbro have been named the global co-master toy licensees for K-pop, Demon Hunters. This is a rare, maybe unprecedented partnership for them.

We’re going to need them both to help meet the massive demand for fans to get closer to their characters off screen every day. We’re here to entertain the world, and we’re delivering tremendous value to our members every day. When you have a hit the size of K-pop, Demon Hunters, it stirs the imagination of how big we could take this. As long as we keep improving on the core business every day, we feel great about the business, and as Greg said, we are as energized as ever.

Thank you, Ted and Greg. Our next question comes from Steve Cahill of Wells Fargo. Can you please provide more color on the nature of the tax expense and why it fell above the operating line?

Sure, Spencer, I’ll take that one. Greg and Ted were on a roll, but I think I will take the short straw for this one. I’ll spend a minute on it because this Brazilian tax matter, it’s a bit complicated, and I want to be sure we’re being really clear about what it is and what it isn’t. It’s not an income tax. It’s a cost of doing business in Brazil. It’s a gross tax on outbound payments, and it’s called the Contribution for Intervention in Economic Domain. It’s a bit of a mouthful. It involves a 10% tax on certain payments made by Brazilian entities to companies outside of Brazil. It’s not a tax that’s specific to Netflix. It’s not even specific to streaming. We assume other companies will be impacted by this.

In our case, Netflix Brazil pays Netflix US for services that enable Netflix Brazil to offer subscriptions to our Brazilian customers. We actually received a favorable ruling from a lower court back in 2022 that concluded we were not subject to this tax, which is why we believe we couldn’t accrue this previously. The legal issue in question relates to the scope of the transactions covered by the tax, and in particular whether the tax applies to service payments that don’t involve a transfer of technology. We flagged this as a potential exposure in our prior 10-Ks and 10-Qs dating back to our 2023 10-K.

In August of this year, the Brazil Supreme Court reached a 7-4 decision against an unrelated company ruling that the tax applies to a wider range of transactions than we thought was legally permissible, in particular that it applies even to service payments that don’t involve a transfer of technology. Given that court’s ruling, that’s caused us to reevaluate the likelihood of prevailing, and we now deem the loss to be probable. That’s why we recorded the expense in Q3. Again, it’s not an income tax, and that’s why we recorded the expense as a component of our cost of revenues. As we said in the letter, the expense we booked in this quarter covers the periods from 2022 through Q3 of 2025.

Of the amount we booked in cost of revenues this quarter, just about 20% of it is for the year 2025, with the remainder related to those 2022 to 2024 periods. I know that was a lot. There are just two really important takeaways that I want to leave you with. The first is that the Contribution for Intervention in Economic Domain is a unique tax. It is a mouthful. No other tax looks or behaves like this in any other major country in which we operate. Secondly, absent this expense, we would have exceeded our Q3 2025 operating income and operating margin forecast, and we don’t expect this matter to have a material impact on our results going forward.

Great, thanks, Spence. I’ll move on to the next question, which comes from Tom Champion of Piper Sandler. Do you have any early views on revenue and operating income growth for 2026?

I’ll take this one as well. Yeah, okay. Look, we’ll issue a full year 2026 guidance on our next call in January, but our financial objectives are unchanged. We look to sustain healthy revenue growth, look to expand margins, and increase free cash flow. Now, we did last year on our Q3 call, we did issue full year guidance, but that was in advance of sunsetting membership reporting. It was a pretty unique timing given that upcoming change in reporting. For 2026, again, we’ll issue the full year 2026 guide as we more typically would on our next call in January.

Thanks, Spence. I’ll move us along to a few questions we’ve received on the topic of advertising. The first one comes from Jason Helfstein of Oppenheimer. Given your comment of doubling upfront commitments in the earnings letter, should we interpret this to mean that full year 2026 advertising could also double?

Greg Peters, Co-CEO, Netflix: It’s exciting to see our progress in 2025, more than doubling our ads revenue there, while, of course, it’s still off a small base relative to the size of our subscription revenue. We feel like we’ve established the fundamentals of the business now. We’ve proven we know how to scale. We see plenty of room for growth ahead. What’s making up that growth right now, as you mentioned, we more than doubled our U.S. upfront commitments. That lands partly in 2025 and partly in 2026, which I think you’re alluding to here. Perhaps even more importantly, though, we’re seeing even higher rates of growth in programmatic. That’s more important because we believe that’s going to be an increasing part of that incremental revenue contribution going forward. What are driving those results? Advertisers are excited about our growing scale. We’ve got a highly attentive and engaged audience.

The rollout of our ad tech stack means we’ve got more formats, we’ve got more measurement, we’ve got more ways to buy. Our slate is a critical and important source of competitive differentiation. While I’ll refrain from offering any 2026 guidance, I would say we are feeling good about our growth trajectory.

Thanks, Greg. A follow-up on that one from Vikram Kesavabotla of Baird. Your offering to advertisers has evolved significantly in 2024, including the launch of the Netflix ad suite and the integrations with additional demand sources. As we look into next year, what are some of the key priorities for the advertising business?

Yeah, consistent with the last comment and answer, we made considerable progress in building out our general capabilities in the ad space. If you use our beloved crawl, walk, run model, we’re now squarely in that walking phase. The rollout of the Netflix ad suite, our own ad suite, has been great because it means we’re just continuing to learn and improve the stack based on client feedback. We’ve got a really fast iteration loop going there that we’re excited about. Key priorities and focus for us is making it easier for advertisers to buy on our service. We want to increase the diversity of advertisers we have. That’s a key direction of growth for us that enables that revenue growth. We’re adding more demand sources like Amazon DSP, AJA, and Japan. We’re improving our own ad sales and go-to-market capabilities. We’re also iterating on ad formats.

Later this quarter, we’ll be introducing ad interactivity. Taking that into 2026, you’re going to see us continue to develop along some of those lines. More ways to buy, more data for targeting and media planning capabilities globally, more modular and interactive ad formats with enhanced AI capabilities, and more measurement functionality in all of our markets. In 2027, we get to pivot to make more focused investments in data capabilities such as machine learning-based optimization, advanced measurement, advanced targeting. I would say we’re getting, we’ve got our legs underneath us. We’re making a good pace, but we’ve got a lot ahead of us to go do. Quite frankly, we expect we’re going to be able to move more quickly than other streamers as we leverage pre-existing tech and data science assets and expertise.

Thanks, Greg. To round out our last question on advertising, this one comes from Dan Salmon of New Street Research. Are fill rates improving in line with your expectations as the Netflix ad suite and new demand partnerships scale up?

Yeah, we focus on overall revenue as the most important metric we’re seeking to optimize. Having said that, fill rates have improved, and we believe they’re going to continue to improve as we continue to develop our go-to-market capabilities, more measurement, more targeting.

Thanks, Greg. I’ll now move us along to the topic of content and engagement. A lot of questions there. We’ll begin first with Steve Cahill of Wells Fargo. Are you seeing a pickup in engagement like you’ve expected?

Yes, total view hours grew a bit faster in Q3 2025 than in the first half of 2025. In fact, in Q3, we achieved our highest quarterly view share ever in the U.S. at 8.6%, and in the UK at 9.4%, according to Nielsen and BARB, respectively. These are just, you know, two countries that we’ve got really good measurement on that share. We also believe we’re going to continue to see steady growth in view hours over time. We grow engagement by expanding our programming and the range of our offering. This is a critical and very proven dimension of growth for us. We’re also seeing that certain engagement delivers outsized and different value. We saw pretty good examples of this in Q3. You got the Canelo Crawford fight, most viewed men’s championship boxing match this century.

You got K-pop, Demon Hunters, our biggest film ever, huge impact on the cultural zeitgeist. Both are great examples, and they’re also from really different parts of our programming spectrum of this punctuated value. We believe we’ve got a better understanding of the streaming business than any of our competitors, but we’re also continuing to learn, and we’re in the process of really building a better understanding of how these particular moments deliver differential value to our members and the business.

Spencer Wang, VP of Finance, IR, and Corporate Development, Netflix: Yeah, I mean, just to add here, Steve, we’re going to continue to benefit long-term from the trend just of folks moving from linear viewing to streaming. That has a kind of a natural adoption curve. I also look forward, and we have an incredible slate in Q4, and we’re really excited to follow that up in 2026. It’s not about any one single title in Q4 or next year. You know, as you know, even our largest titles and the biggest success generally drive less than 1% of our total viewing. It’s really about having a steady drumbeat of shows and films that our members love. That’s what drives continued steady growth and engagement over time. We gave a lot of detail about our Q4 coming up in the letter, including an incredible slate of film and the wild ride finale of Stranger Things.

I wanted to give you a little bit of color in 2026. Maybe this is a longer answer than you were bargaining for, Steve. We’re really particularly excited about a few things coming up next year, like the return of some of our biggest and most loved shows like Bridgerton, Beef, Emily in Paris, One Piece, Outer Banks, Virgin River, The Gentlemen, Avatar: The Last Airbender, Running Point, Ginny and Georgia, Lupin, all coming back for new seasons in 2026. We’ve got an amazing slate of films with a big event film from Greta Gerwig with Narnia. Here Comes the Flood, starring Denzel Washington. Ben Affleck is directing this great movie for us called Animals. Apex from Charlize Theron, an incredible action movie. Matt Damon and Ben Affleck are on screen together and starring in The Rip.

A couple of great rom-coms, Office Romance with Jennifer Lopez, and People We Meet on Vacation. Our French team has got an incredible epic film, Quasimodo, coming up. Peaky Blinders fans are going to freak out for the Peaky Blinders movie, The Immortal Man, with Cillian Murphy. It’s really great. Lots and lots of brand new series work coming on this year and coming out in 2026. Golf with Will Ferrell, Little House on the Prairie, Man on Fire. We have new series from the Duffer Brothers, amazing slate of K-dramas. That’s just to name a few. In other words, we’ve got a pretty great 2026 coming up after this pretty phenomenal Q4.

Thanks, Ted. Dan Kernos from Benchmark Company has a question about our Spotify partnership. How should we think about the recent deal with Spotify? How aggressively will you build out this podcast category?

Greg Peters, Co-CEO, Netflix: This deal is a video co-exclusive partnership with Spotify that secures a curated selection of their top podcasts to help us provide even more entertainment options for our members when they’re looking for pop culture or lifestyle or sports or true crime. We get to deliver to them wherever and however they want to watch. We’re going to build into this category like we do with our other categories based on demand signals that we get from our members. We see this as really the opportunity to integrate high-quality video podcasts that broadens the Netflix offering beyond all the incredible films and series that Ted just mentioned, beyond the live events that we are building, stand-up specials and games. We hope that ultimately reinforces our value as the most important service for your entertainment needs.

Thanks, Greg. Our next question comes from Robert Fishman of Moffett Nathanson. Following the strong theatrical performance of K-pop, Demon Hunters, can you share your updated perspective on monetizing some of your content in the theatrical window on an exclusive or non-exclusive basis?

Spencer Wang, VP of Finance, IR, and Corporate Development, Netflix: First of all, thanks, Robert. There’s no change in the strategy. Our strategy is to give our members exclusive first-run movies on Netflix. We occasionally release certain films in theaters for our fans, like we did with K-pop, Demon Hunters, or as part of our launch strategy, publicity, marketing, qualification, all those things. We will continue to do that. We believe that this film, K-pop, Demon Hunters, actually worked because it was released on Netflix first. Look, we had a film that people fell in love with. That’s first and foremost. Not in a huge way on the first day or even the first weekend. In fact, it was the super fans who watched the movie and repeat-watched the movie that drove the recommendation engine, that got it in front of more super fans who also fell in love with the movie.

That ease and value that allowed folks to repeat-view it, the ubiquity of distribution, which took all the guesswork out of how to watch it when you did finally see it show up in your social media feed, all of this contributed to K-pop, Demon Hunters blowing up all over the world. I would argue in a way that it could not happen anywhere else. If anything, this actually reinforces our strategy because being on Netflix gave the film a chance to build momentum. It allowed fans to learn the songs and to watch it over and over again and to make their own posts and their own dances around K-pop, Demon Hunters. For some films, seeing it together and singing out loud is super fun. It’s a differentiated experience. We were able to do that with the K-pop, Demon Hunters sing-alongs eight weeks after the film premiered on Netflix.

We did have a good weekend. We created a great night out. We are going to do it again on Halloween weekend. This time, every major theater chain is on for the ride. We are also adding a few international markets. It’s been really fun to see this film and to see our ability to break through pop culture on par with some of the biggest theatrical films ever. It’s even better that it’s with an original animated feature because it’s so hard to do.

Great. We now have a question on our live events from Vikram Kesavabotla of Baird. What were your observations from the Canelo versus Crawford fight in September? How are these types of live events impacting engagement, acquisition, and retention on the platform?

Yeah, like Greg said earlier, the Canelo Crawford fight was the most viewed men’s championship fight of the century. It had over 41 million live plus one viewers. It was in the top 10 in 91 countries, and it was a great fight. We believe these big events that attract mass audiences are kind of differentially valuable for our members. It’s a kind of urgent viewing that our members love and value. These events typically have outsized positives for conversation and for acquisition, and we strongly suspect retention. However, we’ve said earlier, live is only a small portion of our content span, and it’s a very small portion of our 200 billion hours viewed. It’s relatively small still, but hugely outsized impact. Like we’ve seen with other titles, this has had that kind of positive impact on acquisition.

It’s a little too early to say for sure on retention, but so far, it looks a lot like the Jake Paul/Mike Tyson performance. We remain incredibly excited about the opportunity in live. Upcoming, we’ve got Jake Paul versus Tank Davis from Miami, November 14th. We really are trying to grow our capabilities outside of the U.S. as well, which you’ll see next year with the World Baseball Classic from Japan.

Thanks, Ted. That’s a good segue to our next question, which is the quarterly question about sports for us. This is from Robert Fishman of MoffettNathanson. Since last earnings, we’ve seen several sports rights deals, including Apple F1, Paramount UFC, etc. While we still await an official MLB update, can you help us think about the importance of global sports rights versus local rights to Netflix? Do the sports rights you look to acquire need to materially accelerate your advertising growth?

As for local versus global, it’s just a scale question. Local cost versus the size of the local audience. No real change in the approach. We’re focused on big live events, which sports are a subcomponent of the live strategy. We’ve said before, we’re not currently focused on the big season packages. In terms of global versus local, we think about it just like series. It varies. Some, like the Canelo Crawford fight, had big global appeal. We think World Baseball Classic in Japan was actually built and designed and budgeted for a specific geography. As far as advertising is concerned, the number one important thing we have to do is thrill our audiences. The revenue from advertising or subscription is the reward for thrilling the audience. We have to stay disciplined on that approach. For upcoming live events that we’re excited about, I had mentioned Jake Paul versus Tank.

That’s November 14th. We have our double-header NFL Christmas Day games with Dallas versus Washington, Detroit versus Minnesota. Skyscraper Live is going to be wild. The SAG Awards, we’ve got WWE every week. I mentioned the World Baseball Classic in Japan in 2026. In 2027 and 2031, we’ve got FIFA’s Women’s World Cup as well. We’re pretty excited about the slate. There’s going to be a lot more that’ll come in between.

Thanks, Ted. We’ll take our next question from Rich Greenfield of Lightshed Partners. Are you testing premium-tier free trials? We recently, we meaning Rich, recently opened Netflix and were prompted with a 4K upgrade screen. Is this a typical promotion or are you selectively testing free trials?

Greg Peters, Co-CEO, Netflix: Yes, we test and productize a variety of offers that we think help members understand and sometimes try a feature or benefit that we think they might enjoy. If you got a 4K TV, as Rich does, you might get a notice from us and say, do you want to try watching, let’s say, Skyscraper Live, that Ted mentioned, somebody free climbing Taipei 101 in 4K and decide if that’s a good option for you. Ultimately, we want a range of plans. We want a range of features, different price points. We want to help members choose the right plan for themselves. We think that yields better member satisfaction and yields better engagement and retention and a better long-term business.

Thanks, Greg. We’ve gotten a series of questions on M&A on that topic today, not surprising given the announcement from our friends at Warner Brothers Discovery. We’ll take this next question from Jessica Reif-Ehrlich of Bank of America. Do you see potential industry consolidation reshaping the competitive landscape? Do you see that as an opportunity or a threat? What implications might that have for Netflix’s content strategy and differentiation?

Spencer Wang, VP of Finance, IR, and Corporate Development, Netflix: Thanks, Jessica. Look, we’ll take it in two parts. First, the opportunity. It’s true that historically, we’ve been more builders than buyers, and we think we have plenty of runway for growth without fundamentally changing that playbook. Nothing is a must-have for us to meet the goals that we have for the business. As we wrote in the letter, we focus on profitable growth and reinvesting in our business, both organically and through selective M&A. When it comes to M&A opportunities, we look at them and we look at all of them. We apply the same framework and lens that we look at when we look to invest in a build. Is it a big opportunity? First question. Second, if it’s IP, does it strengthen our entertainment offering? Is there additional value in ownership? Does it strengthen our existing capabilities somehow? Does it accelerate our existing strategy?

By the way, you look at all these things relative to the price, relative to the opportunity cost, and relative to other alternatives. We’ve been very clear in the past that we have no interest in owning legacy media networks. There is no change there. In general, we believe that we can be and we will be choosy. We have a great business. We’re predominantly focused on growing organically, investing aggressively and responsibly into the growth, and returning excess cash flow to shareholders through our share repurchase. Greg, do you want to add there on?

Greg Peters, Co-CEO, Netflix: Maybe I’ll try and speak to that second part of this, the threat part of the question. We’ve always faced significant competition. We still face it today. This is an incredibly competitive entertainment environment. We’ve also seen a lot of industry consolidation over the years. Think about Disney Fox and Amazon picking up MGM, of course, Time Warner and AT&T, and then Discovery and Warner. None of those mergers were a fundamental shift in the competitive landscape. We have seen also a wide range of outcomes from such mergers. Watching some of our competitors potentially get bigger via M&A does not change, in and of itself at least, our view on the competitive landscape. We don’t think it changes the substance of the challenge that our competitors face.

Specifically, the range of activities that we and our competitors have to get great at has never been assembled in a single company before. Think about producing film and TV shows across multiple genres and multiple languages in dozens of countries around the world, trying to figure out how to incorporate the latest technology, including AI and generative AI. We’re trying to figure out how we build better product experiences that can serve consumers better around the world. How about customer acquisition and retention? How do we optimize global payments? How do we optimize global partnerships? There is so much. We want to get better at all those things. Our competitors are seeking to get better at all those things, of course, as well. You have to do that by the hard work of developing those capabilities in the trenches day to day.

You don’t get there simply by buying another company that is also still developing those same capabilities. Maybe I’ll just end by reiterating what Ted said, which is it’s our responsibility to look at every significant opportunity. We do that. We’ve got a clear framework to evaluate those opportunities. We’ll do whatever we think is best to grow the business.

Great. Thank you. David Joyce from Seaport Research Partners has a slightly different angle on the M&A question. Should potential industry consolidation with embedded studio and streaming assets, could that lead to less third-party content accessibility for Netflix?

Spencer Wang, VP of Finance, IR, and Corporate Development, Netflix: Thanks, David. Look, original titles are the big business driver for us. That’s why we got into this, you know, more than 10 years ago. It’s why we continue to grow and expand the original content investment across new genres, new content forms, and multiple geographies. We’re happy to license titles from industry suppliers to complement our offering. It’s worth noting that we’ve always seen these kind of ebbs and flows from third-party content in terms of access to it. Our competitors are also our suppliers. They change their minds sometimes about selling to competitors. We’ve been dealing with that since the beginning of streaming. As we sit here today, we’re not dependent on any single supplier. No single supplier represents more than a small minority of our total view hours.

More importantly, I think, is that we’ve proven time and time again that licensing to Netflix is the best way to build audience, build revenue, and create value for your IP. Whether it’s Suits or Peaky Blinders or Breaking Bad, we’ve played a very positive role in the life cycle of other folks’ IP. We suspect that dynamic will continue.

Great. We now have a question from Justin Patterson of KeyBank. Netflix recently launched party games that are playable on the TV. How do you think gaming could change the time members spend with Netflix each day?

Greg Peters, Co-CEO, Netflix: Games are clearly a form of entertainment that consumers care about. In terms of the time they spend, which you noted, as well as the money they spend, it’s approximately a $140 billion opportunity consumer spend, ex-China, ex-Russia. That doesn’t even include the ad revenue, which of course is linked to the time and engagement. We’ve mostly talked so far about our work in this space as games because that’s an easy shorthand. We see this initiative as more about interactivity broadly. How does interactivity become complementary to linear storytelling? How is it able to unlock whole new entertainment experiences? For example, real-time voting will be our first live interactive feature. We’re currently testing it on Dinner Time Live with David Chang. It’s going to roll out more broadly, starting with Star Search in January.

We expect to provide other interactive features to deepen engagement with live events as we go in the future. When it comes to actual games, we’ve been building a ton of foundations for the last few years, things like the ability just to develop games, to get those games onto service, connect games with players, get them a high-quality experience. Going forward, we’re building on top of that foundation, but focusing on offering more high-quality games in a few key genres and targeting the right cohort of users. This is a less is more strategy on a few identified verticals. Those verticals include immersive narrative games based on our own IP. You can think about Squid Game Unleashed or Thronglets from the Black Mirror universe or Golf with Happy Gilmore. We’ve got games for kids. This is Peppa Pig, you know, no ads, no in-app payments, safe within your subscription.

Mainstream established titles, think about what we did with Grand Theft Auto, as well as socially engaging party games, which you noted. We’re rolling out this holiday season a slate of party games on TV. It’s great for the whole family. When you’re in front of that TV, all you need is the TV and your phone as a controller. It’s like Boggle Party, Pictionary Game Night, Lego Party, Tetris. We’ve got Party Crashers, which is a social deception game. The part that I like most about this is these games are super easy to access. It’s just like our series and films. You scroll the games tab, you pick whatever you want, click it, and you’re in. You don’t need a special controller. That’s key to this access.

In the years ahead, actually, speaking of controllers, we expect creators will really find interesting and novel ways to unlock all of the power that is in this incredibly advanced controller that we all happen to have in our pockets, which of course is our phones. We’re just starting to scratch the surface today. We think there’s much more we can ultimately do in this space. We already see how this approach not only extends the audience’s engagement with the story, but it creates a synergy that reinforces both mediums, the interactive and the non-interactive side. It drives engagement. It drives retention and therefore supports the business. Looking ahead, we’re going to ramp our investment in this area judiciously based on demonstrating that we’re ramping returns to the business. We’re extremely excited about, you know, the progress we’ve got ahead of us.

Spencer Wang, VP of Finance, IR, and Corporate Development, Netflix: I would say do not play Boggle with Greg. He’s very, very good.

Not as good as our Head of the Games unit, but he’s good.

He has a leg up on us. He’s very good.

Greg Peters, Co-CEO, Netflix: He does. I think he gets to play quite often.

All right, we have another question from Steve Cahill of Wells Fargo. Last quarter, you talked about Netflix being a great place for some creators on YouTube. Since then, you’ve announced one new creator deal with Mark Rober. Should we expect more on this front, and what kinds of content are you looking for?

Spencer Wang, VP of Finance, IR, and Corporate Development, Netflix: Yeah, thanks, Steve. I said before, but we want to be in business with the best creators on the planet, wherever they are. Some of them are in Hollywood, some of them are in Korea, some of them are in Paris, and some of them are sitting on social media platforms and have yet to be discovered. Not everything on YouTube is a fit for us, but there are some creators like Mark Rober, like Miss Rachel, that are great fits for us. Remember, working with content creators from other platforms isn’t a recent thing for us. Folks remember, over the years, we made Hype House. We partnered with Miranda Sings. She had a stand-up comedy special and a series called Haters Back Off.

King Bach, who’s a big star on social media, you can see him in a lot of our films, Babysitter Killer Queen, When We First Met, just to name a few. We also have created a curated select section of video podcasts as well. Some of this stuff is just a very natural expansion, and there’s plenty of room for the world’s best creators wherever they are.

Great. We’ll now wrap up with our last topic, which is Gen AI and two sort of questions or maybe a two-part question. The first part comes from Doug Anmuth of JPMorgan, who’s asking, how has your thinking evolved over the past couple of years about Netflix’s ability to leverage AI? Related, John Hudlick at UBS asks, what are your thoughts on the impact from Sora 2 and other new AI content creation apps in terms of increased competition from short-form video? Do you think it creates new competition from an engagement standpoint?

Greg Peters, Co-CEO, Netflix: Perhaps I’ll kick it off in the first part of that question. Our thinking about AI hasn’t really changed over a decade and a half or more. We’ve had a long history of developing machine learning and AI solutions. We’ve got, you know, a deep technology DNA. We’ve got significant data assets. We’ve got scaled consumer products and scaled business processes. All of that, we think, enables us to have the opportunity to leverage new technical capabilities as they come online. That’s our job. We’re engaging proactively to do so. As we said in the letter, specifically with generative AI, we see a huge number of places in the business where we can bring these technologies in. They provide more capable tools, improve productivity, improve velocity of innovation, and deliver better results for members, creators, and partners.

The vast majority of those cases involve us going to market for solutions and just integrating them into our existing tools and products. There are a few spaces where we think that making targeted investments is important. We think we can develop, often using building blocks from others. Think about this as foundational models that we get open source or commercially to make cutting-edge tools and cutting-edge experiences. Those targeted areas of investment are better product experiences, content production, and advertising. Maybe, Ted, you want to pick it up on the content creation apps as part of the question?

Spencer Wang, VP of Finance, IR, and Corporate Development, Netflix: Yeah, look, what we’ve seen so far from these content creation apps is that it’s likely to have a lot more impact on UGC creators the most in the near term. In other words, AI content replacing viewing of existing user-generated content. That starts to make sense. For what we do, it takes a great artist to make something great. Writing and making shows and films well is a rare commodity, and it’s only done successfully by very few people. AI can give creatives better tools to enhance their overall TV movie experience for our members, but it doesn’t automatically make you a great storyteller if you’re not. If music is a leading indicator of all this, AI-generated music has been around for a long time, and there’s a lot of it, and it’s a pretty small part of total listening.

Established artists like Taylor Swift continue to be more popular than ever. Even in a world filled with AI music, AI seems to be mostly a tool for musicians to take their sound in new directions. We’re confident that AI is going to help us and help our creative partners tell stories better, faster, and in new ways. We’re all in on that. We’re not chasing novelty for novelty’s sake here, and we’re investing in what we believe delivers value for creators and members alike. We’re not worried about AI replacing creativity, but we’re very excited about AI creating tools to help creativity.

Great. Thank you all for your questions. We’re now out of time. Thank you for joining us for our Q3 call. We look forward to speaking with you all next quarter. Thank you.

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