NetFlix 2002 Annual Report Download - page 11

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PART I
Forward−Looking Statements
This annual report contains forward−looking statements within the meaning of the federal securities laws. These forward−looking statements include statements regarding: our plans to
open additional distribution centers in 2003; marketing expenses; technology and development expense; future stock−based compensation expense; our short−term investment strategy;
international expansion; the ability of our recommendation service to accurately predict subscriber preferences; and customer acquisition and retention. These forward−looking statements
are subject to risks and uncertainties described under the caption “Risks Related to Our Business” which could cause actual results to materially differ.
Item 1. Business
We are the largest online entertainment subscription service in the United States providing more than 1,000,000 subscribers access to a comprehensive library of more than 14,500 movie,
television and other filmed entertainment titles. Our standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges for
$19.95 per month. Subscribers can view as many titles as they want in a month. Subscribers select titles at our Web site (www.netflix.com) aided by our proprietary recommendation service,
receive them on DVD by first−class mail and return them to us at their convenience using our prepaid mailers. Once a title has been returned, we mail the next available title in a subscriber’s
queue.
Our subscription service has grown rapidly since its launch in September 1999. We believe our growth has been driven primarily by our unrivalled selection, consistently high levels of
customer satisfaction, rapid consumer adoption of DVD players and our effective marketing programs. In the San Francisco Bay area, where we have one− or two−day delivery,
approximately 3.8% of all households subscribe to Netflix.
Our proprietary recommendation service enables us to create a customized store for each subscriber and to generate personalized recommendations which effectively merchandize our
comprehensive library of titles. We provide more than 30 million personal recommendations daily. In the fourth quarter of 2002, more than 97% of our more than 14,500 titles were selected
by our subscribers. In comparison, most entertainment service providers merchandize a narrow selection of box office hits. The average large video store carries less than 3,000 DVD titles.
We believe that our recommendation technology, based on proprietary algorithms and the more than 230 million movie ratings we have collected from our users, enables us to build deep
subscriber relationships and maintain a high level of library utilization.
We market our service to consumers primarily through pay−for−performance marketing programs, including online promotions, advertising insertions with most leading DVD player
manufacturers and promotions with electronics and video software retailers. These programs encourage consumers to subscribe to our service and include a free trial period of typically 14
days. At the end of the trial period, subscribers are automatically enrolled as paying subscribers, unless they cancel their subscription. Approximately 90% of trial subscribers become paying
subscribers. All paying subscribers are billed monthly in advance by credit card.
We stock almost every title available on DVD, excluding mature and adult content. We have established revenue sharing relationships with more than 50 studios and distributors. These
relationships provide us access to titles on terms attractive to us. We also purchase titles directly from studios, distributors and independent producers.
We ship and receive DVDs from numerous shipping centers located throughout the United States. We currently are operating 18 shipping centers, including our San Jose operations, and plan
to open additional shipping centers in 2003. These centers allow us to provide increasingly faster delivery and return service to our subscribers.
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