NetFlix 2002 Annual Report Download - page 12

We are focused on growing our subscriber base and revenues and utilizing our proprietary technology to minimize operating costs. Our technology is extensively employed to manage and
integrate our business, including our Web site interface, order processing, fulfillment operations and customer service. We believe that our technology also allows us to maximize our library
utilization and to run our fulfillment operations in a flexible manner with minimal capital requirements.
Our service is available nationwide. However, we continue to evaluate international expansion opportunities and believe that, when and if appropriate, we will be successful in expanding our
operations beyond the United States.
Industry Overview
Filmed entertainment is distributed broadly through a variety of channels. Out−of−home channels include movie theaters, airlines and hotels. In−home distribution channels include home
video rental and retail outlets, cable and satellite television, pay−per−view, video−on−demand, or VOD, and broadcast television. Currently, studios distribute their filmed entertainment
content approximately six months after theatrical release to the home video market, seven to nine months after theatrical release to pay−per−view and VOD, one year after theatrical release
to satellite and cable and two to three years after theatrical release to basic cable and syndicated networks; however, in what may be an emerging trend, several of the major studios have
recently shortened the release window on certain titles, in particular the theatrical to home video window.
Consumer Transition to DVD
The home video segment of the in−home filmed entertainment market has undergone a rapid technology transition away from VHS to DVD. At the end of 2002, there were 37 million U.S.
television households with a stand−alone set−top DVD player, representing 34% of U.S. television households, according to Adams Media Research. This number does not include other
electronic devices, such as desktop and laptop computers and video game players, many of which are also capable of playing DVDs. We believe this transition is analogous to the shift in the
music industry from audio cassettes to compact discs that resulted in significant additional demand for both new releases and back catalogue inventory. Similarly, we anticipate that the DVD
will, for all practical purposes, replace the VHS cassette and thereafter, the DVD will enjoy a similarly long consumer lifetime. Netflix provides titles to our subscribers on DVD only and has
never carried VHS content.
Challenges Faced by Consumers in Selecting In−Home Filmed Entertainment
The proliferation of new releases available for in−home filmed entertainment and the additional demand for back catalogue titles on DVD create two primary challenges for consumers in
selecting titles.
First, despite the large number of available titles, consumers lack a deep selection of titles from existing subscription channels and traditional video rental outlets. Subscription channels, such
as HBO and Showtime, and pay−per−view services currently offer a narrow selection of titles at specified times due to programming schedule constraints and technological issues relating to
channel capacity. Traditional video rental outlets primarily focus on offering new releases and devote limited space to display and stock back catalogue titles.
Even when consumers have access to the vast number of titles available, they generally have limited means to effectively sort through the titles. We believe our recommendation service
provides our subscribers the tools to select titles within the vast array of options that appeal to their individual preferences.
Competitive Strengths
We believe that our revenue and subscriber growth are a result of the following competitive strengths:
•Comprehensive Library of Titles . We have developed strategic relationships with top studios and distributors, enabling us to establish and maintain a broad and
deep selection of titles. Since our service
3