NetFlix 2002 Annual Report Download - page 4

Clearly, we are pleased with the results of the past 12 months. In addition to our strong finan-
cial performance, our accomplishments also included surpassing, in our first major metropoli-
tan target market of San Francisco, our nationwide goal of 5 percent household penetration.
We remain opportunistic in looking for ways to improve our service and our operations. In
2002, we invested in 12 new distribution centers around the U.S., increasing the number of
our subscribers who receive their DVDs with next-day service through the U.S. mail. Our
marketing initiatives to acquire new subscribers through various channels including banner
advertising, direct merchandising, and word-of-mouth remain highly successful. We will con-
tinue to evaluate the cost-effectiveness of new channels such as broadcast television as
the number of DVD households continues to grow.
Investors are right to ask why a company, regardless of how well it may be doing at present,
believes its success will endure. At Netflix, we are encouraged by a number of market trends
that indicate strong demand for our service in both the immediate and long-term future.
For starters, consumers are becoming increasingly comfortable with the Internet. The wide-
spread adoption of broadband technologies means a smoother web experience for more
people across the U.S. In particular, people are coming to appreciate the more personalized
recommendations that are enabled by software (compared to, for example, recommenda-
tions from video store clerks who may know nothing about their customers’ movie tastes)
as well as the ease and security with which purchases may now be made online.
Second, as hardware improves and costs come down, the growth of DVD as the medium
of choice for at-home movie entertainment is accelerating. We expect that household
penetration of DVD, already the fastest-growing consumer electronics product in history,
will climb from its approximately 40 million TV households currently to over 100 million in
the next three years.
As DVD ownership has become more mainstream, so has our subscriber base. In 1998 the
demographic profile of our initial target subscriber was a classic early adopter: predomi-
nantly affluent, technologically-savvy, and male. Today, women make up more than half of
our subscribers, while the household income of members joining today is roughly half that
of subscribers who joined two years ago.
To these trends add America’s continuing love affair with movies, which made 2002 the
highest-grossing box office year ever. With Netflix offering consumers a better way to
explore their love of movies at home, consumers are beginning to express a clear prefer-
ence for our simple, easy-to-use subscription service.
BUSINESS BASICS.