NetFlix 2003 Annual Report Download - page 17

PART I
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements include statements regarding: the accuracy of our
recommendation service; our plans to open additional shipping centers; impacts from shorter delivery time;
strategic initiatives regarding international expansion and downloading; operating expenses; future stock-based
compensation; and customer acquisition and retention. These forward-looking statements are subject to risks
and uncertainties described under the caption “Factors That May Affect Future Results of Operations” which
could cause actual results to materially differ. We take no obligation to revise or publicly release the results of
any revision to any forward-looking statements contained in this annual report on Form 10-K, or to explain why
actual results differ.
Item 1. Business
We are the largest online movie rental subscription service in the United States, providing more than
1,487,000 subscribers access to a comprehensive library of more than 18,000 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. In addition to our standard plan, we offer other service plans with different price points that
allow subscribers to keep either fewer or more titles at the same time. Subscribers select titles at our Web site
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 comprehensive selection of titles, 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 had generally one-day delivery service since launch, approximately 5.9 percent of all households
subscribed to Netflix at the end of 2003.
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. In
the fourth quarter of 2003, more than 99 percent of our titles were selected by our subscribers to add to their
queue. In comparison, most entertainment service providers promote a narrow selection of box office hits. We
believe that our recommendation technology, based on proprietary algorithms and the more than 300 million
movie ratings we have collected from our subscribers, enables us to build deep subscriber relationships and
maintain a high level of library utilization.
We promote our service to consumers through various marketing programs, including online promotions,
television advertising, advertising insertions with most leading DVD player manufacturers and promotions with
other third parties. These programs encourage consumers to subscribe to our service and include a free trial
period of 14 days. At the end of the trial period, subscribers are automatically enrolled as paying subscribers,
unless they cancel their subscription. Approximately 90 percent of trial subscribers become paying subscribers.
All paying subscribers are billed monthly in advance.
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. We also purchase titles directly from
studios, distributors and independent producers. These relationships provide us access to titles on financial terms
that are attractive to us.
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