NetFlix 2003 Annual Report Download - page 18

We ship and receive DVDs throughout the United States. We maintain a nationwide network of shipping
centers that allow us to provide fast delivery and return service to our subscribers. As of December 31, 2003, we
were capable of providing more than 80 percent of our subscribers with generally one-day service.
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.
We are organized in a single operating segment. All our revenues are generated in the United States, and
substantially all our revenues are derived from monthly subscription fees.
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. According to Adams Media Research, there were approximately 54 million
U.S. television households with a stand-alone set-top DVD player, representing 49 percent of U.S. television
households, at the end of 2003. This number does not include other electronic devices, such as 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 which resulted in significant additional
demand for both new releases and back catalogue inventory. Similarly, we anticipate that DVD will, for all
practical purposes, replace the VHS cassette and thereafter, DVD will enjoy a similarly long consumer lifetime.
We provide titles to our subscribers on DVD only and have 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 offer new releases and devote limited space to display and stock back catalogue titles.
Second, 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 that appeal to their individual preferences.
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