NetFlix 2004 Annual Report Download - page 17

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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, but are not limited to, statements regarding:
operating expenses; gross margin; liquidity; subscriber acquisition and retention; churn; developments in
downloading; revenue per average paying subscriber; and impacts arising from our price change, delivery time,
volume of movie rentals, our DVD library investments, marketing expenses, and subscriber acquisition cost.
These forward-looking statements are subject to risks and uncertainties that could cause actual results and
events to differ. A detailed discussion of these and other risks and uncertainties that could cause actual results
and events to differ materially from such forward-looking statements is included throughout this filing and
particularly in the “ Factors That May Affect Future Results of Operations” section set forth in this Annual
Report on Form 10-K. All forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to revise or publicly release the results of any
revision to any such forward-looking statement, except as may otherwise be required by law
Item 1. Business
We are the largest online movie rental subscription service providing more than 2,600,000 subscribers
access to a comprehensive library of more than 35,000 movie, television and other filmed entertainment titles.
Our standard subscription plan allows subscribers to have up to three titles out at the same time with no due
dates, late fees or shipping charges for $17.99 per 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 U.S. mail and return them to us at their convenience using our prepaid mailers. After 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
approximately 9 percent and, in the rest of the country approximately 2.3%, of all households subscribed to
Netflix at the end of 2004.
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
believe that our recommendation technology, based on proprietary algorithms and the hundreds of millions of
movie ratings we have collected from our subscribers, enables us to build deep subscriber relationships and
maintain a high level of library utilization.
We continually invest in improvements to our service in an effort to deepen our subscriber relationships as
well as to further distinguish our service from that of our competitors. In the fourth quarter of 2004, we launched
our social networking feature, called FriendsTM, which allows subscribers to share movie ratings and
recommendations with their friends who are also Netflix subscribers. We also launched ProfilesTM, which allows
subscribers to set up sub-accounts for spouses, children and others, where each sub-account gets its own queue
and recommendations.
We promote our service to consumers through various marketing programs, including online promotions,
television advertising, package inserts and other promotions with third parties. These programs encourage
consumers to subscribe to our service and may include a free trial period of 14 days. At the end of the free trial
period, subscribers are automatically enrolled as paying subscribers, unless they cancel their subscription. All
paying subscribers are billed monthly in advance.
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