NetFlix 2004 Annual Report Download - page 18

We stock more than 35,000 DVD titles. We have established revenue sharing relationships with more than
67 studios and distributors. We also purchase titles directly from studios, distributors and independent producers.
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, 2004, we
had 30 shipping centers.
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 we
have no long-lived assets outside the United States. 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 three to 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 is an emerging trend, the major studios have 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, at the end of 2004, there were
approximately 71 million U.S. television households with a stand-alone set-top DVD player, representing
approximately 64 percent of U.S. television households. 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 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 continue to 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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