NetFlix 2005 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 and the DVD format; revenue per average paying subscriber; and impacts relating to our pricing
strategy, delivery time, volume of movie rentals and growth of the online DVD rental market, 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 Item 1A: “Risk Factors” 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 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 4,200,000 subscribers
access to a comprehensive library of more than 55,000 movie, television and other filmed entertainment titles.
Our most popular 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, we offer a number of other subscription
plans to accommodate a variety of movie watching preferences. 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 late 1999. This growth has been fueled by the
rapid adoption of DVDs as a medium for home entertainment as well as increased awareness of online DVD
rentals. We also believe our growth has been driven by our comprehensive selection of titles, consistently high
levels of customer satisfaction and our effective marketing programs. We expect that our business will continue
to grow as the market for online DVD rentals continues to grow, a reflection of both the convenience and value
of the subscription rental model.
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 approximately one billion
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. We focus on improving our website
experience and functionality and seek to create value-added features for our subscribers, such as our social
networking feature, called FriendsSM and our queue management feature, called ProfilesSM. In addition, we
continue to focus on the new revenue initiatives launched in the second quarter of 2005: retail sales of
previously-viewed DVDs and our Ad Sales program. We also continue to invest resources to develop solutions
for downloading movies to consumers. Our core strategy has been and remains to grow a large DVD subscription
business; however, as technology and infrastructure develop to allow effective and convenient delivery of movies
over the Internet and when meaningful content becomes available, we intend to offer our subscribers the choice
of receiving their movies on DVD or by downloading, whichever they prefer.
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