NetFlix 2005 Annual Report Download - page 19

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Competitive Strengths
We believe that our revenue and subscriber growth are a result of the following competitive strengths:
•Comprehensive Library of Titles. We have developed strategic relationships with top studios and
distributors, enabling us to establish and maintain a broad and deep selection of titles. Since our service
is available nationally, we believe that we can economically acquire and provide subscribers a broader
selection of titles than video rental outlets, video retailers, subscription channels, pay-per-view and
VOD services. To maximize our selection of titles, we continuously add newly released titles to our
library. Our library contains numerous copies of popular new releases, as well as many titles that appeal
to more select audiences. We currently offer more than 55,000 titles.
•Personalized Merchandizing. We utilize our proprietary recommendation service to create a custom
interface for each subscriber to effectively merchandize our library. Subscribers rate titles on our Web
site, and our recommendation service compares these ratings to the database of ratings collected from
our entire user base. For each visitor, these comparisons are used to make predictions about specific
titles the visitor may enjoy. These predictions are used to merchandize titles to visitors throughout the
Web site. As of December 31, 2005, we had approximately one billion movie ratings in our database.
We believe that our recommendation service allows us to create demand for our entire library and
maximize utilization of each title.
•Scalable Business Model. We believe that we have a scalable, low-cost business model designed to
maximize our revenues and minimize our costs. As we continue to expand our subscriber base, we are
able to leverage operational changes in a cost effective manner which further reduces our operating
costs on a per subscriber basis. Such cost reductions include increased automation and vendor
negotiating leverage. Subscribers’ prepaid monthly payments and the recurring nature of our
subscription business provide working capital benefits and significant near-term revenue visibility. Our
scalable infrastructure and online interface eliminate the need for expensive retail outlets and allow us to
service our large and expanding subscriber base from a network of low-cost shipping centers. We
employ temporary, hourly and part-time workers to contain labor costs and provide maximum operating
flexibility.
•Convenience, Selection and Fast Delivery. Subscribers can conveniently select titles by building and
modifying a personalized queue of titles on our Web site. We create a unique experience for subscribers
because most pages on our Web site are tailored to individual selection and ratings history. Under our
most popular service, subscribers can have up to three DVDs out at the same time with no due dates or
late fees. Based on their queue, we send them available DVDs by U.S. mail that are then returned to us
in prepaid mailers. After receipt of returned DVDs, we mail subscribers the next available title in their
queue of selected titles. We have over 55,000 titles to choose from and our nationwide network of
distribution centers allows us to offer fast delivery.
Growth Strategy
Our strategy to provide a premier filmed entertainment subscription service to our large and growing
subscriber base includes the following key elements:
•Providing Compelling Value for Subscribers. We provide subscribers access to our comprehensive
library of more than 55,000 titles with no due dates, late fees or shipping charges for a fixed monthly
fee. We merchandize titles in easy-to-recognize lists including new releases, by genre and other targeted
categories. Our convenient, easy-to-use Web site allows subscribers to quickly select current titles,
reserve upcoming releases and build an individual queue for future viewing using our proprietary
personalization technology. We provide service features to our subscribers that, among other things,
enable social networking and further individualization of the service through establishment of
sub-account queues and recommendations. Our recommendation service provides subscribers with
recommendations of titles from our library. We quickly deliver titles to subscribers from our shipping
centers located throughout the United States by U.S. mail.
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