NetFlix 2006 Annual Report Download - page 10

experience and functionality and seek to create value-added features for our subscribers, such as our social
networking feature, called Friends®and our queue management feature, called ProfilesSM. In addition, we
generate a small portion of our revenue from the sale of advertising.
We promote our service to consumers through various marketing programs, including online promotions,
television and radio advertising, package inserts, direct mail and other promotions with third parties. These
programs encourage consumers to subscribe to our service and may include a free trial period. 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.
We stock more than 70,000 DVD titles. We have established revenue sharing relationships with several
studios and distributors. We also purchase titles directly from studios, distributors and independent producers. In
addition, we have more than 1,000 titles available on our website for instant viewing. We also develop and
acquire content through our wholly-owned subsidiary, Red Envelope Entertainment, LLC, which is dedicated to
developing and acquiring original content productions.
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.
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 continues to be an emerging trend, the major studios have shortened the release
window on certain titles, in particular the theatrical to home video window. We anticipate that the studios will
continue to test a variety of modifications or adjustments to the traditional window, including releasing movies
simultaneously on DVD and VOD, but we believe that DVD, and its high definition successors HD-DVD and
BluRay, will continue to receive a preferential distribution window in light of the large profits DVD generates for
the studios.
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 catalog titles on DVD create two primary challenges for consumers in selecting titles.
First, despite the large number of available titles on DVD, consumers lack a deep selection of titles from
existing subscription channels and traditional video rental outlets. Subscription channels, pay-per-view and
video-on-demand services continue to offer a narrow selection of titles. Likewise, traditional video rental outlets
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