NetFlix 2006 Annual Report Download - page 11

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primarily offer new releases and devote limited space to display and stock back catalog titles. We believe our
selection of over 70,000 titles on DVD offers an attractive alternative to these traditional channels.
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 and our website features
provide our subscribers the tools to select titles that appeal to their individual preferences. We also recently
launched our Previews feature, which allows subscribers to conveniently and efficiently browse through
promotional trailers of movies they may find appealing and directly add them to their queue.
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 DVD titles. Since our
service is available nationally, we believe that we can economically acquire and provide subscribers a
broader selection of DVD titles than video rental outlets, video retailers, subscription channels,
pay-per-view and VOD services. To maximize our selection of DVD titles, we continuously add newly
released DVD titles to our library. Our DVD library contains numerous copies of popular new releases,
as well as many DVD titles that appeal to more select audiences. We currently offer more than 70,000
DVD titles and more than 1,000 titles available through our instant-viewing feature.
•Personalized Merchandising. We utilize our proprietary recommendation service to create a custom
interface for each subscriber to effectively merchandise 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 merchandise titles to visitors throughout the Web site.
As of December 31, 2006, we had approximately 1.7 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 DVD.
•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 allow us to service our large and expanding subscriber base from a network of
low-cost shipping centers.
•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 subscribers return to us
in prepaid mailers. After receipt of returned DVDs, we mail subscribers the next available DVD in their
queue of selected titles. We have over 70,000 DVD titles to choose from and our nationwide network of
distribution centers allows us to offer fast delivery. In addition, in January of 2007, we introduced our
instant-viewing feature which is being made available to subscribers in a phased roll-out.
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