NetFlix 2006 Annual Report Download - page 14

Content Acquisition
We acquire content either through revenue sharing agreements or direct purchases. Under our revenue
sharing agreements with studios and distributors, we generally obtain titles for a low initial cost in exchange for a
commitment to share a percentage of our subscription revenues for a defined period of time. After the revenue
sharing period expires for a title, we generally have the option of returning the title to the studio, destroying the
title or purchasing the title. The principal structure of each agreement is similar in nature but the specific terms
are generally unique to each studio. In addition to revenue sharing agreements, we also purchase titles from
various studios, distributors and other suppliers on a purchase order basis. For titles delivered through our
instant-viewing feature, we license content on a fixed fee or per-view basis from various studios and other
content providers.
Fulfillment Operations
We currently stock more than 70,000 titles on more than 55 million DVDs. We have allocated substantial
resources to developing, maintaining and testing the proprietary technology that helps us manage the fulfillment
of individual orders and the integration of our Web site, transaction processing systems, fulfillment operations,
inventory levels and coordination of our shipping centers.
We ship and receive DVDs from a nationwide network of shipping centers located throughout the United
States. We believe our shipping centers allow us to improve the subscription experience for subscribers by
shortening the transit time for our DVDs through the U.S. Postal Service. We currently do not ship on weekends
or holidays.
Customer Service
We believe that our ability to establish and maintain long-term relationships with subscribers depends, in
part, on the strength of our customer support and service operations. We engage in frequent communication with
our subscribers in order to continually improve our Web site and our service. Our customer service center is open
seven days a week. We utilize e-mail and phone service to communicate with subscribers. We focus on
eliminating the causes of customer support calls and providing certain self-service features on our Web site, such
as the ability to report and correct most shipping problems. We continue to explore new avenues to deliver
efficient problem resolution and feedback channels. Our customer service center is located in Hillsboro, Oregon.
Competition
The market for in-home filmed entertainment is intensely competitive and subject to rapid change. Many
consumers maintain simultaneous relationships with multiple in-home filmed entertainment providers and can
easily shift spending from one provider to another. For example, consumers may subscribe to HBO, rent a DVD
from Blockbuster, buy or download a DVD from Wal-Mart or Amazon and subscribe to Netflix, or some
combination thereof, all in the same month.
Video rental outlets and retailers with whom we compete include Blockbuster, Movie Gallery,
Amazon.com, Wal-Mart Stores and Best Buy. We believe that we compete with these video rental outlets and
movie retailers primarily on the basis of title selection, convenience and price. We believe that our scalable
business model, our subscription service with home delivery and access to our comprehensive library of more
than 70,000 DVD titles compete favorably against traditional video rental outlets and retailers.
We also compete against other online DVD subscription services, such as Blockbuster Online, subscription
entertainment services, such as HBO and Showtime, pay-per-view and VOD providers and cable and satellite
providers. It remains possible that other potential online entrants will offer competing services, either directly or
in conjunction with others.
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