NetFlix 2006 Annual Report Download - page 68

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NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
estimates it will sell at the end of their useful lives, a salvage value of $3.00 per DVD has been provided
effective July 1, 2004. For those DVDs that the Company does not expect to sell, no salvage value is provided.
Simultaneously with the change in accounting estimate of expected salvage values, the Company recorded a
write-off of approximately $1.9 million related to non-recoverable salvage value in the third quarter of 2004.
The revenue sharing agreements enable the Company to obtain DVDs at a lower upfront cost than under
traditional direct purchase arrangements. Under the revenue sharing agreements, the Company shares a
percentage of the actual net revenues generated by the use of each particular title with the studios over a fixed
period of time, or the Title Term, which typically ranges from six to twelve months for each DVD title. The
revenue sharing expense associated with the use of each title is expensed to cost of revenues and is reflected in
cash flows from operating activities on the Company’s Consolidated Statements of Cash Flows. At the end of the
Title Term, the Company generally has the option of returning the DVD title to the studio, destroying the title or
purchasing the title. In addition, the Company remits an upfront non-refundable payment to acquire titles from
the studios and distributors under revenue sharing agreements. This payment includes a contractually specified
initial fixed license fee that is capitalized and amortized in accordance with the Company’s DVD library
amortization policy. This payment may also include a contractually specified prepayment of future revenue
sharing obligations that is classified as prepaid revenue sharing expense and is charged to expense as future
revenue sharing obligations are incurred.
DVD library and accumulated amortization consisted of the following:
As of December 31,
2005 2006
DVD library .......................................... $304,490 $ 484,034
Less accumulated amortization ........................... (247,458) (379,126)
DVD library, net ....................................... $ 57,032 $ 104,908
3. Intangible Assets
Intangible assets and accumulated amortization consisted of the following:
As of December 31,
2005 2006
Patents, gross ......................................... $481 $1,066
Less accumulated amortization ........................... (24) (97)
Patents, net ........................................... $457 $ 969
In 2005 and 2006, the Company capitalized $481 and $585, respectively, related to certain technology
patents acquired. The capitalized patents are being amortized in the Consolidated Statements of Operations over
the remaining useful life of the patents, the last of which expires in August 2020. The annual amortization
expense of the patents that existed as of December 31, 2006 is expected to be approximately $99 for each of the
five succeeding years.
F-15