NetFlix 2007 Annual Report Download - page 6

Download and view the complete annual report

Please find page 6 of the 2007 NetFlix annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 83

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83

PART I
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements include, but are not limited to, statements regarding: the
growth of our business; growth in online DVD rentals; operating expenses; gross margin; liquidity;
developments in Internet delivery of content, our instant-watching feature and DVD formats; revenue per
average paying subscriber; impacts relating to our pricing strategy, our content library investments, and
fulfillment expenses. These forward-looking statements are subject to risks and uncertainties that could cause
actual results and events to differ. A detailed discussion of these and other risks and uncertainties that could
cause actual results and events to differ materially from such forward-looking statements is included throughout
this filing and particularly in Item 1A: “Risk Factors” section set forth in this Annual Report on Form 10-K. All
forward-looking statements included in this document are based on information available to us on the date
hereof, and we assume no obligation to revise or publicly release any revision to any such forward-looking
statement, except as may otherwise be required by law.
Item 1. Business
We are the largest online movie rental subscription service in the United States, providing approximately
7.5 million subscribers access to approximately 90,000 DVD titles plus a growing library of more than 6,000
choices that can be watched instantly on their personal computers, or PCs. We offer nine subscription plans,
starting at $4.99 a month. There are no due dates, no late fees and no shipping fees. Subscribers select titles at
our Web site aided by our proprietary recommendation service, receive them on DVD by U.S. mail and return
them to us at their convenience using our prepaid mailers. After a DVD has been returned, we mail the next
available DVD in a subscriber’s queue. We also offer certain titles through our instant-watching feature. The
terms and conditions by which subscribers utilize our service and a more detailed description of how our service
works can be found at www.netflix.com/TermsOfUse.
Our subscription service has grown rapidly since inception. This growth has been fueled by the rapid
adoption of DVDs as a medium for home entertainment as well as increased awareness of online DVD rentals.
We also believe our growth has been driven by our comprehensive selection of titles, consistently high levels of
customer satisfaction and our effective marketing programs. We expect that our business will continue to grow as
the market for online DVD rentals continues to grow, a reflection of both the convenience and value of the
subscription rental model.
Our core strategy is to grow a large DVD subscription business and to expand into Internet-based delivery
of content as that market develops. We believe that the DVD format, along with its high definition successor
formats, including Blu-ray will continue to be the main vehicle for watching content in the home for the
foreseeable future and that by growing a large DVD subscription business, we will be well positioned to
transition our subscribers and our business to Internet-based delivery of content. In January 2007, we introduced
our instant-watching feature for PCs. We intend to broaden the distribution capability of our instant-watching
feature to other platforms and partners over time. In January 2008, we announced a development arrangement
with LG Electronics. While the terms of this arrangement have not been finalized, we anticipate developing, in
conjunction with LG Electronics and other consumer electronics’ manufacturers, a set-top box device or other
devices that will enable our instant-watching feature to be viewed directly on subscribers’ televisions.
Our proprietary recommendation service enables us to create a customized store for each subscriber and to
generate personalized recommendations which effectively merchandise our comprehensive library of content.
We believe that our recommendation technology, based on proprietary algorithms and the approximately 2.0
billion movie ratings collected from our subscribers, enables us to build deep subscriber relationships and
maintain a high level of library utilization.
1