NetFlix 2007 Annual Report Download - page 7

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 approximately 90,000 DVD titles. We have established revenue sharing relationships with several
studios and distributors. We also purchase titles directly from studios, distributors and other suppliers. In
addition, we have more than 6,000 choices available on our Web site for instant-watching.
We ship and receive DVDs throughout the United States. We maintain a nationwide network of shipping
centers that allows 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, including movie theaters, airlines,
hotels and in-home. 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,
four to seven months after theatrical release to pay-per-view and VOD, one year after theatrical release to
premium television and two to three years after theatrical release to basic cable and network television. 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, such as Blu-ray, 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, existing subscription channels and traditional
video rental outlets stock a limited selection of titles, frustrating consumer demand for more choice. Subscription
channels, pay-per-view and VOD services continue to offer a relatively narrow selection of titles. Likewise,
traditional video rental outlets primarily offer new releases and devote limited space to display and stock back
catalog titles. We believe our selection of approximately 90,000 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 Web site features
provide our subscribers the tools to select titles that appeal to their individual preferences.
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