NetFlix 2010 Annual Report Download - page 37

When the streaming license fee is known or reasonably determinable for a specific title and the specific title
is first available for streaming to subscribers, the title is recognized on the consolidated balance sheets as current
content library for the portion available for streaming within one year and as non-current content library for the
remaining portion. New titles recognized in the content library are classified in the line item “Acquisition of
streaming content library” within net cash provided by operating activities in the consolidated statements of cash
flows. We amortize the content library on a straight-line basis over each title’s window of availability. The
amortization is classified in cost of subscription in the consolidated statements of operations and in the line item
“Amortization of content library” within net cash provided by operating activities in the consolidated statements
of cash flows. For the titles recognized in content library, the license fees due but not paid are classified on the
consolidated balance sheets as “Accounts payable” for the amounts due within one year and as “Other non-
current liabilities” for the amounts due beyond one year. Changes in these liabilities are classified in the line
items “Accounts payable” and “Other assets and liabilities” within net cash provided by operating activities in
the consolidated statement of cash flows. Commitments for the titles not yet available for streaming are not yet
recognized in the content library and are included in footnote 5 to the consolidated financial statements.
When the streaming license fee is not known or reasonably determinable for a specific title, the title does
not meet the criteria for recognition in the content library. The license fee is not known or reasonably
determinable for a specific title in fixed fee license agreements that do not specify the number of titles, the
license fee per title and the windows of availability per title. Over the term of these agreements, we typically
make periodic fixed prepayments that are classified in prepaid content on the consolidated balance sheets. We
amortize the license fees on a straight-line basis over the term of each license agreement. The amortization is
classified in cost of subscription in the consolidated statements of operations and in the line item “Net income”
within net cash provided by operating activities in the consolidated statements of cash flows. Changes in prepaid
content are classified within net cash provided by operating activities in the line item “Prepaid content” in the
consolidated statements of cash flows. Commitments for licenses that do not meet the criteria for recognition in
the content library are included in footnote 5 to the consolidated financial statements.
We acquire DVD content for the purpose of renting such content to our subscribers and earning subscription
rental revenues, and, as such, we consider our direct purchase DVD library to be a productive asset. Accordingly,
we classify our DVD library as a non-current asset on the consolidated balance sheets. The acquisition of DVD
content library, net of changes in related liabilities, is classified in the line item “Acquisition of DVD content
library” within cash used in investing activities in the consolidated statements of cash flows because the DVD
content library is considered a productive asset. Other companies in the in-home entertainment video industry
classify these cash flows as operating activities. We amortize our direct purchase DVDs, less estimated salvage
value, on a “sum-of-the-months” accelerated basis over their estimated useful lives. The useful life of the new
release DVDs and back-catalog DVDs is estimated to be one year and three years, respectively. In estimating the
useful life of its DVDs, we consider historical utilization patterns, primarily the number of times a DVD title is
shipped to subscribers in a given period, as well as an estimate for lost or damaged DVDs. The amortization of
the DVD content library is classified in cost of subscription in the consolidated statement of operations and in the
line item “Amortization of content library” within net cash provided by operating activities in the consolidated
statements of cash flows.
We also obtain DVD and streaming content through revenue sharing agreements with studios and
distributors. Revenue sharing obligations incurred based on utilization are classified in cost of subscription in the
consolidated statements of operations and in the line item “Net income” within net cash provided by operating
activities in the consolidated statements of cash flows. The terms of some revenue sharing agreements obligate us
to make a low initial payment for certain titles, representing a minimum contractual obligation under the
agreement. The low initial payment is in exchange for a commitment to share a percentage of our subscription
revenues or to pay a fee, based on utilization, for a defined period of time, or the title term, which typically
ranges from six to twelve months for each title. The initial payment may be in the form of an upfront non-
refundable payment. This payment is capitalized in the content library in accordance with our DVD and
streaming content policies as applicable. The initial payment may also be in the form of a prepayment of future
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