NetFlix 2014 Annual Report Download - page 53

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Table of Contents
Streaming Content
The Company licenses and acquires rights to stream TV shows, movies and original content to members for unlimited viewing. These
rights are for a fixed fee and specify windows of availability. Payment terms for certain content agreements require more up-front cash relative
to expense.
The Company capitalizes the fee per title and records a corresponding liability at the gross amount of liabilities when the license period
begins, the cost of the title is known and the title is accepted and available for streaming. The portion available for streaming within one year is
recognized as “Current content library, net” and the remaining portion as “Non-current content library, net” on the Consolidated Balance
Sheets. The acquisition of streaming content rights and the changes in related liabilities, are classified within cash used in operating activities
on the Consolidated Statements of Cash Flows.
The Company amortizes the content library in “Cost of revenues” on a straight line or on an accelerated basis, as appropriate:
The content library is stated at the lower of unamortized cost or net realizable value. Streaming content (whether capitalized or not) is
reviewed in aggregate at the geographic region level for impairment when an event or change in circumstances indicates a change in the
expected usefulness of the content. The level of geographic aggregation is determined based on the streaming content rights which are
generally specific to a geographic region inclusive of several countries (such as Latin America). No material write down from unamortized cost
to a lower net realizable value was recorded in any of the periods presented.
DVD Content Library
The Company acquires DVD content for the purpose of renting such content to its members and earning membership rental revenues,
and, as such, the Company considers its direct purchase DVD library to be a productive asset. Accordingly, the Company classifies its DVD
library in “Non-current content library, net” on the Consolidated Balance Sheets. The acquisition of DVD content library, net of changes in
related liabilities, is classified within cash used in investing activities on 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. The Company amortizes its direct purchase DVDs on an accelerated basis over their estimated useful lives, which range from one
year to
two years. The Company also obtains DVD content through revenue sharing agreements with studios and other content providers.
Revenue sharing obligations are expensed as incurred based on shipments.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over
the shorter of the estimated useful lives of the respective assets, generally up to 30 years , or the lease term for leasehold improvements, if
applicable. Leased buildings are capitalized and included in property and equipment when the Company was involved in the construction
funding and did not meet the “sale-leaseback” criteria.
47
• For content that does not premiere on the Netflix service (representing the vast majority of content), the Company amortizes on a
straight-line basis over the shorter of each title’s contractual window of availability or estimated period of use, beginning with the
month of first availability. The amortization period typically ranges from six months to five years.
•
For content that premieres on the Netflix service, the Company expects more upfront viewing due to the additional merchandising and
marketing efforts for this original content available only on Netflix. Hence, the Company amortizes on an accelerated basis over the
amortization period, which is the shorter of four years or the license period, beginning with the month of first availability. If a
subsequent season is added, the amortization period is extended by a year.
•
If the cost per title cannot be reasonably estimated, the license fee is not capitalized and costs are expensed on a straight line basis over
the license period. This typically occurs when the license agreement does not specify the number of titles, the license fee per title or
the windows of availability per title.