This business report has been created to establish and show who our company is and what we offer. It is our purpose to inform those who do not know anything about us and to show new opportunities for those who do know about us. We will talk about our goals, services we offer, our employees, our growth, and risk factors.
Netflix, Inc. is the world’s leading internet television network with over 93 million streaming members in over 190 countries enjoying more than 125 million hours of TV shows and movies per day, including original series, documentaries and feature films. Our members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Additionally, in the United States (“U.S.”), our members can receive DVDs delivered quickly to their homes.
We are a pioneer in the internet delivery of TV shows and movies, launching our streaming service in 2007. Since this launch, we have developed an ecosystem for internet-connected screens and have added increasing amounts of content that enable consumers to enjoy TV shows and movies directly on their internet-connected screens. As a result of these efforts, we have experienced growing consumer acceptance of, and interest in, the delivery of TV shows and movies directly over the internet.
Our core strategy is to develop our streaming membership business comprehensively inside the parameters of our overall revenue targets. We are consistently enhancing our members' experiences by expanding our content with an emphasis on a programming blend of substance that pleases our members. Also, we are interminably upgrading our user interface and stretching out our streaming services to more web connected screens. Our members would are now able to download a choice of titles for offline-streaming.
We continue to grow our streaming service both domestically and internationally. We began our international expansion with Canada in 2010 and have since then launched our service globally, with the exception of The People’s Republic of China and territories where U.S. companies are not allowed to operate. We have also expanded our streaming content offering to include more exclusive and original programming, including several Emmy, Golden Globe and Academy Award nominated original series and documentaries. Our original programming increasingly includes content that we produce.
The market for entertainment video is ridiculously competitive and subject to rapid and constant change. We compete against other entertainment television providers, such as multichannel video programming distributors (“MVPDs”), internet-based movie and television content providers (including those that provide pirated content), video gaming providers and DVD rental outlets and more broadly against other sources of entertainment that our members are able to choose in their moments of free time. We also compete against video providers in obtaining content that our members enjoy, both for licensed streaming content and for original content projects.
While consumers can maintain simultaneous relationships with multiple entertainment sources, we strive for consumers to choose our company specifically in their moments of free time. We have often referred to this choice as our objective of “winning moments of truth.” In attempting to win these moments of truth with our members, we are continually improving our service, including both our technology and our content, which is increasingly exclusive and curated, and includes our own original programming.
Our membership growth exhibits a seasonal pattern that reflects variations when consumers buy internet- connected screens and when they tend to increase their viewing. Historically, the first and fourth quarters (October through March) represent our greatest membership growth across our Domestic and International streaming segments. Our membership growth may be impacted by the release of certain high-profile original content. Internationally, we expect each market to demonstrate more predictable seasonal patterns as our service offering in each market becomes more established and we have a longer history to assess such patterns.
As of December 31, 2016, we had approximately 4,700 total employees. Of these employees, approximately 4,500 were full-time, including approximately 1,300 categorized as temporary.
Risks Related to Our Business
Changes in competitive offerings for entertainment video, including the potential rapid adoption of piracy- based video offerings, could adversely impact our business.
The market for entertainment video is intensely competitive and subject to rapid change. Through new and existing distribution channels, consumers have increasing options to access entertainment video. The various economic models underlying these channels include subscription, transactional, ad-supported and piracy-based models.
All of these have the potential to capture meaningful segments of the entertainment video market. Piracy, in particular, threatens to damage our business, as its fundamental proposition to consumers is so compelling and difficult to compete against: virtually all content for free. Furthermore, in light of the compelling consumer proposition, piracy services are subject to rapid global growth. Traditional providers of entertainment video, including broadcasters and cable network operators, as well as internet based e-commerce or entertainment video providers are increasing their internet-based video offerings.
Several of these competitors have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may secure better terms from suppliers, adopt more aggressive pricing and devote more resources to product development, technology, infrastructure, content acquisitions and marketing. New entrants may enter the market or existing providers may adjust their services with unique offerings or approaches to providing entertainment video. Companies also may enter into business combinations or alliances that strengthen their competitive positions. If we are unable to successfully or profitably compete with current and new competitors, our business will be adversely affected, and we may not be able to increase or maintain market share, revenues or profitability.
We could be subject to economic, political, regulatory and other risks arising from our international operations.
Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks that may be different from or incremental to those in the U.S. In addition to the risks that we face in the U.S., our international operations involve risks that could adversely affect our business, including:
• the need to adapt our content and user interfaces for specific cultural and language differences, including licensing a certain portion of our content assets before we have developed a full appreciation for its performance within a given territory;
• difficulties and costs associated with staffing and managing foreign operations;
• management distraction;
• political or social unrest and economic instability;
• compliance with U.S. laws such as the Foreign Corrupt Practices Act, export controls and economic sanctions, and local laws prohibiting corrupt payments to government officials;
• difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions;
• regulatory requirements or government action against our service, whether in response to enforcement of actual or purported legal and regulatory requirements or otherwise, that results in disruption or non- availability of our service or particular content in the applicable jurisdiction;
• less favorable foreign intellectual property laws;
• adverse domestic or international tax consequences such as those related to repatriation of cash from foreign jurisdictions into the United States, non-income related taxes such as value-added tax or other indirect taxes, changes in tax laws or tax rates or their interpretations and the related application of judgment in determining our global provision for income taxes, deferred tax assets or liabilities or other tax liabilities given the ultimate tax determination is uncertain;
• fluctuations in currency exchange rates, which we do not use foreign exchange contracts or derivatives to hedge against and which could impact revenues and expenses of our international operations and expose us to foreign currency exchange rate risk;
• profit repatriation and other restrictions on the transfer of funds;
• differing payment processing systems as well as consumer use and acceptance of electronic payment methods, such as payment cards;
• new and different sources of competition;
• censorship requirements that cause us to remove or edit popular content, leading to consumer disappointment or dissatisfaction with our service;
• low usage and/or penetration of internet-connected consumer electronic devices;
• different and more stringent user protection, data protection, privacy and other laws;
• availability of reliable broadband connectivity and wide area networks in targeted areas for expansion;
• integration and operational challenges as well as potential unknown liabilities in connection with companies we may acquire or control; and
• differing, and often more lenient, laws and consumer understanding/attitudes regarding the illegality of piracy.
Our failure to manage any of these risks successfully could harm our international operations and our overall business, and results of our operations.
Our corporate headquarters are located in Los Gatos, California and consist of leased space aggregating approximately 600,000 square feet.
In the United States, we lease other offices in various locations, including Beverly Hills, California for content acquisition, marketing and general and administrative operations and Fremont, California for our DVD operations. In 2017, we expect to relocate from Beverly Hills to Los Angeles in a new leased space of approximately 400,000 square feet. We also lease office space in other countries to support international streaming operations.
We believe that our existing facilities are adequate to meet current requirements, and that suitable additional or substitute space will be available as needed to accommodate any further physical expansion of operations and for any additional offices.
STOCK PERFORMANCE GRAPH
Notwithstanding any statement to the contrary in any of our previous or future filings with the Securities and Exchange Commission, the following information relating to the price performance of our common stock shall not be deemed “filed” with the Commission or “soliciting material” under the Securities Exchange Act of 1934 and shall not be incorporated by reference into any such filings.
The following graph compares, for the five year period ended December 31, 2016, the total cumulative stockholder return on the Company’s common stock, as adjusted for the Stock Split, with the total cumulative return of the NASDAQ Composite Index, the S&P 500 Index and the RDG Internet Composite Index. Measurement points are the last trading day of each of the Company’s fiscal years ended December 31, 2011, December 31, 2012, December 31, 2013, December 31, 2014, December 31, 2015 and December 31, 2016.
Total cumulative stockholder return assumes $100 invested at the beginning of the period in the Company’s common stock, the stocks represented in the NASDAQ Composite Index, the stocks represented in the S&P 500 Index and the stocks represented in the RDG Internet Composite Index, respectively, and reinvestment of any dividends.
In prior years, the Company used the S&P North American Technology Internet Index, which was discontinued in March 2016. Accordingly, the Company now uses the RDG Internet Composite Index as a replacement for the discontinued index. Historical stock price performance should not be relied upon as an indication of future stock price performance.
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