NFLX

Netflix, Inc.

With more than 12 million subscribers, we are the world’s largest subscription service streaming movies and TV episodes over the Internet and sending DVDs by mail. Our subscribers can instantly watch unlimited movies and TV episodes streamed to their TVs and computers and can receive DVDs delivered quickly to their homes. We offer a variety of subscription plans, with no due dates, no late fees, no shipping fees and no pay-per-view fees. Aided by our proprietary recommendation and merchandising technology, subscribers can select from a growing library of titles that can be watched instantly and a vast array of titles on DVD. On average, approximately 2 million discs are shipped daily from our distribution centers across the United States. Additionally, more than 48% of our subscribers instantly watched more than 15 minutes of streaming content in the fourth quarter of 2009.

Subscribers can:

•Watch streaming content without commercial interruption on their computers and TVs. The viewing experience is enabled by Netflix controlled software that can run on a variety of consumer electronics devices (“Netflix Ready Devices”). These Netflix Ready Devices currently include Blu-ray disc players, Internet-connected TVs, digital video players and game consoles.

•Receive DVDs 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.

Our core strategy is to grow a large subscription business consisting of streaming and DVD-by-mail content. By combining streaming and DVD as part of the Netflix subscription, we are able to offer subscribers a uniquely compelling selection of movies for one low monthly price. We believe this creates a competitive advantage as compared to a streaming only subscription service. This advantage will diminish over time as more content becomes available over the Internet from competing services, by which time we expect to have further developed our other advantages such as brand, distribution, and our proprietary merchandising platform. Despite the growing popularity of Internet delivered content, we expect that the standard definition DVD, along with its high definition successor, Blu-ray (collectively referred to as “DVD”), will continue to be the primary means by which a majority of Netflix subscribers view content for the foreseeable future. However, at some point in the future, we expect that Internet delivery of content to the home will surpass DVD as the primary means by which most Netflix subscribers view content.

We promote our service to consumers through various marketing programs, including online promotions, TV and radio advertising, package inserts, direct mail and other promotions with third parties. We also engage our consumer electronics partners to generate new subscribers for our service. 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 believe that our paid marketing efforts are significantly enhanced by the benefits of word-of-mouth advertising, our subscriber referrals and our active public relations programs.

We use our proprietary recommendation and merchandising technology to determine which titles are presented to a subscriber. In doing so, we believe we provide our subscribers with a quick and personalized way to find titles they are more likely to enjoy while also effectively managing our inventory utilization. Our merchandising efforts are used throughout our web site and as part of the user interface on many Netflix Ready Devices to determine which titles are displayed to subscribers, including the generation of lists of similar titles. We believe our merchandising efforts create a powerful method for catalog browsing and efficient library utilization.

We obtain content through direct purchases, revenue sharing agreements and license agreements with studios, distributors and other suppliers. DVD content is typically obtained through direct purchases or revenue sharing agreements. Streaming content is generally licensed for a fixed fee for the term of the license agreement.

We ship and receive DVDs throughout the United States and maintain a nationwide network of shipping centers that allows us to provide fast delivery and return service to our subscribers. We also utilize third party content delivery networks to help us efficiently stream movies and TV episodes in high volume to Netflix subscribers over the Internet.

We are focused on growing our subscriber base and revenues and utilizing our proprietary recommendation and merchandising technology to minimize variable and fixed operating costs within the framework of providing a valuable and compelling user experience. 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. We currently generate all our revenues in the United States, although we plan to launch a limited international expansion with a streaming subscription service in 2010. Substantially all our revenues are derived from monthly subscription fees. We have no long-lived assets outside the United States.

Growth strategy

Our core strategy to grow a large subscription business consisting of streaming and DVD-by-mail content includes the following key elements:

Providing compelling value for subscribers. For a low fixed monthly fee, we provide subscribers access to a growing library of movies and TV episodes that can be watched instantly and a vast selection of DVD titles. We quickly deliver DVDs to subscribers from our shipping centers located throughout the United States by U.S. mail. Subscribers can, at no additional fee, also stream movies and TV episodes to their computers and TVs. There are no due dates, no late fees, no shipping fees and no pay-per-view fees. We merchandise titles in easy-to-recognize lists including new releases, by genre and other targeted categories. Our recommendation and merchandising technology provides subscribers with individualized recommendations of titles from our library. Our convenient, easy-to-use Web site allows subscribers to quickly select current titles, reserve upcoming releases and build an individual queue for future viewing.

Utilizing technology to enhance subscriber experience and operate efficiently. We utilize proprietary and other technology to manage the processing and distribution of DVDs from our shipping centers and the delivery of streaming content over the Internet. Our software and equipment automate the process of tracking and routing DVDs to and from each of our shipping centers and allocate order responsibilities among them. We continuously monitor, test and seek to improve the efficiency of our distribution, processing and inventory management systems as our subscriber base and shipping volume grows. We operate a nationwide network of shipping centers and continue to develop this network to meet the demands of our operations. We also utilize third party content delivery networks to help us efficiently stream movies and TV episodes in high volume to Netflix subscribers over the Internet.

Building mutually beneficial relationships with entertainment video providers. We have invested substantial resources in establishing strong ties with various entertainment video providers. We maintain an office in Beverly Hills, California in order to maintain effective working relationships with the major studios. We obtain content through direct purchases, revenue sharing agreements and license agreements. We work with the content providers to determine which method of acquiring titles is the most beneficial for each party. Our growing subscriber base provides studios with an additional distribution outlet for popular movies and TV episodes, as well as niche titles and programs.

Expanding the number of devices capable of streaming video from Netflix. We have engaged a number of consumer electronics partners to offer instant streaming of content from Netflix to various devices. We currently offer subscribers the ability to stream content through their computers and other devices, including the Xbox 360, PlayStation3, Internet-connected TVs and Blu-ray players, TiVo, and the Roku video digital player. We intend to broaden our partner relationships over time so that more devices, such as the Nintendo Wii game console, are capable of streaming content from Netflix. By providing consumers with a broad array of devices capable of streaming content from Netflix, we believe that we enhance the value of our service to subscribers as well as position ourselves for continued growth as the Internet delivery of content becomes more popular.

Employees

As of December 31, 2009, we had 1,883 full-time employees. We also utilize part-time and temporary employees, primarily in our fulfillment operations, to respond to the fluctuating demand for DVD shipments. As of December 31, 2009, we had 2,197 part-time and temporary employees. Our employees are not covered by a collective bargaining agreement, and we consider our relations with our employees to be good.