Segment Information

9 Months Ended

Sep. 30, 2012

Segment Reporting [Abstract]

Segment Information

Segment Information

Beginning in the fourth quarter of 2011, the Company has three operating segments: Domestic streaming, International streaming and Domestic DVD. Segment information is presented along the same lines that the Company’s chief operating decision maker reviews the operating results in assessing performance and allocating resources. The Company’s chief operating decision maker reviews revenue and contribution profit (loss) for each of the reportable segments. Contribution profit (loss) is defined as revenues less cost of revenues and marketing expenses.

Revenues and the related credit card fees are attributed to the operating segment based on the nature of the underlying subscription (DVD or streaming) and the geographic region from which the subscription originates. Cost of revenues are primarily attributed to the operating segment based on the amounts directly incurred by the segment to obtain content and deliver it to the specific region. Allocations of certain corporate costs related to customer service are included in the total cost of revenues within each operating segment. Marketing is primarily comprised of advertising expenses which are generally included in the segment in which the expenditures are directly incurred. Marketing also includes an allocation of the cost of revenues incurred by that segment related to free trials.

There are no internal revenue transactions between the Company’s reportable segments. The Company's chief operating decision maker does not review an allocation of assets by reportable segment. The Domestic and International streaming segments derive revenue from monthly subscription services consisting solely of streaming content. The Domestic DVD segment derives revenue from monthly subscription services consisting solely of DVDs-by-mail.

Between the fourth quarter of 2010 and the third quarter of 2011, the Company had two operating segments: Domestic and International. During this time, the Company’s domestic streaming service and DVDs-by-mail operations were combined. Subscribers in the U.S. were able to receive both streaming services and DVDs under a single hybrid plan. Accordingly, revenues were generated and marketing expenses were incurred in connection with the subscription offerings as a whole. Therefore, it is impracticable to allocate revenues or marketing expenses or present discrete segment information for the Domestic streaming and Domestic DVD segments for periods prior to the fourth quarter of 2011.

In the third quarter of 2011, the Company made certain changes to its domestic pricing and plan structure which require subscribers who wish to receive both streaming services and DVDs-by-mail to have two separate subscription plans. Following this change, beginning in the fourth quarter of 2011, the Company was able to generate discrete financial information for its Domestic streaming and Domestic DVD operations and began reporting this information to the chief operating decision maker for review.

The following tables represent segment information for the quarter ended September 30, 2012:

	As of/ Three months ended September 30, 2012
	Domestic Streaming		International Streaming			Domestic DVD		Consolidated
	(in thousands)
Total subscriptions at end of period (1)	25,101		4,311			8,606		—
Revenues	$	556,027	$	77,744		$	271,318	$	905,089
Cost of revenues and marketing expense	465,079		170,121			140,671		775,871
Contribution profit (loss)	$	90,948	$	(92,377	)	$	130,647	$	129,218
Other operating expenses								113,083
Operating income								16,135
Other income (expense)								(4,189		)
Provision for income taxes								4,271
Net income								$	7,675

	As of/ Nine months ended September 30, 2012
	Domestic Streaming		International Streaming			Domestic DVD		Consolidated
	(in thousands)
Total subscriptions at end of period (1)	25,101		4,311			8,606		—
Revenues	$	1,595,397	$	186,142		$	882,504	$	2,664,043
Cost of revenues and marketing expense	1,354,769		470,629			471,958		2,297,356
Contribution profit (loss)	$	240,628	$	(284,487	)	$	410,546	$	366,687
Other operating expenses								336,333
Operating income								30,354
Other income (expense)								(14,778		)
Provision for income taxes								6,321
Net income								$	9,255

The following tables represent the Company’s segment information for the quarter ended September 30, 2011:

	As of/ Three months ended September 30, 2011
	Domestic		International			Consolidated
	(in thousands)
Total unique subscribers at end of period (2)	23,789		1,480			25,269
Revenues	$	799,152	$	22,687		$	821,839
Cost of revenues and marketing expense	579,720		46,005			625,725
Contribution profit (loss)	$	219,432	$	(23,318	)	$	196,114
Other operating expenses						99,272
Operating income						96,842
Other income (expense)						(3,219		)
Provision for income taxes						31,163
Net income						$	62,460

	As of/ Nine months ended September 30, 2011
	Domestic		International			Consolidated
	(in thousands)
Total unique subscribers at end of period (2)	23,789		1,480			25,269
Revenues	$	2,275,140	$	53,862		$	2,329,002
Cost of revenues and marketing expense	1,655,828		97,268			1,753,096
Contribution profit (loss)	$	619,312	$	(43,406	)	$	575,906
Other operating expenses						261,710
Operating income						314,196
Other income (expense)						(11,509		)
Provision for income taxes						111,780
Net income						$	190,907

(1) A subscription is defined as the right to receive either the Netflix streaming service or Netflix DVD service. In connection with the Company's subscription services, the Company offers free-trial memberships to new and certain rejoining members. A method of payment is required to be provided even during the free-trial period for the membership to be defined as a subscription and included in the above metrics. Total unique subscribers and total subscriptions include those subscribers who are on a free-trial. Paid unique subscribers and paid subscriptions exclude free trial memberships. A subscription would cease to be reflected in the above metrics as of the effective cancellation date. Voluntary cancellations become effective at the end of the monthly subscription period, while involuntary cancellation of the service, as a result of a failed method of payment, becomes effective immediately.

(2) For purposes of determining the number of unique subscribers, domestic subscribers who have elected both a DVD and a streaming subscription plan are considered a single unique subscriber.