Segment Information

9 Months Ended

Sep. 30, 2017

Segment Reporting [Abstract]

Segment Information

Segment Information

The Company has three reportable segments: Domestic streaming, International streaming and Domestic DVD. Segment information is presented in the same manner that the Company’s chief operating decision maker ("CODM") reviews the operating results in assessing performance and allocating resources. The Company’s CODM reviews revenues and contribution profit (loss) for each of the reportable segments. Contribution profit (loss) is defined as revenues less cost of revenues and marketing expenses incurred by the segment. The Company has aggregated the results of the International operating segments into one reportable segment because these operating segments share similar long-term economic and other qualitative characteristics.

The Domestic streaming segment derives revenues from monthly membership fees for services consisting solely of streaming content to members in the United States. The International streaming segment derives revenues from monthly membership fees for services consisting solely of streaming content to members outside the United States. The Domestic DVD segment derives revenues from monthly membership fees for services consisting solely of DVD-by-mail. Revenues and the related payment card fees are attributed to the operating segment based on the nature of the underlying membership (streaming or DVD) and the geographic region from which the membership originates. There are no internal revenue transactions between the Company’s segments.

The vast majority of the cost of revenues relate to content expenses, which include the amortization of streaming content assets and other costs associated with the licensing and acquisition of streaming content. In connection with the Company's global expansion, content acquired, licensed, and produced increasingly includes global rights. The Company allocates this content between the International and Domestic streaming segments based on estimated fair market value. Content expenses for each streaming segment thus include both expenses directly incurred by the segment as well as an allocation of expenses incurred for global or multi-territory rights. Other costs of revenues such as delivery costs are primarily attributed to the operating segment based on amounts directly incurred by the segment. Marketing expenses consist primarily of advertising expenses and certain payments made to marketing partners, including consumer electronics ("CE") manufacturers, multichannel video programming distributors ("MVPDs"), mobile operators and internet service providers ("ISPs"), which are generally included in the segment in which the expenditures are directly incurred.

The Company's long-lived tangible assets were located as follows:

	As of
	September 30, 2017		December 31, 2016
	(in thousands)
United States	$	293,733	$	236,977
International	28,688		13,418

The following tables represent segment information for the three and nine months ended September 30, 2017:

	As of/ Three Months Ended September 30, 2017
	Domestic Streaming		International Streaming		Domestic DVD		Consolidated
	(in thousands)
Total memberships at end of period (1)	52,772		56,476		3,569
Revenues	$	1,547,210	$	1,327,435	$	110,214	$	2,984,859
Cost of revenues	864,408		1,081,485		47,087		1,992,980
Marketing	128,901		183,589		—		312,490
Contribution profit	$	553,901	$	62,361	$	63,127	$	679,389
Other operating expenses							470,762
Operating income							208,627
Other income (expense)							(92,390		)
Benefit from income taxes							(13,353		)
Net income							$	129,590

	As of/ Nine Months Ended September 30, 2017
	Domestic Streaming		International Streaming		Domestic DVD		Consolidated
	(in thousands)
Total memberships at end of period (1)	52,772		56,476		3,569
Revenues	$	4,522,751	$	3,538,862	$	345,345	$	8,406,958
Cost of revenues	2,445,858		2,946,414		160,040		5,552,312
Marketing	357,547		500,536		—		858,083
Contribution profit	$	1,719,346	$	91,912	$	185,305	$	1,996,563
Other operating expenses							1,403,187
Operating income							593,376
Other income (expense)							(239,385		)
Benefit from income taxes							(19,421		)
Net income							$	373,412

The following tables represent segment information for the three and nine months ended September 30, 2016:

	As of/ Three Months Ended September 30, 2016
	Domestic Streaming		International Streaming			Domestic DVD		Consolidated
	(in thousands)
Total memberships at end of period (1)	47,497		39,246			4,273
Revenues	$	1,304,333	$	853,480		$	132,375	$	2,290,188
Cost of revenues	720,658		748,515			63,671		1,532,844
Marketing	108,495		173,548			—		282,043
Contribution profit (loss)	$	475,180	$	(68,583	)	$	68,704	$	475,301
Other operating expenses								369,265
Operating income								106,036
Other income (expense)								(26,909		)
Provision for income taxes								27,610
Net income								$	51,517

	As of/ Nine Months Ended September 30, 2016
	Domestic Streaming		International Streaming			Domestic DVD		Consolidated
	(in thousands)
Total memberships at end of period (1)	47,497		39,246			4,273
Revenues	$	3,673,845	$	2,263,429		$	415,854	$	6,353,128
Cost of revenues	2,094,310		2,076,576			204,596		4,375,482
Marketing	277,243		428,839			—		706,082
Contribution profit (loss)	$	1,302,292	$	(241,986	)	$	211,258	$	1,271,564
Other operating expenses								1,045,705
Operating income								225,859
Other income (expense)								(55,621		)
Provision for income taxes								50,308
Net income								$	119,930

The following table represents the amortization of content assets:

	Domestic Streaming		International Streaming		Domestic DVD		Consolidated
	(in thousands)
Three months ended September 30,
2017	$	727,832	$	899,645	$	13,259	$	1,640,736
2016	597,039		627,069		19,284		1,243,392
Nine months ended September 30,
2017	2,033,268		2,450,686		48,368		4,532,322
2016	1,709,168		1,748,822		59,746		3,517,736

(1) A membership (also referred to as a subscription) is defined as the right to receive Netflix service following sign-up and a method of payment being provided. Memberships are assigned to territories based on the geographic location used at time of sign-up as determined by the Company's internal systems, which utilize industry standard geo-location technology. The Company offers free-trial memberships to certain new and rejoining members. Total members include those who are on a free-trial as long as a method of payment has been provided. A membership is canceled and ceases to be reflected in the above metrics as of the effective cancellation date. Voluntary cancellations become effective at the end of the prepaid membership period, while involuntary cancellation of the service, as a result of a failed method of payment, becomes effective immediately.