Segment Information

6 Months Ended

Jun. 30, 2019

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. As markets within the Company's International streaming segment become profitable, the CODM increasingly focuses on the Company's global operating margin as a measure of profitability. As of the second quarter of 2019, the Company has three reportable segments: Domestic streaming, International streaming and Domestic DVD. 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 related to streaming content to members in the United States. The International streaming segment derives revenues from monthly membership fees for services related to streaming content to members outside of 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 processing 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.

Amortization of streaming content assets makes up the majority of cost of revenues. The Company obtains multi-territory or global rights for its streaming content and allocates these rights between Domestic and International streaming segments based on estimated fair market value. Amortization of content assets and other expenses associated with the acquisition, licensing, and production of streaming content for each streaming segment thus includes 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 either attributed to the operating segment based on amounts directly incurred by the segment or are allocated across segments by management. Marketing expenses consist primarily of advertising expenses and certain payments made to marketing partners, including CE manufacturers, MVPDs, mobile operators and ISPs, which are generally included in the segment in which the expenditures are directly incurred.

The Company's long-lived tangible assets, as well as the Company's operating lease right-of-use assets recognized on the Consolidated Balance Sheets as of June 30, 2019, were located as follows:



	As of
	June 30, 2019		December 31, 2018
	(in thousands)
United States	$	1,276,044	$	381,947
International	184,646		36,334

The following tables represent segment information for the three and six months ended June 30, 2019:



	As of/ Three Months Ended June 30, 2019
	Domestic Streaming			International Streaming		Domestic DVD			Consolidated
	(in thousands)
Total paid memberships at end of period (1)	60,103			91,459		2,411
Total paid net membership additions (losses) (1)	(126		)	2,825		(154		)
Total free trials at end of period	1,575			4,481		17
Revenues	$	2,299,189		$	2,547,727	$	76,200		$	4,923,116
Cost of revenues	1,196,420			1,778,890		30,347			3,005,657
Marketing	250,606			352,544		—			603,150
Contribution profit	$	852,163		$	416,293	$	45,853		$	1,314,309
Other operating expenses									607,890
Operating income									706,419
Other income (expense)									(205,503		)
Provision for income taxes									230,266
Net income									$	270,650



	As of/ Six Months Ended June 30, 2019
	Domestic Streaming		International Streaming		Domestic DVD			Consolidated
	(in thousands)
Total paid memberships at end of period (1)	60,103		91,459		2,411
Total paid net membership additions (losses) (1)	1,617		10,686		(295		)
Total free trials at end of period	1,575		4,481		17
Revenues	$	4,372,744	$	4,914,476	$	156,888		$	9,444,108
Cost of revenues	2,335,955		3,476,011		64,305			5,876,271
Marketing	471,652		748,076		—			1,219,728
Contribution profit	$	1,565,137	$	690,389	$	92,583		$	2,348,109
Other operating expenses								1,182,606
Operating income								1,165,503
Other income (expense)								(264,928		)
Provision for income taxes								285,873
Net income								$	614,702

The following tables represent segment information for the three and six months ended June 30, 2018:



	As of/ Three Months Ended June 30, 2018
	Domestic Streaming		International Streaming		Domestic DVD			Consolidated
	(in thousands)
Total paid memberships at end of period (1)	55,959		68,395		2,971
Total paid net membership additions (losses) (1)	872		4,580		(167		)
Total free trials at end of period	1,420		4,367		28
Revenues	$	1,893,222	$	1,921,144	$	92,904		$	3,907,270
Cost of revenues	969,995		1,392,512		39,924			2,402,431
Marketing	251,298		340,709		—			592,007
Contribution profit	$	671,929	$	187,923	$	52,980		$	912,832
Other operating expenses								450,619
Operating income								462,213
Other income (expense)								(33,577		)
Provision for income taxes								44,287
Net income								$	384,349



	As of/ Six Months Ended June 30, 2018
	Domestic Streaming		International Streaming		Domestic DVD			Consolidated
	(in thousands)
Total paid memberships at end of period (1)	55,959		68,395		2,971
Total paid net membership additions (losses) (1)	3,149		10,561		(359		)
Total free trials at end of period	1,420		4,367		28
Revenues	$	3,713,241	$	3,703,230	$	191,655		$	7,608,126
Cost of revenues	1,906,475		2,714,218		82,317			4,703,010
Marketing	502,017		626,767		—			1,128,784
Contribution profit	$	1,304,749	$	362,245	$	109,338		$	1,776,332
Other operating expenses								867,541
Operating income								908,791
Other income (expense)								(180,539		)
Provision for income taxes								53,779
Net income								$	674,473

(1)

A paid membership (also referred to as a paid subscription) is defined as a membership that has the right to receive Netflix service following sign-up and a method of payment being provided, and that is not part of a free trial or other promotional offering by the Company to certain new and rejoining members. A membership is canceled and ceases to be reflected in the above metrics as of the effective cancellation date. Voluntary cancellations generally become effective at the end of the prepaid membership period. Involuntary cancellation of the service, as a result of a failed method of payment, becomes effective immediately. 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 following table represents the amortization of content assets:



	Domestic Streaming		International Streaming		Domestic DVD		Consolidated
	(in thousands)
Three months ended June 30,
2019	$	916,494	$	1,315,421	$	7,656	$	2,239,571
2018	751,947		1,065,870		11,154		1,828,971
Six months ended June 30,
2019	1,780,805		2,575,796		16,165		4,372,766
2018	1,482,219		2,084,442		22,288		3,588,949