Segment Information

9 Months Ended

Sep. 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. The Company’s CODM currently 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. Because the Company increasingly obtains multi-territory or global rights for streaming content, contribution profit (loss) on a regional basis is becoming a less meaningful metric and as such, the CODM increasingly focuses on the Company's global operating margin as the primary measure of profitability. As of the third quarter of 2019, the Company has three reportable segments: Domestic streaming, International streaming and Domestic DVD. 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 September 30, 2019, were located as follows:



	As of
	September 30, 2019		December 31, 2018
	(in thousands)
United States	$	1,307,086	$	381,947
International	206,228		36,334

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



	As of/ Three Months Ended September 30, 2019
	Domestic Streaming		International Streaming		Domestic DVD			Consolidated
	(in thousands)
Total paid memberships at end of period (1)	60,620		97,714		2,276
Total paid net membership additions (losses) (1)	517		6,255		(135		)
Total free trials at end of period	1,375		4,215		16
Revenues	$	2,412,598	$	2,760,430	$	71,877		$	5,244,905
Cost of revenues	1,210,105		1,860,021		27,793			3,097,919
Marketing	211,793		342,004		—			553,797
Contribution profit	$	990,700	$	558,405	$	44,084		$	1,593,189
Other operating expenses								612,950
Operating income								980,239
Other income (expense)								32,084
Provision for income taxes								347,079
Net income								$	665,244



	As of/ Nine Months Ended September 30, 2019
	Domestic Streaming		International Streaming		Domestic DVD			Consolidated
	(in thousands)
Total paid memberships at end of period (1)	60,620		97,714		2,276
Total paid net membership additions (losses) (1)	2,134		16,941		(430		)
Total free trials at end of period	1,375		4,215		16
Revenues	$	6,785,342	$	7,674,906	$	228,765		$	14,689,013
Cost of revenues	3,546,060		5,336,032		92,098			8,974,190
Marketing	683,445		1,090,080		—			1,773,525
Contribution profit	$	2,555,837	$	1,248,794	$	136,667		$	3,941,298
Other operating expenses								1,795,556
Operating income								2,145,742
Other income (expense)								(232,844		)
Provision for income taxes								632,952
Net income								$	1,279,946

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



	As of/ Three Months Ended September 30, 2018
	Domestic Streaming		International Streaming		Domestic DVD			Consolidated
	(in thousands)
Total paid memberships at end of period (1)	56,957		73,465		2,828
Total paid net membership additions (losses) (1)	998		5,070		(143		)
Total free trials at end of period	1,507		5,170		24
Revenues	$	1,937,314	$	1,973,283	$	88,777		$	3,999,374
Cost of revenues	1,038,473		1,455,554		37,101			2,531,128
Marketing	210,595		299,735		—			510,330
Contribution profit	$	688,246	$	217,994	$	51,676		$	957,916
Other operating expenses								477,248
Operating income								480,668
Other income (expense)								(101,858		)
Benefit for income taxes								(24,025		)
Net income								$	402,835



	As of/ Nine Months Ended September 30, 2018
	Domestic Streaming		International Streaming		Domestic DVD			Consolidated
	(in thousands)
Total paid memberships at end of period (1)	56,957		73,465		2,828
Total paid net membership additions (losses) (1)	4,147		15,631		(502		)
Total free trials at end of period	1,507		5,170		24
Revenues	$	5,650,555	$	5,676,513	$	280,432		$	11,607,500
Cost of revenues	2,944,948		4,169,772		119,418			7,234,138
Marketing	712,612		926,502		—			1,639,114
Contribution profit	$	1,992,995	$	580,239	$	161,014		$	2,734,248
Other operating expenses								1,344,789
Operating income								1,389,459
Other income (expense)								(282,397		)
Provision for income taxes								29,754
Net income								$	1,077,308

(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 September 30,
2019	$	912,793	$	1,367,184	$	6,654	$	2,286,631
2018	800,884		1,110,883		9,959		1,921,726
Nine months ended September 30,
2019	2,693,598		3,942,980		22,819		6,659,397
2018	2,283,102		3,195,326		32,247		5,510,675