Netflix is one of the few annual reports I bother to read as an investor. Last year’s has some interesting bits.
Their recommendation system is important enough to merit mentions on the first page:
Our proprietary recommendation service enables us to create a customized store for each subscriber and to generate personalized recommendations which effectively merchandise our comprehensive library of content. We believe that our recommendation technology, based on proprietary algorithms and the approximately 2.0 billion movie ratings collected from our subscribers, enables us to build deep subscriber relationships and maintain a high level of library utilization.
CEO Reed Hastings has always said that mail-order DVD is not his end-game; that also comes out explicitly on the first page:
Our core strategy is to grow a large DVD subscription business and to expand into Internet-based delivery of content as that market develops.
Their competition also has a high cost of entry to match selection, as they stock 90,000 DVD titles. Proprietary software is mentioned a number of times, though it sounds like open source is in the mix, too:
We utilize a variety of proprietary software and freely available and commercially supported tools, integrated in a system designed to rapidly and precisely diagnose and recover from failures.
Among the risks called out are postage increases, and again, the recommendation service, including it’s use of “private” data. Oddly, they don’t mention the million-dollar Netflix prize as a mitigation strategy.
Finally, to provide another data point on CEO Pay - Cash vs Stock, their proxy statement shows executive pay evenly divided between cash and stock options.
