NETFLIX, INC. This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Results of Operations The following represents our consolidated performance highlights: As of/ Year Ended December 31, Change 2021 2020 2019 2021 vs. 2020 (in thousands, except revenue per membership and percentages) Financial Results: Streaming revenues$ 29,515,496 $ 24,756,675 $ 19,859,230 19 % DVD revenues 182,348 239,381 297,217 (24) % Total revenues$ 29,697,844 $ 24,996,056 $ 20,156,447 19 % Global Streaming Memberships: Paid net membership additions 18,181 36,573 27,831 (50) % Paid memberships at end of period 221,844 203,663 167,090 9 % Average paying memberships 210,784 189,083 152,984 11 % Average monthly revenue per paying membership$ 11.67 $ 10.91 $ 10.82 7 % Operating income$ 6,194,509 $ 4,585,289 $ 2,604,254 35 % Operating margin 21 % 18 % 13 % Consolidated revenues for the year endedDecember 31, 2021 increased 19% as compared to the year endedDecember 31, 2020 , due to the 11% growth in average paying memberships and a 7% increase in average monthly revenue per paying membership. The increase in average monthly revenue per paying membership resulted from our price changes and favorable fluctuations in foreign exchange rates. Paid net membership additions for the year endedDecember 31, 2021 decreased 50% as compared to the year endedDecember 31, 2020 . Our service continues to grow globally, with over 90% of the paid net membership additions for the year endedDecember 31, 2021 coming from outsidethe United States andCanada (UCAN) region. The increase in operating margin is due primarily to content amortization growing at a slower rate as compared to the 19% increase in revenues in part as a result of delays in content releases due to the COVID-19 pandemic. The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict. See Item 1A: "Risk Factors" section set forth in this Annual Report on Form 10-K for additional details. While most of our productions have resumed, certain of our productions continue to experience disruption, as do the productions of our third-party content suppliers. Other partners have similarly had their operations disrupted, including those partners that we use for our operations as well as development, production and post-production of content. Production disruptions and new health and safety protocols and requirements can result in additional costs including additional pay to cast and crew and use of PPE and testing. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our members, suppliers or vendors, or on our financial results. Streaming Revenues We derive revenues from monthly membership fees for services related to streaming content to our members. We offer a variety of streaming membership plans, the price of which varies by country and the features of the plan. As ofDecember 31 , 20 -------------------------------------------------------------------------------- Table of Contents 2021, pricing on our paid plans ranged from theU.S. dollar equivalent of$2 to$27 per month. We expect that from time to time the prices of our membership plans in each country may change and we may test other plan and price variations. The following tables summarize streaming revenue and other streaming membership information by region for the years endedDecember 31, 2021 , 2020 and 2019.
As of/ Year Ended December 31, Change
2021 2020 2019 2021 vs. 2020
(inthousands, except revenue per membership and percentages) Revenues
$ 12,972,100 $ 11,455,396 $ 10,051,208 $ 1,516,704 13 % Paid net membership additions 1,279 6,274 2,905 (4,995) (80) % Paid memberships at end of period (1) 75,215 73,936 67,662 1,279 2 % Average paying memberships 74,234 71,689 66,615 2,545 4 % Average monthly revenue per paying membership $ 14.56$ 13.32 $ 12.57 $ 1.24 9 % Constant currency change (2) 9 %
As of/ Year Ended December 31, Change
2021 2020 2019 2021 vs. 2020
(inthousands, except revenue per membership and percentages) Revenues
$ 9,699,819 $ 7,772,252 $ 5,543,067 $ 1,927,567 25 % Paid net membership additions 7,338 14,920 13,960 (7,582) (51) % Paid memberships at end of period (1) 74,036 66,698 51,778 7,338 11 % Average paying memberships 69,518 60,425 44,731 9,093 15 % Average monthly revenue per paying membership $ 11.63$ 10.72 $ 10.33 $ 0.91 8 % Constant currency change (2) 4 %Latin America (LATAM) As of/ Year Ended December 31, Change 2021 2020 2019 2021 vs. 2020 (in
thousands, except revenue per membership and percentages) Revenues
$ 3,576,976 $ 3,156,727 $ 2,795,434 $ 420,249 13 % Paid net membership additions 2,424 6,120 5,340 (3,696) (60) % Paid memberships at end of period (1) 39,961 37,537 31,417 2,424 6 % Average paying memberships 38,573 35,297 28,391 3,276 9 % Average monthly revenue per paying membership $ 7.73$ 7.45 $ 8.21 $ 0.28 4 % Constant currency change (2) 8 % Asia-Pacific (APAC) 21
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As of/ Year Ended December 31, Change
2021 2020 2019 2021 vs. 2020
(inthousands, except revenue per membership and percentages) Revenues
$ 3,266,601 $ 2,372,300 $ 1,469,521 $ 894,301 38 % Paid net membership additions 7,140 9,259 5,626 (2,119) (23) % Paid memberships at end of period (1) 32,632 25,492 16,233 7,140 28 % Average paying memberships 28,461 21,674 13,247 6,787 31 % Average monthly revenue per paying membership $ 9.56$ 9.12 $ 9.24 $ 0.44 5 % Constant currency change (2) 2 % (1) A paid membership (also referred to as a paid subscription) is defined as a membership that has the right to receiveNetflix service following sign-up and a method of payment being provided, and that is not part of a free trial or certain other promotions that may be offered by the Company to new or 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 cancellations, as a result of a failed method of payment, become 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. (2) We believe constant currency information is useful in analyzing the underlying trends in average monthly revenue per paying membership. In order to exclude the effect of foreign currency rate fluctuations on average monthly revenue per paying membership, we estimate current period revenue assuming foreign exchange rates had remained constant with foreign exchange rates from each of the corresponding months of the prior-year period. For the year endedDecember 31, 2021 , our revenues would have been approximately$443 million lower had foreign currency exchange rates remained constant with those for the year endedDecember 31, 2020 . Cost of Revenues Amortization of content assets makes up the majority of cost of revenues. Expenses directly associated with the acquisition, licensing and production of content (such as payroll and related personnel expenses, costs associated with obtaining rights to music included in our content, overall deals with talent, miscellaneous production related costs and participations and residuals), streaming delivery costs and other operations costs make up the remainder of cost of revenues. We have built our own global content delivery network ("Open Connect") to help us efficiently stream a high volume of content to our members over the internet. Delivery expenses, therefore, include equipment costs related to Open Connect, payroll and related personnel expenses and all third-party costs, such as cloud computing costs, associated with delivering content over the internet. Other operations costs include customer service and payment processing fees, including those we pay to our integrated payment partners, as well as other costs directly incurred in making our content available to members. Year Ended December 31, Change 2021 2020 2019 2021 vs. 2020 (in thousands, except percentages) Cost of revenues$ 17,332,683 $ 15,276,319 $ 12,440,213 $ 2,056,364 13 % As a percentage of revenues 58 % 61 % 62 % The increase in cost of revenues for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 was primarily due to a$1,423 million increase in content amortization relating to our existing and new content, including more exclusive and original programming. Other costs of revenues increased$633 million , primarily due to the continued growth in our content production activities, coupled with an increase in expenses associated with streaming delivery costs and payment processing fees driven by our growing member base. The decrease in cost of revenues as a percentage of revenues from 61% to 58% is primarily due to delays in content releases due to the COVID-19 pandemic, resulting in content amortization growing at a slower rate as compared to the growth in revenue.
Marketing
Marketing expenses consist primarily of advertising expenses and certain payments made to our marketing partners, including consumer electronics ("CE") manufacturers, MVPDs, mobile operators and ISPs. Advertising expenses include
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promotional activities such as digital and television advertising. Marketing
expenses also include payroll and related expenses for personnel that support
marketing activities.
Year Ended December 31, Change
2021 2020 2019 2021 vs. 2020
(in thousands, except percentages)
Marketing $ 2,545,146 $ 2,228,362 $ 2,652,462 $ 316,784 14 %
As a percentage of revenues 9 % 9 % 13 %
The increase in marketing expenses for the year ended December 31, 2021 as
compared to the year ended December 31, 2020 was primarily due to a $222 million
increase in advertising expenses, partially offset by increased payments to our
marketing partners. In addition, personnel-related costs increased $116 million ,
primarily due to growth in average headcount to support the increase in our
production activity and continued improvements in our streaming service.
Technology and Development
Technology and development expenses consist primarily of payroll and related
expenses for technology personnel responsible for making improvements to our
service offerings, including testing, maintaining and modifying our user
interface, our recommendations, merchandising and infrastructure. Technology and
development expenses also include costs associated with general use computer
hardware and software.
Year Ended December 31, Change
2021 2020 2019 2021 vs. 2020
(in thousands, except percentages)
Technology and development $ 2,273,885 $ 1,829,600 $ 1,545,149 $ 444,285 24 %
As a percentage of revenues 8 % 7 % 8 %
The increase in technology and development expenses for the year ended
December 31, 2021 as compared to the year ended December 31, 2020 was primarily
due to a $384 million increase in personnel-related costs, primarily due to
growth in average headcount to support the increase in our production activity
and continued improvements in our streaming service.
General and Administrative
General and administrative expenses consist of payroll and related expenses for
corporate personnel. General and administrative expenses also include
professional fees and other general corporate expenses.
Year Ended December 31, Change
2021 2020 2019 2021 vs. 2020
(in thousands, except percentages)
General and administrative $ 1,351,621 $ 1,076,486 $ 914,369 $ 275,135 26 %
As a percentage of revenues 5 % 4 % 5 %
The increase in general and administrative expenses for the year ended
December 31, 2021 as compared to the year ended December 31, 2020 was primarily
due to a $187 million increase in personnel-related costs, primarily due to
growth in average headcount to support the increase in our production activity
and continued improvements in our streaming service. In addition, third-party
expenses, including costs for contractors and consultants, increased
$66 million .
Interest Expense
Interest expense consists primarily of the interest associated with our
outstanding debt obligations, including the amortization of debt issuance costs.
See Note 6 Debt in the accompanying notes to our consolidated financial
statements included in Part II, Item 8, "Financial Statements and Supplementary
Data" of this Annual Report on Form 10-K for further detail on our debt
obligations.
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Year Ended December 31, Change
2021 2020 2019 2021 vs. 2020
(in thousands, except percentages)
Interest expense $ 765,620 $ 767,499 $ 626,023 $ (1,879) - %
As a percentage of revenues 3 % 3 % 3 %
Interest expense for the year ended
Interest and Other Income (Expense)
Interest and other income (expense) consists primarily of foreign exchange gains
and losses on foreign currency denominated balances and interest earned on cash
and cash equivalents.
Year Ended December 31, Change
2021 2020 2019 2021 vs. 2020
(in thousands, except percentages)
Interest and other income (expense) $ 411,214 $ (618,441) $ 84,000 $ 1,029,655 166 %
As a percentage of revenues 1 % (2) % - %
Interest and other income (expense) increased primarily due to foreign exchange
gains of $403 million for the year ended December 31, 2021 as compared to a loss
of $660 million for the year ended December 31, 2020 . The foreign exchange gain
in the year ended December 31, 2021 was primarily driven by the non-cash $431
million gain from the remeasurement of our Senior Notes denominated in euros,
partially offset by the remeasurement of cash and content liability positions in
currencies other than the functional currencies. The foreign exchange loss in
the year ended December 31, 2020 was primarily driven by the non-cash
$533 million loss from the remeasurement of our Senior Notes denominated in
euros, coupled with the remeasurement of cash and content liability positions in
currencies other than the functional currencies.
Provision for Income Taxes
Year Ended December 31, Change
2021 2020 2019 2021 vs. 2020
(in thousands, except percentages)
Provision for income taxes $ 723,875 $ 437,954 $ 195,315 $ 285,921 65 %
Effective tax rate 12 % 14 % 9 %
The decrease in our effective tax rate for the year ended December 31, 2021 as
compared to the year ended December 31, 2020 is primarily due to the
establishment of a valuation allowance on the California R&D credit in the year
ended December 31, 2020 , offset primarily by a lower benefit on a percentage
basis from excess tax benefits related to stock-based compensation.
In 2021, the difference between our 12% effective tax rate and the Federal
statutory rate of 21% was primarily due to the recognition of excess tax
benefits of stock-based compensation and the impact of international provisions
of the Tax Cuts and Jobs Act.
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Liquidity and Capital Resources
Year Ended December 31, Change
2021 2020 2021 vs. 2020
(in thousands)
Cash, cash equivalents and restricted cash $ 6,055,111 $ 8,238,870 $ (2,183,759) (27) %
Short-term and long-term debt 15,392,895 16,308,973 (916,078) (6) %
Cash, cash equivalents and restricted cash decreased $2,184 million in the year
ended December 31, 2021 primarily due to acquisitions, the repurchase of stock,
purchases of property and equipment and repayment of debt, partially offset by
cash provided by operations.
Debt, net of debt issuance costs, decreased $916 million primarily due to the
repayment upon maturity of the $500 million aggregate principal amount of our
5.375% Senior Notes in February 2021 , coupled with the remeasurement of our
euro-denominated notes. The amount of principal and interest due in the next
twelve months is $1,408 million . The amount of principal and interest due beyond
the next twelve months is $18,638 million . As of December 31, 2021 , no amounts
had been borrowed under our $1 billion Revolving Credit Agreement. See Note 6
Debt in the accompanying notes to our consolidated financial statements.
We anticipate that our future capital needs from the debt market will be more
limited compared to prior years. Our ability to obtain this or any additional
financing that we may choose to, or need to, obtain will depend on, among other
things, our development efforts, business plans, operating performance and the
condition of the capital markets at the time we seek financing. We may not be
able to obtain such financing on terms acceptable to us or at all. If we raise
additional funds through the issuance of equity or debt securities, those
securities may have rights, preferences or privileges senior to the rights of
our common stock, and our stockholders may experience dilution.
In March 2021 , our Board of Directors authorized the repurchase of up to
$5 billion of our common stock, with no expiration date. Stock repurchases may
be effected through open market repurchases in compliance with Rule 10b-18 under
the Exchange Act, including through the use of trading plans intended to qualify
under Rule 10b5-1 under the Exchange Act, privately-negotiated transactions,
accelerated stock repurchase plans, block purchases, or other similar purchase
techniques and in such amounts as management deems appropriate. We are not
obligated to repurchase any specific number of shares, and the timing and actual
number of shares repurchased will depend on a variety of factors, including our
stock price, general economic, business and market conditions, and alternative
investment opportunities. We may discontinue any repurchases of our common stock
at any time without prior notice. As of December 31, 2021 , the Company has
repurchased 1,182,410 shares of common stock for an aggregate amount of
$600 million . As of December 31, 2021 , $4.4 billion remains available for
repurchases.
Our primary uses of cash include the acquisition, licensing and production of
content, marketing programs, streaming delivery and personnel-related costs.
Cash payment terms for non-original content are in line with the amortization
period. Investments in original content, and in particular content that we
produce and own, require more cash upfront relative to licensed content. For
example, production costs are paid as the content is created, well in advance of
when the content is available on the service and amortized. We expect to
continue to significantly increase our investments in global content,
particularly in original content. We currently anticipate that cash flows from
operations, available funds and access to financing sources, including our
revolving credit facility, will continue to be sufficient to meet our cash needs
for the next twelve months and beyond.
Our material cash requirements from known contractual and other obligations
primarily relate to our content, debt and lease obligations. Expected timing of
those payments are as follows:
Total Next 12 Months Beyond 12 Months
Content obligations (1) $ 23,161,360 $ 10,019,306 $ 13,142,054
Debt (2) 20,046,277 1,408,382 18,637,895
Operating lease obligations (3) 3,516,461 409,230 3,107,231
Total $ 46,724,098 $ 11,836,918 $ 34,887,180
(1)As of December 31, 2021 , content obligations were comprised of $4.3 billion
included in "Current content liabilities" and $3.1 billion of "Non-current
content liabilities" on the Consolidated Balance Sheets and $15.8 billion of
obligations that are not reflected on the Consolidated Balance Sheets as they
did not then meet the criteria for recognition.
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Content obligations include amounts related to the acquisition, licensing and
production of content. An obligation for the production of content includes
non-cancelable commitments under creative talent and employment agreements and
other production related commitments. An obligation for the acquisition and
licensing of content is incurred at the time we enter into an agreement to
obtain future titles. Once a title becomes available, a content liability is
recorded on the Consolidated Balance Sheets. Certain agreements include the
obligation to license rights for unknown future titles, the ultimate quantity
and/or fees for which are not yet determinable as of the reporting date.
Traditional film output deals, or certain TV series license agreements where the
number of seasons to be aired is unknown, are examples of these types of
agreements. The contractual obligations table above does not include any
estimated obligation for the unknown future titles, payment for which could
range from less than one year to more than five years. However, these unknown
obligations are expected to be significant and we believe could include
approximately $1 billion to $4 billion over the next three years, with the
payments for the vast majority of such amounts expected to occur after the next
twelve months. The foregoing range is based on considerable management judgments
and the actual amounts may differ. Once we know the title that we will receive
and the license fees, we include the amount in the contractual obligations table
above.
(2)Debt obligations include our Notes consisting of principal and interest
payments. See Note 6 Debt in the accompanying notes to our consolidated
financial statements for further details.
(3)See Note 5 Balance Sheet Components in the accompanying notes to our
consolidated financial statements for further details regarding leases. As of
December 31, 2021 , the Company has additional operating leases for real estate
that have not yet commenced of $366 million which has been included above. Total
lease obligations as of December 31, 2021 increased $677 million from
$2,839 million as of December 31, 2020 to $3,516 million as of December 31, 2021
due to growth in facilities to support our growing headcount and growing number
of original productions.
In addition, as of December 31, 2021 , we had gross unrecognized tax benefits of
$203 million , of which $39 million was classified in "Other non-current
liabilities" in the Consolidated Balance Sheets. At this time, an estimate of
the range of reasonably possible adjustments to the balance of unrecognized tax
benefits cannot be made.
Free Cash Flow
We define free cash flow as cash provided by (used in) operating activities less
purchases of property and equipment and change in other assets. We believe free
cash flow is an important liquidity metric because it measures, during a given
period, the amount of cash generated that is available to repay debt
obligations, make strategic acquisitions and investments and for certain other
activities like share repurchases. Free cash flow is considered a non-GAAP
financial measure and should not be considered in isolation of, or as a
substitute for, net income, operating income, cash flow provided by (used in)
operating activities, or any other measure of financial performance or liquidity
presented in accordance with GAAP.
In assessing liquidity in relation to our results of operations, we compare free
cash flow to net income, noting that the major recurring differences are excess
content payments over amortization, non-cash stock-based compensation expense,
non-cash remeasurement gain/loss on our euro-denominated debt, and other working
capital differences. Working capital differences include deferred revenue,
excess property and equipment purchases over depreciation, taxes and semi-annual
interest payments on our outstanding debt. Our receivables from members
generally settle quickly.
Year Ended December 31, Change
2021 2020 2019 2021 vs. 2020
(in thousands)
Net cash provided by (used in) operating
activities $ 392,610 $
2,427,077
(505,354) (387,064) (834,499) (165) %
Net cash provided by (used in) financing
activities (1,149,776) 1,237,311 4,505,662 (2,387,087) (193) %
Non-GAAP reconciliation of free cash flow:
Net cash provided by (used in) operating
activities 392,610 2,427,077 (2,887,322) (2,034,467) (84) %
Purchases of property and equipment (524,585) (497,923) (253,035) (26,662) (5) %
Change in other assets (26,919) (7,431) (134,029) (19,488) (262) %
Free cash flow $ (158,894) $
1,921,723
Net cash provided by operating activities decreased$2,034 million from the year endedDecember 31, 2020 to$393 million for the year endedDecember 31, 2021 primarily driven by an increase in investments in content that require more 26 -------------------------------------------------------------------------------- Table of Contents upfront cash payments, partially offset by a$4,702 million or 19% increase in revenues. The payments for content assets increased$4,933 million , from$12,537 million to$17,469 million , or 39%, as compared to the increase in the amortization of content assets of$1,423 million , from$10,807 million to$12,230 million , or 13%. The increase in payments for content assets was primarily driven by delays in productions resulting from the pandemic that impacted the prior year, which resulted in the timing of certain production payments being shifted into the current year. In addition, we had increased payments associated with higher operating expenses, primarily related to increased headcount to support our continued improvements in our streaming service and our international expansion. Net cash used in investing activities increased$834 million , primarily due to acquisitions. Net cash provided by (used in) financing activities decreased$2,387 million primarily due to no debt issuances in the year endedDecember 31, 2021 as compared to proceeds from the issuance of debt of$1,002 million , net of$8 million issuance costs in the year endedDecember 31, 2020 , coupled with the repurchases of common stock for an aggregate amount of$600 million in the year endedDecember 31, 2021 and repayment upon maturity of the$500 million aggregate principal amount of our 5.375% Senior Notes inFebruary 2021 . Free cash flow was$5,275 million lower than net income for the year endedDecember 31, 2021 primarily due to$5,239 million of cash payments for content assets over amortization expense,$431 million of non-cash remeasurement gain on our euro-denominated debt and$8 million other non-favorable working capital differences, partially offset by$403 million of non-cash stock-based compensation expenses. Free cash flow was$840 million lower than net income for the year endedDecember 31, 2020 primarily due to$1,730 million of cash payments for content assets over amortization expense and$308 million in other non-favorable working capital differences, partially offset by$533 million of non-cash remeasurement loss on our euro-denominated debt,$415 million of non-cash stock-based compensation expenses, and a$250 million non-cash valuation allowance on the California R&D credit. Indemnifications The information set forth under Note 8 Guarantees - Indemnification Obligations in the accompanying notes to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K is incorporated herein by reference. Critical Accounting Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods.The Securities and Exchange Commission ("SEC") has defined a company's critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Content
We acquire, license and produce content, including original programming, in
order to offer our members unlimited viewing of video entertainment. The content
licenses are for a fixed fee and specific windows of availability. Payment terms
for certain content licenses and the production of content require more upfront
cash payments relative to the amortization expense. Payments for content,
including additions to content assets and the changes in related liabilities,
are classified within "Net cash provided by (used in) operating activities" on
the Consolidated Statements of Cash Flows.
We recognize content assets (licensed and produced) as "Content assets, net" on
the Consolidated Balance Sheets. For licensed content, we capitalize the fee per
title and record a corresponding liability at the gross amount of the liability
when the license period begins, the cost of the title is known and the title is
accepted and available for streaming. For produced content, we capitalize costs
associated with the production, including development cost, direct costs and
production overhead. Participations and residuals are expensed in line with the
amortization of production costs.
Based on factors including historical and estimated viewing patterns, we
amortize the content assets (licensed and produced) in "Cost of revenues" on the
Consolidated Statements of Operations over the shorter of each title's
contractual window of availability or estimated period of use or ten years,
beginning with the month of first availability. The amortization is on an
accelerated basis, as we typically expect more upfront viewing, and film
amortization is more accelerated than TV
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Table of Contents series amortization. On average, over 90% of a licensed or produced content asset is expected to be amortized within four years after its month of first availability. We review factors that impact the amortization of the content assets on a regular basis. Our estimates related to these factors require considerable management judgment. Our business model is subscription based as opposed to a model generating revenues at a specific title level. Content assets (licensed and produced) are predominantly monetized as a group and therefore are reviewed at a group level when an event or change in circumstances indicates a change in the expected usefulness of the content or that the fair value may be less than unamortized cost. To date, we have not identified any such event or changes in circumstances. If such changes are identified in the future, these aggregated content assets will be stated at the lower of unamortized cost or fair value. In addition, unamortized costs for assets that have been, or are expected to be, abandoned are written off. Income Taxes We record a provision for income taxes for the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, and our forecast of future earnings, future taxable income and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying business. Actual operating results in future years could differ from our current assumptions, judgments and estimates. However, we believe that it is more likely than not that most of the deferred tax assets recorded on our Consolidated Balance Sheets will ultimately be realized. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. As ofDecember 31, 2021 the valuation allowance of$318 million was related to theCalifornia research and development credits and certain foreign tax attributes that we do not expect to realize. We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. AtDecember 31, 2021 , our estimated gross unrecognized tax benefits were$203 million of which$136 million , if recognized, would favorably impact our future earnings. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates. See Note 10 Income Taxes to the consolidated financial statements for further information regarding income taxes. Recent Accounting Pronouncements The information set forth under Note 1 to the consolidated financial statements under the caption "Basis of Presentation and Summary of Significant Accounting Policies" is incorporated herein by reference.
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