activities. 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 from operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP.

In comparing free cash flow to net income, the major recurring differences are excess streaming and DVD payments over expenses, stock-based compensation expense, deferred revenue, taxes and semi-annual interest payments on the 8.50% Notes. Because consumers use credit cards to buy from us, our receivables from customers settle quickly and deferred revenue is a source of cash flow. For streaming content, we typically enter into multi-year licenses with studios and other distributors that may result in an increase in content library and a corresponding increase in liabilities in the Consolidated Balance Sheet. The payment terms for these license fees may extend over the term of the license agreements, which typically range from six months to five years. License fee obligations with payment terms that are due beyond one year are classified on the Consolidated Balance Sheets as “Non-current content liabilities.” Minimum commitments for licenses and known titles that do not meet the criteria for asset recognition in the content library are included in Note 5 of Item 8, Financial Statements and Supplementary Data.

The following tables reconcile net cash provided by operating activities, a GAAP financial measure, to free cash flow, a non-GAAP financial measure.

Free cash flow for the year ended December 31, 2011 increased $55.5 million primarily due to an increase of $98.9 million in net income as adjusted for the increase in non-cash stock based compensation of $33.6 million and decreased tax prepayments of $20.2 million. This was partially offset by an increase in excess content payments over expenses of $53.2 million, a $12.9 million increase in excess property and equipment payments over expense and decreased deferred revenue of $5.5 million. Payments for content increased $727.6 million while content expenses increased $674.4 million.

Free cash flow for the year ended December 31, 2010 increased $33.9 million primarily due to an increase of $60.4 million in net income as adjusted for the increase in non-cash stock based compensation of $15.4 million, decreased property and equipment payments over expense of $11.9 million and increased deferred revenue of $10.0 million. This was partially offset by an increase in excess streaming and DVD content payments over expenses of $32.8 million coupled with increased tax prepayments of $14.0 million. Payments for content increased $198.7 million while content expenses increased $165.9 million.

Effect of Exchange Rates

Revenues, as well as certain expenses, primarily content licensing and marketing, incurred in the International streaming segment, are denominated in the local currency. During the year ended December 31, 2011 and 2010, the gains or losses on foreign exchange transactions and the effect of exchange rate changes on cash and cash equivalents were immaterial.

Contractual