NetFlix 2002 Annual Report Download - page 13

is available nationally, we believe that we can economically acquire and provide subscribers a broader selection of titles than video rental outlets, video retailers,
subscription channels, pay−per−view and VOD services. We currently offer virtually every title available from the more than 50 studios and distributors from whom we
acquire titles. To maximize our selection of titles, we continuously add newly released titles to our library. Our library contains numerous copies of popular new
releases, as well as the many titles that appeal to more select audiences.
•Personalized Merchandizing . We utilize our proprietary recommendation service to create a custom interface for each subscriber to effectively merchandize our library. Users
rate titles on our Web site, and our recommendation service compares these ratings against the database of ratings collected from our entire user base. For each visitor, these
comparisons are used to make predictions about specific titles the visitor may enjoy. These predictions are used to merchandize titles to visitors throughout the Web site. We
believe that our recommendation service allows us to create demand for our entire library and maximize utilization of each title. We believe that as the number of our
subscribers and ratings database grows, our recommendation service will be able to more accurately predict individual preferences.
•Scalable Business Model . We believe that we have a scalable, low−cost business model designed to maximize our revenues and minimize our costs.
Subscribers’ prepaid monthly credit card payments and the recurring nature of our subscription business provide working capital benefits and significant
near−term revenue visibility. In order to manage and contain subscriber acquisition costs, we primarily utilize pay−for−performance marketing programs. We
have entered into revenue sharing agreements with studios and distributors to lower our upfront cash payments which enhance our ability to expand the depth
and breadth of our library. Our scalable infrastructure and online interface eliminate the need for expensive retail outlets and allow us to service our large and
expanding subscriber base from a series of low−cost shipping centers. We employ temporary, hourly and part−time workers to contain labor costs and provide
maximum operating flexibility. Finally, we have low delivery costs through the use of standard first−class mail to ship and return titles to and from subscribers.
•Convenience, Selection and Fast Delivery . Subscribers can conveniently select titles by building and modifying a personalized queue of titles on our Web site. We
create a unique experience for subscribers because most pages on our Web site are tailored to individual selection and ratings history. Under our standard service,
subscribers can have three titles out at the same time with no due dates or late fees. Once selected, available titles are sent to subscribers by first−class mail and
returned to us in pre−paid mailers. Currently, we can reach more than half of our subscribers with generally next−day delivery. As we rollout more shipping centers,
our one−day delivery service capability will increase. Upon receipt of returned titles, we automatically mail subscribers the next available title in their queue of
selected titles.
Growth Strategy
Our strategy to provide a premier filmed entertainment subscription service to our large and growing subscriber base includes the following key elements:
•Providing Compelling Value for Subscribers . We provide subscribers access to our comprehensive library of 14,500 titles with no due dates, late fees or shipping charges for
a fixed monthly fee. We merchandize titles in easy to recognize lists including new releases, genres and other targeted categories. Our convenient, easy to use Web site allows
subscribers to quickly select current titles, reserve upcoming releases and build an individual queue for future viewing using our proprietary personalization technology. Our
recommendation service provides subscribers with recommendations of titles from our library. We quickly deliver titles to subscribers from our shipping centers located
throughout the United States by standard first−class mail.
•Utilizing Technology to Enhance Subscriber Experience and Operate Efficiently . We utilize proprietary technology developed in−house to manage the processing and
distribution of DVDs from our shipping centers. Our software automates the process of tracking and routing titles to and from each of
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