NetFlix 2002 Annual Report Download - page 16

Content Acquisition
We have entered into revenue sharing arrangements with more than 50 studios and distributors. Under these agreements, we generally obtain titles for a low initial cost in exchange for a
commitment to share a percentage of our subscription revenues for a defined period of time. After the revenue sharing period expires for a title, the agreements generally grant us the right to
acquire for a minimal fee a percentage of the units for retention or sale by us. The balance of the units are destroyed or returned to the originating studio. The principal terms of each
agreement are similar in nature but are generally unique to each studio. In addition to revenue sharing agreements, we also purchase titles from various studios and distributors and other
suppliers, on a purchase order basis. On a quarterly basis, we acquired approximately 60% to 80% of our DVDs through our revenue sharing arrangements.
Fulfillment Operations
We currently stock more than 14,500 titles on more than 5.1 million DVDs. During December 2002, we shipped to and received from subscribers more than 9.7 million DVDs. We have
applied substantial resources developing, maintaining and testing the proprietary technology that helps us manage the fulfillment of individual orders and the integration of our Web site,
transaction processing systems, fulfillment operations, inventory levels and coordination of our shipping centers.
We ship and receive DVDs from numerous shipping centers located throughout the United States. We currently are operating 18 shipping centers serving the metropolitan areas of Atlanta,
Boston, Dallas, Denver, Detroit, Houston, Los Angeles, Miami, Minneapolis, New York, Newark, Philadelphia, Phoenix, Portland, San Francisco, Stamford, Seattle and Washington, DC.
We plan to open additional shipping centers in 2003. We estimate the set−up cost of a shipping center to be approximately $60,000. The capacity of our shipping centers is a function of total
square footage, configuration and staffing levels.
We believe our shipping centers allow us to improve the subscription experience for non−San Francisco Bay area subscribers by shortening the transit time for our DVDs in the U.S. Postal
Service. Based on performance standards established by the U.S. Postal Service for its postal zones, we expect to be able to provide one−day delivery service to approximately 60% of the
U.S. population by the end of 2003, or approximately 70% of our subscribers. Currently, based on these performance standards we can provide one− or two−day delivery service to more
than 90% of the U.S. population.
Customer Service
We believe that our ability to establish and maintain long−term relationships with subscribers depends, in part, on the strength of our customer support and service operations. We encourage
and utilize frequent communication with and feedback from our subscribers in order to continually improve our Web site and our service. Our customer service center is open seven days a
week. We utilize email to proactively correspond with subscribers. We also offer phone support for subscribers who prefer to talk directly with a customer service representative. We focus
on eliminating the causes of customer support calls and automating certain self−service features on our Web site, such as the ability to report and correct most shipping problems. Our
customer service operations are housed in our San Jose, California facility.
Competition
The market for in−home filmed entertainment is intensely competitive and subject to rapid change. Many consumers maintain simultaneous relationships with multiple in−home filmed
entertainment providers and can easily shift spending from one provider to another. For example, consumers may subscribe to HBO, rent a DVD from Blockbuster, buy a DVD from
Wal−Mart and subscribe to Netflix, or some combination thereof, all in the same month.
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