NetFlix 2002 Annual Report Download - page 23

and is amortized to cost of subscription revenues ratably over the remaining term of the agreements which initial terms were either three or five years.
Postage and packaging . Postage and packaging costs consist of the postage costs to mail titles to and from our paying subscribers, each of which was $0.34 through June 29, 2002 and
increased to $0.37 on June 30, 2002, and the packaging and label costs for the mailers.
Cost of Sales Revenues
Cost of revenues for DVD sales includes the salvage value for used DVDs sold and, historically, cost of merchandise sold to customers.
Operating Expenses
Fulfillment
Fulfillment expense represents those expenses incurred in operating and staffing our distribution and customer service centers, including costs attributable to receiving, inspecting and
warehousing our library.
Fulfillment expense also includes credit card fees and other collection related expenses. Through December 2001, we maintained only one distribution center in San Jose, California. As of
December 31, 2002, we were operating from 13 shipping centers located throughout the United States, including our San Jose operations. During 2003, we anticipate opening between 10 to
15 additional shipping centers to continue to reduce delivery times and increase library utilization.
Technology and Development
Technology and development expense consists of payroll and related expenses we incur related to testing, maintaining and modifying our Web site, our recommendation service,
telecommunications systems and infrastructure and other internal−use software systems. Technology and development expense also includes depreciation of the computer hardware and
capitalized software we use to run our Web site and store our data. We continuously research and test a variety of potential improvements to our internal hardware and software systems in an
effort to improve our productivity and enhance our subscribers’ experience. We expect to continue to invest in technology and improvements in our Web site and internal−use software, and
as a result, we expect our technology and development expense will continue to increase. We have capitalized technology and development related expenses of $1.3 million in 2000, $1.2
million in 2001 and $1.2 million in 2002. The capitalized amounts are amortized on a straight−line basis over the estimated period of benefit of each improvement, generally one year.
Marketing
Marketing expense consists of marketing expenditures and other promotional activities, including revenue sharing costs, postage and packaging costs and library amortization costs related to
free trial periods. In the second half of 2001, we implemented several new subscriber acquisition activities which provide incentives in the form of pay−for−performance payments for each
new subscriber provided to us. We anticipate that our marketing expense will increase in future periods as a result of the overall growth in our subscriber base, free trial offers and
pay−for−performance arrangements.
General and Administrative
General and administrative expense consists of payroll and related expenses for executive, finance, content acquisition and administrative personnel, as well as recruiting, professional fees
and other general corporate expenses.
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