NetFlix 2003 Annual Report Download - page 21

Merchandizing
The key to our merchandizing efforts is the personal recommendations generated by our recommendation
service. All subscribers and site visitors are given many opportunities to rate titles. The ratings from our
recommendation service determine which available titles are displayed to a subscriber and in which order. For
example, our subscribers can find recently released titles more easily by ranking new releases by user preference
rather than by new release date, allowing them to quickly find titles they are more likely to enjoy. Ratings also
determine which available titles are featured in lead page positions on our Web site to increase customer
satisfaction and selection activity. Finally, data from our recommendation service is used to generate lists of
similar titles. Subscribers often start from a familiar title and use our “Recommendations” link to find other titles
they may enjoy. This has proven to be a powerful method for catalogue browsing.
Recommendations are available to anyone who has rated titles on our Web site, whether or not they are a
subscriber. By aggregating the ratings of our subscribers and other visitors, we have built what we believe to be
the world’s largest personal movie ratings database, containing more than 300 million ratings.
We also provide our subscribers with decision support information about each title in our library. This
information includes:
• factual data, including length, rating, cast and crew, special DVD features and screen formats;
• editorial perspective, including plot synopses, movie trailers and reviews written by our editors, third
parties and by other Netflix subscribers; and
• data from our recommendation service, including personal rating, average rating and other similar titles
the subscriber may enjoy.
Marketing
We have multiple marketing channels through which we attract subscribers to our service. Online
advertising is our largest paid source of new subscribers. We advertise our service online through paid search
listings, permission based e-mails, banner ads, and text on popular Web portals and other Web sites. In addition,
we have an affiliate program whereby we make available Web-based banner ads and other advertisements that
third parties may retrieve on a self-assisted basis from our Web site and place on their Web sites. Third parties
that place our advertisements and generate online subscriber referrals are generally paid a cash bounty for each
subscriber referred to us, with no minimum or maximum amounts for which we are liable. We believe that our
paid marketing efforts are significantly enhanced by the benefits of word-of-mouth advertising, our subscriber
referrals and our active public relations programs. During 2003, online and word-of-mouth advertising accounted
for approximately 85 percent of all new trial subscriber acquisitions.
We work with a number of other channels on an opportunistic basis. For example, we have agreements with
leading DVD player manufacturers requiring them to place inside certain DVD player boxes a Netflix insert that
describes our service and offers a free trial. We also have a relationship with a leading consumer electronics and
video retailer, which involves a variety of promotional efforts using point-of-sale materials, stickers on product
packaging and other items to promote Netflix in its stores and those of its subsidiaries. In addition, we launched
our television advertising campaigns in select markets beginning in January 2004, following a test in several
markets during the fourth quarter of 2003.
Content Acquisition
We acquire content either through revenue sharing agreements or direct purchases. Under our revenue
sharing agreements with studios and distributors, 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
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