NetFlix 2003 Annual Report Download - page 22

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, distributors and
other suppliers on a purchase order basis.
Fulfillment Operations
We currently stock more than 18,000 titles on more than 12 million DVDs. During December 2003, we
shipped to and received from subscribers more than 18 million DVDs. We have allocated substantial resources to
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
believe our shipping centers allow us to improve the subscription experience for subscribers by shortening the
transit time for our DVDs through the U.S. Postal Service. Based on performance standards established by the
U.S. Postal Service for its postal zones, we currently provide one-day delivery service to approximately 61
percent of the U.S. population, or 80 percent of our subscribers. We anticipate increasing such one-day coverage
marginally as we open additional shipping centers to meet our growing demand.
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 e-mail 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
center is located 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.
Video rental outlets and retailers with whom we compete include Blockbuster, Hollywood Entertainment,
Amazon.com, Wal-Mart Stores and Best Buy. In particular, Blockbuster has launched in 25 percent of its U.S.-
based operations a store-based subscription program in 2003 and plans to launch this program nationwide by the
end of 2004. This program will provide many of the benefits of our business model in a store-based retail
environment. We believe that we compete with these video rental outlets and movie retailers primarily on the
basis of title selection, convenience and price. We believe that our scalable business model, our subscription
service with home delivery and access to our comprehensive library of more than 18,000 titles compete favorably
against traditional video rental outlets.
We also compete against other online DVD subscription services, such as Walmart.com and
FilmCaddy.com, a subsidiary of Blockbuster, subscription entertainment services, such as HBO and Showtime,
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