NetFlix 2003 Annual Report Download - page 34

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Cost of Revenues
Year Ended December 31,
2001
Percent
Change 2002
Percent
Change 2003
(in thousands, except percentages)
Cost of revenues:
Subscription ................................... $49,088 57.0% $77,044 91.8 % $147,736
Sales ........................................ 819 33.3% 1,092 (42.9)% 624
Totalcostofrevenues ....................... $49,907 56.6% $78,136 89.9 % $148,360
The increase in cost of subscription revenues in absolute dollars from 2002 to 2003 was primarily
attributable to the following factors:
• The number of DVDs mailed to paying subscribers increased 111 percent, which was driven by a
78 percent increase in the number of average paying subscribers coupled with a 19 percent increase in
disc usage per average paying subscriber. We believe the increase in disc usage was primarily
attributable to the decrease in delivery time due to the expansion of our nationwide network of shipping
centers.
• Postage and packaging expenses increased by $30.1 million, representing a 103 percent increase. This
increase was primarily attributable to the increase in the number of average paying subscribers and the
number of DVDs mailed to paying subscribers, partially offset by a modest reduction in postage rate per
DVD shipped as a result of an increased utilization of postal sorters on outbound mail.
• DVD amortization increased by $24.4 million, representing a 157 percent increase. This increase was
primarily attributable to increased acquisitions for our DVD library.
• Revenue sharing expenses increased by $16.1 million, representing a 55 percent increase. This increase
was primarily attributable to the increase in the number of average paying subscribers and the number of
DVDs mailed to paying subscribers, partially offset by a decrease in the percentage of titles subject to
revenue sharing agreements mailed to paying subscribers.
The increase in cost of subscription revenues in absolute dollars from 2001 to 2002 was primarily
attributable to the following factors:
• The number of DVDs mailed to paying subscribers increased 117 percent, which was driven by a
104 percent increase in the number of average paying subscribers coupled with a 7 percent increase in
disc usage per average paying subscriber.
• Revenue sharing expenses increased by $16.8 million, representing a 132 percent increase. This increase
was primarily attributable to the increase in the number of average paying subscribers and the number of
DVDs mailed to paying subscribers, coupled with a modest increase in the percentage of titles subject to
revenue sharing agreements mailed to paying subscribers.
• Postage and packaging expenses increased by $14.5 million, representing a 99 percent increase. This
increase was primarily attributable to the increase in the number of average paying subscribers and the
number of DVDs mailed to paying subscribers. Our postage rate per title in 2002 was lower than 2001,
notwithstanding the rate for first-class postage increasing to $0.37 from $0.34 on June 20, 2002. This
postage rate per title decrease was primarily attributable to the benefits of a full year of reduced postage
per title as a result of packaging improvements completed during the second quarter of 2001.
• Amortization of intangible assets increased by $0.8 million, representing a 43 percent increase. The
increase in amortization was attributable to increases in intangible assets caused by our obligation to
issue additional shares to studios upon dilution, which ceased immediately prior to our initial public
offering in May 2002.
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