NetFlix 2004 Annual Report Download - page 21

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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 and we have collected over
525 million ratings. The ratings from our recommendation service determine which available titles are displayed
to a subscriber and in which order. In doing so, we help our subscribers quickly find titles they are more likely to
enjoy. Ratings also determine which available titles are featured most prominently 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.
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 one important channel for acquiring new subscribers. We advertise our service online through paid
search listings, banner ads, text on popular Web portals and other Web sites, and permission based e-mails. 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.
We pay for online marketing on a placement, per-impression basis or per-click basis, as well as through
cash bounties paid for each subscriber referred to us. We also participate in a variety of cooperative advertising
programs with studios under the terms of which we receive cash consideration in exchange for featuring the
studio’s movies in Netflix promotional advertising. 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.
We work with a number of other marketing channels, for example, we advertise our service on various
regional and national television and radio stations. We also have a number of arrangements where advertisements
describing our service are inserted or otherwise incorporated into consumer packaging, such as DVD player
boxes. We utilize direct mail and print. We also have a relationship with a leading consumer electronics and
video retailer, which involves a variety of promotional efforts
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, we generally have the option of returning the title to the studio, destroying the
title or purchasing the title. 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.
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