NetFlix 2004 Annual Report Download - page 35

The increase in our subscription revenues in 2004 as compared to 2003 was primarily as a result of
substantial growth in the average number of paying subscribers and to a lesser extent, due to a slight increase in
average monthly subscription revenue per paying subscriber. We believe the increase in the number of paying
subscribers was driven by the continuing consumer adoption of DVD players, increased consumer awareness of
our service and continuing improvements in our service. The increase in the average monthly subscription
revenue per paying subscriber was a result of the price increase implemented in the second quarter of 2004. In
June 2004, we increased the monthly subscription price of our standard service from $19.95 to $21.99. However,
effective November 2004, in response to the changing competitive landscape, we lowered the price of our
standard service to $17.99. As a result of the price decrease, we expect the average monthly subscription revenue
per paying subscriber to decrease in 2005.
The increase in our subscription revenues in 2003 as compared to 2002 was primarily attributable to an
increase in the average number of paying subscribers. We believe the increase in the number of paying
subscribers was driven by the continuing consumer adoption of DVD players, increased consumer awareness of
our service and continuing improvements in our service.
Churn declined to 4.4 percent in the fourth quarter of 2004 from 4.8 percent in the same period of 2003 and
from 6.3% in the same period of 2002. We believe the decline was primarily attributable to three reasons:
• First, the reduction in the price of our standard subscription plan to from $21.99 per month to $17.99 per
month effective November 1, 2004. Prior to that, in June 2004, we experienced an increase in churn
when we increased the price of our standard subscription plan from $19.95 per month to $21.99 per
month.
• As we grow, the ratio of new subscribers to total subscribers declines, leading to an increase in the
average duration, or age, of the subscriber base. New subscribers are actually more likely to cancel their
subscriptions than older subscribers, and therefore, an increase in subscriber age tends to lead to
reductions in churn.
• Lastly, we continued to make improvements in a number of key areas, including increasing the in-stock
rate and selection of titles as we expanded our DVD library and enhancing our Web site and
recommendation service. We believe these improvements to our service increased subscriber
satisfaction, which resulted in lower churn.
We anticipate that churn will increase in face of competition from existing competitors and other potential
new entrants in the online movie rental subscription business. In particular, we face intense competition from
Blockbuster, which introduced its in-store subscription program on a nationwide basis in May 2004, launched its
online subscription service in August 2004, reduced the price of its online subscription service to $14.99 per
month in December 2004, and eliminated late fees for in-store rentals in January 2005. If we are unable to
compete effectively against Blockbuster and our other existing competitors as well as against potential new
entrants into the online movie rental subscription business such as Amazon, in both retaining our existing
subscribers and attracting new subscribers, our churn will likely increase and our business will be adversely
affected.
The following table presents our ending subscriber information:
As of December 31,
2002
Percent
Change 2003
Percent
Change 2004
(in thousands, except percentages)
Subscribers:
Free subscribers ............................ 61 71 124
As a percentage of total subscribers ............ 7.1% 4.8% 4.8%
Paid subscribers ............................ 796 1,416 2,486
As a percentage of total subscribers ............ 92.9% 95.2% 95.2%
Total subscribers ........................... 857 73.5% 1,487 75.5% 2,610
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