NetFlix 2004 Annual Report Download - page 36

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Cost of Revenues
Year Ended December 31,
2002
Percent
Change 2003
Percent
Change 2004
(in thousands, except percentages)
Cost of revenues:
Subscription ................................... $77,044 91.8% $147,736 85.1% $273,401
Sales ........................................ 1,092 (42.9)% 624 389.9% 3,057
Totalcostofrevenues ....................... $78,136 89.9% $148,360 86.3% $276,458
The increase in cost of subscription revenues in 2004 as compared to 2003 was primarily attributable to the
following factors:
• The number of DVDs mailed to paying subscribers increased 102 percent, which was driven by a 78
percent increase in the number of average paying subscribers coupled with a 13 percent increase in
monthly movie rentals per average paying subscriber.
• Postage and packaging expenses increased by $55.3 million, representing a 93 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 per-unit postage and
packaging cost.
• DVD amortization increased by $34.8 million, representing an 87 percent increase. This increase was
primarily attributable to increased acquisitions for our DVD library partially offset by the change in
estimate related to back-catalogue useful lives of $10.9 million.
• Revenue sharing expenses increased by $36.5 million, representing a 80 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 DVDs subject to
revenue sharing agreements mailed to paying subscribers.
The increase in cost of subscription revenues in absolute dollars in 2003 as compared to 2002 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
monthly movie rentals per average paying subscriber. We believe the increase in monthly movie rentals
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.
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