NetFlix 2005 Annual Report Download - page 21

Download and view the complete annual report

Please find page 21 of the 2005 NetFlix annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 96

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96

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
approximately one billion 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 and expanding
library utilization.
We also provide our subscribers with detailed information about each title in our library which helps them
select movies they will enjoy. This information may include:
• 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 an 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 also advertise our service on various regional and national television and radio stations. We utilize
direct mail and print advertising as well as promote our services in certain consumer package goods. 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.
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 structure of each agreement is similar in nature but the specific terms
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 55,000 titles on more than 25 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.
5