NetFlix 2005 Annual Report Download - page 44

postage by 2 cents to $0.39 effective January 8, 2006. We receive discounts on outbound postage costs related to
our mail preparation practices.
Fulfillment expenses:
Fulfillment expenses represent those expenses incurred in operating and staffing our shipping and customer
service centers, including costs attributable to receiving, inspecting and warehousing our library. Fulfillment
expenses also include credit card fees.
Operating Expenses:
Technology and Development. Technology and development expenses consist of payroll and related
expenses we incur related to testing, maintaining and modifying our Web site, our recommendation service,
developing solutions for downloading movies to subscribers, telecommunications systems and infrastructure and
other internal-use software systems. Technology and development expenses also include depreciation of the
computer hardware and capitalized software we use to run our Web site and store our data.
Marketing. Marketing expenses consist of payroll and related expenses and advertising expenses.
Advertising expenses include marketing program expenditures and other promotional activities, including
revenue sharing expenses, postage and packaging expenses and library amortization related to free trial periods.
General and Administrative. General and administrative expenses consist of payroll and related expenses
for executive, finance, content acquisition and administrative personnel, as well as recruiting, professional fees
and other general corporate expenses.
Stock-Based Compensation. During the second quarter of 2003, we adopted the fair value recognition
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and
Disclosure, an Amendment of FASB Statement No. 123, for stock-based compensation. We elected to apply the
retroactive restatement method under SFAS No. 148 and all prior periods presented have been restated to reflect
the compensation costs that would have been recognized had the fair value recognition provisions of SFAS
No. 123 been applied to all awards granted.
During the third quarter of 2003, we began granting stock options to our employees on a monthly basis. The
vesting periods provide for options to vest immediately, in comparison with the three to four-year vesting periods
for stock options granted prior to the third quarter of 2003. As a result of immediate vesting, all stock-based
compensation expense determined under SFAS No. 123 is fully recognized upon the grant of the stock option.
For those stock options granted prior to the third quarter of 2003 with three to four-year vesting periods, we
continue to amortize the deferred compensation related to those stock options over the remaining vesting periods.
Gain on disposal of DVDs. Gain on disposal of DVDs represents the difference between proceeds from
sales of DVDs and associated cost of DVD sales. Cost of DVD sales includes the net book value of the DVDs
sold, shipping charges and, where applicable, a contractually specified percentage of the sales value for the
DVDs that are subject to revenue sharing agreements.
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