NetFlix 2005 Annual Report Download - page 47

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Cost of Revenues
Year Ended December 31,
2003
Percent
Change 2004
Percent
Change 2005
(in thousands, except percentages)
Cost of revenues:
Subscription .................................. $147,736 85.1% $273,401 44.0% $393,788
Fulfillment expenses ........................... 31,274 81.0% 56,609 25.0% 70,762
Total cost of revenues ...................... $179,010 84.4% $330,010 40.8% $464,550
As a percentage of revenues. ................. 66.2% 65.9% 68.1%
Subscription
The increase in cost of subscription for 2005 as compared to 2004 was primarily attributable to the
following factors:
• The number of DVDs mailed to paying subscribers increased 53 percent, which was driven by a 59
percent increase in the number of average paying subscribers offset by a slight decline in monthly movie
rentals per average paying subscriber.
• Postage and packaging expenses increased by 52 percent. This increase was primarily attributable to the
increase in the number of average paying subscribers and the number of DVDs mailed to paying
subscribers.
• DVD amortization increased by 23 percent primarily due to increased acquisitions for our DVD library
partially offset by the impact in the current year of $7.8 million related to the change in estimate of
useful life of our back-catalogue DVD library made in the third quarter of 2004.
• Revenue sharing expenses increased by 54 percent. This increase was primarily attributable to the
increase in the number of average paying subscribers coupled with a slight increase in the percentage of
DVDs subject to revenue sharing agreements mailed to paying subscribers.
The increase in cost of subscription 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 93 percent. 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 87 percent. This increase was primarily attributable to increased
acquisitions for our DVD library partially offset by a reduction in amortization of $10.9 million as a
result of the change in estimate related to back-catalogue useful lives.
• Revenue sharing expenses increased by 80 percent. 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.
Fulfillment expenses
The increase in fulfillment expenses in absolute dollars in 2005 as compared to 2004 was primarily
attributable to an increase in credit card fees as a result of the increase in subscriptions, an increase in personnel-
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