NetFlix 2007 Annual Report Download - page 10

Merchandising
Our merchandising efforts are based on the personal recommendations generated by our recommendation
service. All subscribers and site visitors are given many opportunities to rate titles and, as of December 31, 2007,
we have collected approximately 2.0 billion ratings. The ratings from our recommendation service help
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 help determine which available titles are
featured most prominently on our Web site in an effort 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 tool to find other titles they might enjoy. This is a powerful
method for catalog 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;
• movie trailers and other editorial perspectives, including plot synopses 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 use multiple marketing channels through which we attract subscribers to our service. Online advertising
is an important channel for acquiring 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 to promote our services in certain consumer packaged 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 studios 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 through direct purchases, revenue sharing agreements and license agreements.
Under our revenue sharing agreements with studios and distributors, we generally obtain titles for a low
initial cost in exchange for a commitment for a defined period of time either to share a percentage of our
subscription revenues or to pay a fee based on content utilization. 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. We also purchase titles from various studios, distributors and other suppliers on a purchase order basis.
Under these arrangements, we typically pay a per disc fee for each of the DVDs we purchase. For titles delivered
through our instant-watching feature, we generally license the content directly for a period of time. Following
expiration of the license term, we are no longer able to distribute the content through our instant-watching feature
unless we extend or renew the associated license agreement.
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