NetFlix 2008 Annual Report Download - page 10

search listings, banner ads, text links 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 engage our consumer electronic
partners to generate new subscribers for our service. We also advertise our service on various regional and
national television and radio stations. We use targeted, solo direct mail, shared mail and newspaper print
advertising to acquire new subscribers. 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 obtain content through direct purchases, revenue sharing agreements and license agreements. Under our
DVD and streaming 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
DVD, we generally have the option of returning the DVD to the studio, destroying the DVD or purchasing the
DVD. The principal structure of each agreement is similar in nature but the specific terms are generally unique to
each studio. We also purchase DVDs 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 that
are streamed to our subscribers, we generally license the content directly from studios and distributors for a
defined period of time. Following expiration of the license term, we remove the content from our service unless
we extend or renew the associated license agreement.
Fulfillment Operations
We currently stock over 100,000 titles on more than 72 million DVDs. Not all titles are available in both
standard definition DVD and Blu-ray formats. We have allocated substantial resources to developing,
maintaining and testing the 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. We ship and receive DVDs from a nationwide network of shipping centers
located throughout the United States. We believe our shipping centers allow us to improve the customer
experience for subscribers by shortening the transit time for our DVDs through the U.S. Postal Service.
Customer Service
We believe that our ability to establish and maintain long-term relationships with subscribers depends, in
part, on the strength of our customer support and service operations. As such, we work on maintaining and
improving the overall quality and level of customer service and support we provide to our subscribers. Our
customer service center is located in Hillsboro, Oregon, and primarily handles subscriber inquiries by telephone.
In addition, we continue to focus on eliminating the causes of customer support calls and providing certain self-
service features on our Web site, such as the ability to report and correct most shipping problems. We continue to
explore new avenues to deliver efficient problem resolution and feedback channels.
Competition
The market for in-home entertainment video is intensely competitive and subject to rapid change. Many
consumers maintain simultaneous relationships with multiple in-home entertainment video providers and can
easily shift spending from one provider to another. For example, consumers may subscribe to cable, rent a DVD
from Redbox or Blockbuster, buy a DVD from Wal-Mart or Amazon, download a movie from Apple iTunes,
watch a television show on Hulu.com, and subscribe to Netflix, or some combination thereof, all in the same
month. New competitors may be able to launch new businesses at a relatively low cost. DVDs and Internet
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