NetFlix 2009 Annual Report Download - page 10

subscribers. We believe that our recommendation technology and our other merchandising practices allow us
to create broad-based demand for our library and maximize utilization of our library. By creating demand for
content, we seek to cost-effectively balance subscriber demand between newer, more expensive titles, and
older, less expensive titles. Our ability to generate demand for these older, or “long-tail,” titles while
maintaining high levels of customer satisfaction helps us manage and maintain our gross margin, subscriber
acquisition cost, churn rate and lifetime subscriber profit. To that end, approximately 70% of the DVDs
shipped during 2009 were titles with DVD release dates greater than 13 weeks.
Growing scale. We have achieved a level of scale in our business that provides many operational and
competitive advantages. From an operational perspective, for example, we are able to cost effectively
automate many of our shipping and receiving processes, helping to drive down unit shipping costs while
also providing a better, more consistent experience to our subscribers. Such scale economies also have
contributed over time to expanding operating margins which has made it possible for Netflix to aggressively
price its service offering at levels difficult for competition to meet.
Convenience, selection and fast delivery. Subscribers can conveniently select titles by building and
modifying a personalized queue of titles on our Web site or by selecting titles directly from select Netflix
Ready Devices. We create a unique experience for subscribers by generating user interfaces on our Website
and Netflix Ready Devices that are tailored to subscribers’ individual rental and ratings history. Subscribers
rate approximately 20 million movies a week and Netflix has recorded more than 3 billion ratings to date.
Based on each subscriber’s queue, we ship DVDs by first class mail and subscribers return these DVDs to
us in prepaid mailers. After receipt of returned DVDs, we mail our subscribers the next available DVD in
their queue of selected titles. We have a vast array of titles on DVD and our nationwide network of
distribution centers allows us to offer fast delivery. In addition, subscribers can select from a growing
number of titles that can be watched instantly on their computers or TVs without commercial interruption.
The number of streaming content choices has grown approximately 30% over the year ended December 31,
2009 and is expected to continue to grow rapidly for the foreseeable future.
Growth strategy
Our core strategy to grow a large subscription business consisting of streaming and DVD-by-mail content
includes the following key elements:
Providing compelling value for subscribers. For a low fixed monthly fee, we provide subscribers access to
a growing library of movies and TV episodes that can be watched instantly and a vast selection of DVD
titles. We quickly deliver DVDs to subscribers from our shipping centers located throughout the United
States by U.S. mail. Subscribers can, at no additional fee, also stream movies and TV episodes to their
computers and TVs. There are no due dates, no late fees, no shipping fees and no pay-per-view fees. We
merchandise titles in easy-to-recognize lists including new releases, by genre and other targeted categories.
Our recommendation and merchandising technology provides subscribers with individualized
recommendations of titles from our library. Our convenient, easy-to-use Web site allows subscribers to
quickly select current titles, reserve upcoming releases and build an individual queue for future viewing.
Utilizing technology to enhance subscriber experience and operate efficiently. We utilize proprietary and
other technology to manage the processing and distribution of DVDs from our shipping centers and the
delivery of streaming content over the Internet. Our software and equipment automate the process of
tracking and routing DVDs to and from each of our shipping centers and allocate order responsibilities
among them. We continuously monitor, test and seek to improve the efficiency of our distribution,
processing and inventory management systems as our subscriber base and shipping volume grows. We
operate a nationwide network of shipping centers and continue to develop this network to meet the demands
of our operations. We also utilize third party content delivery networks to help us efficiently stream movies
and TV episodes in high volume to Netflix subscribers over the Internet.
Building mutually beneficial relationships with entertainment video providers. We have invested
substantial resources in establishing strong ties with various entertainment video providers. We maintain an
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