NetFlix 2009 Annual Report Download - page 39

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Cost of Revenues
Cost of Subscription
Cost of subscription revenues consists of content delivery costs related to shipping DVDs and providing
streaming content to subscribers as well as expenses related to the acquisition of content. Costs related to free-
trial periods are allocated to marketing expenses.
Content delivery expenses consist of the postage costs to mail DVDs to and from our paying subscribers, the
packaging and label costs for the mailers and all costs associated with streaming content over the Internet. We
utilize third party content delivery networks to help us efficiently stream content in high volume to our
subscribers over the Internet.
Content acquisition expenses consist of costs incurred in obtaining content such as amortization of content
and revenue sharing expense. We obtain content from studios, distributors and other suppliers through direct
purchases, revenue sharing agreements and license agreements.
Year ended December 31, Change
2009 2008 2009 vs. 2008
(in thousands, except percentages)
Cost of subscription .................................. $909,461 $761,133 19.5%
As a percentage of revenues ........................... 54.4% 55.8%
The $148.3 million increase in cost of subscription revenues was due to the following factors:
• Content delivery expenses increased $101.7 million primarily due to an 18.6% increase in the number of
DVDs mailed to paying subscribers. The increase in the number of DVDs mailed was driven by a 26.6%
increase in the average number of paying subscribers, partially offset by a 6.3% decline in monthly DVD
rentals per average paying subscriber primarily attributed to the growing popularity of our lower priced
plans.
• Content acquisition expenses increased by $46.6 million. This increase was primarily attributable to
investments in streaming content.
Year ended December 31, Change
2008 2007 2008 vs. 2007
(in thousands, except percentages)
Cost of subscription .................................. $761,133 $664,407 14.6%
As a percentage of revenues ........................... 55.8% 55.1%
The $96.7 million increase in cost of subscription revenues was due to the following factors:
• Content delivery expenses increased $72.7 million primarily due to a 19.0% increase in the number of
DVDs mailed to paying subscribers. The increase in the number of DVDs mailed was driven by a 23.1%
increase in the average number of paying subscribers, partially offset by a 3.2% decline in monthly DVD
rentals per average paying subscriber primarily attributed to the growing popularity of our lower priced
plans. The increase is also due to an increase in the rates of first class postage in May 2008.
• Content acquisition expenses increased by $24.0 million This increase was primarily attributable to the
increased investments in streaming content, as well as an increase in DVD revenue sharing costs.
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