NetFlix 2010 Annual Report Download - page 27

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Cost of Revenues
Cost of Subscription
Cost of subscription revenues consists of expenses related to the acquisition and licensing of content, as well
as content delivery costs related to providing streaming content and shipping DVDs to subscribers. Costs related
to free-trial periods are allocated to marketing expenses.
Content acquisition and licensing expenses consist primarily of amortization of streaming content licenses,
amortization of DVD library and revenue sharing expenses. We obtain content through streaming content license
agreements, DVD direct purchases and DVD and streaming revenue sharing agreements with studios, distributors
and other suppliers.
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.
Year ended December 31, Change
2010 2009 2010 vs. 2009
(in thousands, except percentages)
Cost of subscription ................................ $1,154,109 $909,461 26.9%
As a percentage of revenues .......................... 53.4% 54.4%
The $244.6 million increase in cost of subscription revenues was due to the following factors:
• Content acquisition and licensing expenses increased by $165.9 million. This increase was primarily
attributable to investments in streaming content, partially offset by decreases in DVD content
acquisitions.
• Content delivery expenses increased $78.7 million primarily due to a 9.7% increase in the number of
DVDs mailed to paying subscribers. The increase in the number of DVDs mailed was driven by a 41.3%
increase in the average number of paying subscribers, partially offset by a 22.3% decline in monthly
DVD rentals per average paying subscriber primarily attributed to the growing popularity of our lower
priced plans and growth in streaming. In addition, content delivery expenses increased due to higher
costs associated with our use of third-party delivery networks resulting from an increase in the total
number of hours of streaming content viewed by our subscribers.
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 and licensing expenses increased by $46.6 million. This increase was primarily
attributable to investments in streaming content.
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