Further analysis of reasons Netflix wants you to receive more discs

Form 10-Q

This information is from the Form 10-Q which Netflix filed with the Securities and Exchange Commission at the end of the first quarter of 2004. "Subscriber churn" is the term used to describe how many subscribers quit the service or fail to sign up following the end of their free trial. Lower subscriber churn is their goal, because it reduces marketing expenses and increases revenue.

increase in subscriber churn may signal a deterioration in the quality of our service, or it may signal an unfavorable behavioral change in the mix of new subscribers. Lower subscriber churn means higher customer retention, faster revenue growth and lower marketing expenses as a percent of revenues for any given level of subscriber acquisition.

"Subscriber acquisition cost" is the term for how much it costs Netflix to find and keep its customers, through advertising and promotions. They want to keep this low. It's cheaper to keep you as a customer than to try to find a replacement for you if you quit, which is why they want you happy. If you rent alot of discs, you'll be happy (if you watch and enjoy them, of course).

For example, disc usage may increase, which depresses our gross margin. However, increased disc usage may result in higher subscriber satisfaction, which reduces subscriber churn and increases word-of-mouth advertising about our service. As a result, marketing expense may fall as a percent of revenues and operating expenses margins rise, offsetting the impact of a reduction in gross margin.

It is also in their interest to increase the number of titles they distribute, because it makes you happy, you share the good news with your friends, and Netflix spends less on advertising.

We can also make trade-offs between our DVD library investments which have an inverse relationship with subscriber churn and subscriber acquisition cost. For example, an increase in our DVD library investments may improve customer satisfaction and lower subscriber churn, and hence increase the number of new subscribers acquired via word-of-mouth. This in turn may allow us to accelerate our subscriber growth for a given level of marketing spending.

These factors give me reason to disbelieve that Netflix would deliberately slow down the number of discs you receive under any circumstances. I realize this is contrary to the popular findings of DVD Rent Test, but it shows there would be no financial incentive for them to provide poor customer service.

I have observed a periodic slowdown in turnaround of discs, but I think there is an explanation other than that they are doing it on purpose. My theory is that disc delivery times experiences occasional slowdowns as Netflix adjusts to rapid growth. When a new distribution center opens, there is rapid overnight growth in the number of local subscribers, which puts a powerful strain on the new DC with its new, inexperienced staff and management. I think we should give them time to adjust. You'll see that your disc turnaround times will return to normal in about a month, if you hang in there.