Netflix (NFLX)

Cost of Revenues

FACE="Times New Roman" SIZE="2">Subscription

Cost of subscription revenues consists of postage and packaging costs related to
shipping DVDs to subscribers as well as content related expenses. Costs related to free-trial periods are allocated to marketing expenses.

SIZE="2">Postage and Packaging.    Postage and packaging expenses consist of the postage costs to mail DVDs to and from our paying subscribers and the packaging and label costs for the mailers. Between January 8, 2006
and May 13, 2007, the rate for first-class postage was $0.39. The U.S. Postal Service increased the rate of first class postage by 2 cents to $0.41 effective May 14, 2007 and by one cent to $0.42 effective May 12, 2008. We receive
discounts on outbound postage costs related to our mail preparation practices.

Content Expenses.    We obtain
titles from studios and distributors through direct purchases, revenue sharing agreements or license agreements. Direct purchases of DVDs normally result in higher upfront costs than titles obtained through revenue sharing agreements. Content
related expenses consist of costs incurred in obtaining titles such as amortization of content and revenue sharing expense.

Cost of Revenues

FACE="Times New Roman" SIZE="2">Subscription

Cost of subscription revenues consists of postage and packaging costs related to
shipping DVDs to subscribers as well as content related expenses. Costs related to free-trial periods are allocated to marketing expenses.

SIZE="2">Postage and Packaging.    Postage and packaging expenses consist of the postage costs to mail DVDs to and from our paying subscribers and the packaging and label costs for the mailers. Between January 8, 2006
and May 13, 2007, the rate for first-class postage was $0.39. The U.S. Postal Service increased the rate of first class postage by 2 cents to $0.41 effective May 14, 2007 and by one cent to $0.42 effective May 12, 2008. We receive
discounts on outbound postage costs related to our mail preparation practices.

Content Expenses.    We obtain
titles from studios and distributors through direct purchases, revenue sharing agreements or license agreements. Direct purchases of DVDs normally result in higher upfront costs than titles obtained through revenue sharing agreements. Content
related expenses consist of costs incurred in obtaining titles such as amortization of content and revenue sharing expense.

Cost of Revenues

FACE="Times New Roman" SIZE="2">Subscription

Cost of subscription revenues consists of postage and packaging costs related to
shipping DVDs to subscribers as well as content related expenses. Costs related to free-trial periods are allocated to marketing expenses.

SIZE="2">Postage and Packaging.    Postage and packaging expenses consist of the postage costs to mail DVDs to and from our paying subscribers and the packaging and label costs for the mailers. Between January 8, 2006
and May 13, 2007, the rate for first-class postage was $0.39. The U.S. Postal Service increased the rate of first class postage by 2 cents to $0.41 effective May 14, 2007 and by one cent to $0.42 effective May 12, 2008. We receive
discounts on outbound postage costs related to our mail preparation practices.

Content Expenses.    We obtain
titles from studios and distributors through direct purchases, revenue sharing agreements or license agreements. Direct purchases of DVDs normally result in higher upfront costs than titles obtained through revenue sharing agreements. Content
related expenses consist of costs incurred in obtaining titles such as amortization of content and revenue sharing expense.

Cost of Revenues

FACE="Times New Roman" SIZE="2">Subscription

The increase in cost of subscription revenues in absolute dollars for 2008 as compared to 2007 was
primarily attributable to the following factors:

The increase in cost of subscription revenues in absolute dollars for 2007 as compared to 2006
was primarily attributable to the following factors:

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Table of Contents

Cost of Revenues

FACE="Times New Roman" SIZE="2">Subscription

The increase in cost of subscription revenues in absolute dollars for 2008 as compared to 2007 was
primarily attributable to the following factors:

The increase in cost of subscription revenues in absolute dollars for 2007 as compared to 2006
was primarily attributable to the following factors:

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Table of Contents

Cost of Revenues

FACE="Times New Roman" SIZE="2">Subscription

The increase in cost of subscription revenues in absolute dollars for 2008 as compared to 2007 was
primarily attributable to the following factors:

The increase in cost of subscription revenues in absolute dollars for 2007 as compared to 2006
was primarily attributable to the following factors:

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Table of Contents

Cost of Revenues

Subscription.    Cost of subscription revenues consists of postage and packaging expenses related to shipping DVDs to subscribers, as well as content related expenses incurred in obtaining titles such as

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Table of Contents

NETFLIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

amortization of content and revenue sharing expenses. Revenue sharing expenses are recorded when either DVDs are shipped to subscribers or streaming content is viewed by subscribers. Costs related to free-trial periods are allocated to marketing expenses.

Fulfillment Expenses.    Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing the Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

Subscription.    Cost of subscription revenues consists of postage and packaging expenses related to shipping DVDs to subscribers, as well as content related expenses incurred in obtaining titles such as

F-10

Table of Contents

NETFLIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

amortization of content and revenue sharing expenses. Revenue sharing expenses are recorded when either DVDs are shipped to subscribers or streaming content is viewed by subscribers. Costs related to free-trial periods are allocated to marketing expenses.

Fulfillment Expenses.    Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing the Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

SIZE="2">Subscription.    Cost of subscription revenues consists of postage and packaging expenses related to shipping DVDs to subscribers, as well as content related expenses incurred in obtaining titles such as

F-10

Table of Contents

NETFLIX, INC.

FACE="Times New Roman" SIZE="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

amortization of content and revenue sharing expenses. Revenue sharing expenses are recorded when either DVDs are shipped to subscribers or streaming content
is viewed by subscribers. Costs related to free-trial periods are allocated to marketing expenses.

Fulfillment
Expenses.    Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing the
Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

SIZE="2">Subscription.    Cost of subscription revenues consists of postage and packaging expenses related to shipping DVDs to subscribers, as well as content related expenses incurred in obtaining titles such as

F-10

Table of Contents

NETFLIX, INC.

FACE="Times New Roman" SIZE="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

amortization of content and revenue sharing expenses. Revenue sharing expenses are recorded when either DVDs are shipped to subscribers or streaming content
is viewed by subscribers. Costs related to free-trial periods are allocated to marketing expenses.

Fulfillment
Expenses.    Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing the
Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

SIZE="2">Subscription.    Cost of subscription revenues consists of postage and packaging expenses related to shipping DVDs to subscribers, as well as content related expenses incurred in obtaining titles such as

F-10

Table of Contents

NETFLIX, INC.

FACE="Times New Roman" SIZE="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

amortization of content and revenue sharing expenses. Revenue sharing expenses are recorded when either DVDs are shipped to subscribers or streaming content
is viewed by subscribers. Costs related to free-trial periods are allocated to marketing expenses.

Fulfillment
Expenses.    Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing the
Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

Subscription. Cost of subscription revenues consists of postage and packaging expenses, amortization of the content library and revenue sharing expenses. Revenue sharing expenses are recorded when DVDs are shipped to subscribers or subscribers watch streaming content.

The terms of some revenue sharing agreements with studios obligate the Company to make minimum revenue sharing payments for certain titles. The Company amortizes minimum revenue sharing prepayments (or accretes an amount payable to studios if the payment is due in arrears) as revenue sharing obligations are incurred. A provision for estimated shortfall, if any, on minimum revenue sharing payments is made in the period in which the shortfall becomes probable and can be reasonably estimated. Additionally, the terms of certain purchase agreements with studios provide for rebates based on achieving specified performance levels. The Company accrues for these rebates as earned based on historical title performance and estimates of demand for the titles over the remainder of the title term. Actual rebates may vary which could result in an increase or reduction in the estimated amounts previously accrued.

Fulfillment expenses. Fulfillment expenses represent costs incurred in operating and staffing the Company’s shipping centers and customer service location, including costs attributable to receiving, inspecting and warehousing the Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

Subscription. Cost of subscription revenues consists of postage and packaging expenses, amortization of the content library and revenue sharing expenses. Revenue sharing expenses are recorded when DVDs are shipped to subscribers or subscribers watch streaming content.

The terms of some revenue sharing agreements with studios obligate the Company to make minimum revenue sharing payments for certain titles. The Company amortizes minimum revenue sharing prepayments (or accretes an amount payable to studios if the payment is due in arrears) as revenue sharing obligations are incurred. A provision for estimated shortfall, if any, on minimum revenue sharing payments is made in the period in which the shortfall becomes probable and can be reasonably estimated. Additionally, the terms of certain purchase agreements with studios provide for rebates based on achieving specified performance levels. The Company accrues for these rebates as earned based on historical title performance and estimates of demand for the titles over the remainder of the title term. Actual rebates may vary which could result in an increase or reduction in the estimated amounts previously accrued.

Fulfillment expenses. Fulfillment expenses represent costs incurred in operating and staffing the Company’s shipping centers and customer service location, including costs attributable to receiving, inspecting and warehousing the Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

Subscription. Cost of subscription revenues consists of postage and packaging expenses, amortization of the content library and revenue sharing expenses. Revenue sharing expenses are recorded when DVDs are shipped to subscribers or subscribers watch streaming content.

The terms of some revenue sharing agreements with studios obligate the Company to make minimum revenue sharing payments for certain titles. The Company amortizes minimum revenue sharing prepayments (or accretes an amount payable to studios if the payment is due in arrears) as revenue sharing obligations are incurred. A provision for estimated shortfall, if any, on minimum revenue sharing payments is made in the period in which the shortfall becomes probable and can be reasonably estimated. Additionally, the terms of certain purchase agreements with studios provide for rebates based on achieving specified performance levels. The Company accrues for these rebates as earned based on historical title performance and estimates of demand for the titles over the remainder of the title term. Actual rebates may vary which could result in an increase or reduction in the estimated amounts previously accrued.

Fulfillment expenses. Fulfillment expenses represent costs incurred in operating and staffing the Company’s shipping centers and customer service location, including costs attributable to receiving, inspecting and warehousing the Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

Subscription.    Cost of subscription revenues consists of postage and packaging expenses, amortization of the content library and revenue sharing expenses. Revenue sharing expenses are recorded when either DVDs are shipped to subscribers or Internet-based content is viewed by subscribers.

The terms of some revenue sharing agreements with studios obligate the Company to make minimum revenue sharing payments for certain titles. The Company amortizes minimum revenue sharing prepayments (or accretes an amount payable to studios if the payment is due in arrears) as revenue sharing obligations are incurred. A provision for estimated shortfall, if any, on minimum revenue sharing payments is made in the period in which the shortfall becomes probable and can be reasonably estimated. Additionally, the terms of certain purchase agreements with studios provide for rebates based on achieving specified performance levels. The Company accrues for these rebates as earned based on historical title performance and estimates of demand for the titles over the remainder of the title term. Actual rebates may vary which could result in an increase or reduction in the estimated amounts previously accrued.

Fulfillment Expenses.    Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing the Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

FACE="Times New Roman" SIZE="2">Subscription.    Cost of subscription revenues consists of postage and packaging expenses, amortization of the content library and revenue sharing expenses. Revenue sharing expenses are
recorded when either DVDs are shipped to subscribers or Internet-based content is viewed by subscribers.

The terms of some revenue sharing
agreements with studios obligate the Company to make minimum revenue sharing payments for certain titles. The Company amortizes minimum revenue sharing prepayments (or accretes an amount payable to studios if the payment is due in arrears) as
revenue sharing obligations are incurred. A provision for estimated shortfall, if any, on minimum revenue sharing payments is made in the period in which the shortfall becomes probable and can be reasonably estimated. Additionally, the terms of
certain purchase agreements with studios provide for rebates based on achieving specified performance levels. The Company accrues for these rebates as earned based on historical title performance and estimates of demand for the titles over the
remainder of the title term. Actual rebates may vary which could result in an increase or reduction in the estimated amounts previously accrued.

SIZE="2">Fulfillment Expenses.    Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving,
inspecting and warehousing the Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

Subscription. Cost of subscription consists of postage and packaging expenses, amortization of the content library and revenue sharing expenses related to shipping titles and the delivery of Internet-based content to paying subscribers. Revenue sharing expenses are recorded when either a) DVDs are shipped to subscribers or b) Internet-based content is viewed by subscribers.

The terms of some revenue sharing agreements with studios obligate the Company to make minimum revenue sharing payments for certain titles. The Company amortizes minimum revenue sharing prepayments (or accretes an amount payable to studios if the payment is due in arrears) as revenue sharing obligations are incurred. A provision for estimated shortfall, if any, on minimum revenue sharing payments is made in the period in which the shortfall becomes probable and can be reasonably estimated. Additionally, the terms of our purchase agreements with studios provide for rebates based on achieving specified performance levels. The Company accrues for these rebates as earned based on historical title performance and estimates of demand for the titles over the remainder of the title term. Actual rebates may vary which could result in an increase or reduction in the estimated amounts previously accrued.

Fulfillment expenses. Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing the Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

Subscription. Cost of subscription consists of postage and packaging expenses, amortization of the content library and revenue sharing expenses related to shipping titles and the delivery of internet-based content to paying subscribers. Revenue sharing expenses are recorded when either a) DVDs are shipped to subscribers or b) internet-based content is viewed by subscribers.

The terms of some revenue sharing agreements with studios obligate the Company to make minimum revenue sharing payments for certain titles. The Company amortizes minimum revenue sharing prepayments (or accretes an amount payable to studios if the payment is due in arrears) as revenue sharing obligations are incurred. A provision for estimated shortfall, if any, on minimum revenue sharing payments is made in the period in which the shortfall becomes probable and can be reasonably estimated. Additionally, the terms of our purchase agreements with studios provide for rebates based on achieving specified performance levels. The Company accrues for these rebates as earned based on historical title performance and estimates of demand for the titles over the remainder of the title term. Actual rebates may vary which could result in an increase or reduction in the estimated amounts previously accrued.

Fulfillment expenses. Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing the Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

Subscription. Cost of subscription consists of postage and packaging expenses, amortization of the content library and revenue sharing expenses related to shipping titles and the delivery of internet-based content to paying subscribers. Revenue sharing expenses are recorded when either a) DVDs are shipped to subscribers or b) internet-based content is viewed by subscribers.

The terms of some revenue sharing agreements with studios obligate the Company to make minimum revenue sharing payments for certain titles. The Company amortizes minimum revenue sharing prepayments (or accretes an amount payable to studios if the payment is due in arrears) as revenue sharing obligations are incurred. A provision for estimated shortfall, if any, on minimum revenue sharing payments is made in the period in which the shortfall becomes probable and can be reasonably estimated. Additionally, the terms of some revenue sharing agreements with studios provide for rebates based on achieving specified performance levels. The Company accrues for these rebates as earned based on historical title performance and estimates of demand for the titles over the remainder of the title term. Actual rebates may vary which could result in an increase or reduction in the estimated amounts previously accrued.

Fulfillment expenses. Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing the Company’s content library. Fulfillment expenses also include credit card fees.

Cost of Revenues

Subscription.    Cost of subscription consists of revenue sharing expenses, amortization of the DVD library, amortization of intangible assets related to equity instruments issued to studios and postage and packaging expenses related to DVDs provided to paying subscribers. Revenue sharing expenses are recorded as DVDs subject to revenue sharing agreements are shipped to subscribers.

The terms of some revenue sharing agreements with studios obligate the Company to make minimum revenue sharing payments for certain titles. The Company amortizes minimum revenue sharing prepayments (or accretes an amount payable to studios if the payment is due in arrears) as revenue sharing obligations are incurred. A provision for estimated shortfall, if any, on minimum revenue sharing payments is made in the period in which the shortfall becomes probable and can be reasonably estimated. Additionally, the terms of some revenue-sharing agreements with studios provide for rebates based on achieving specified performance levels. The Company accrues for these rebates as earned based on historical title performance and estimates of demand for the titles over the remainder of the title term. Actual rebates may vary which could result in an increase or reduction in the estimated amounts previously accrued.

Fulfillment expenses.    Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and customer service centers, including costs attributable to receiving, inspecting and warehousing the Company’s DVD library. Fulfillment expenses also include credit card fees.

Cost of Revenues

Cost of subscription revenues consists of revenue sharing expenses, amortization of our DVD library, and postage and packaging expenses related to shipping titles to paying subscribers. Costs related to free-trial subscribers are allocated to marketing expenses. Fulfillment expenses represent those expenses incurred in operating and staffing our shipping and customer service centers, including costs attributable to receiving, inspecting and warehousing our library. Fulfillment expenses also include credit card fees.

Subscription

The increase in cost of subscription revenues in absolute dollars for the three and nine months ended September 30, 2006 in comparison with the same prior-year periods corresponds with the increase in the number of average paying subscribers offset by a decline in monthly movie rentals per average paying subscriber. The increase in average paying subscribers drove increases in the number of DVDs mailed to paying subscribers and related postage and packaging expenses. However, the increase was offset in part by a decline in revenue share cost per paid shipment as well as the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers. Additionally, DVD amortization increased due to increased acquisitions for our DVD library.

Our cost of subscription fluctuates based on several factors, including the level of acquisitions for our DVD library; the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers; revenue sharing costs per paid shipment and postage rates. The cost of subscription for the first nine months of 2006 was impacted by the increase in the postage rates by 2 cents effective January 8, 2006.

Fulfillment expenses

The increase in fulfillment expenses in absolute dollars for the three and nine months ended September 30, 2006 in comparison with the same prior-year periods was primarily attributable to the following factors:

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Cost of Revenues

Cost of subscription revenues consists of revenue sharing expenses, amortization of our DVD library, and postage and packaging expenses related to shipping titles to paying subscribers. Costs related to free-trial subscribers are allocated to marketing expenses. Fulfillment expenses represent those expenses incurred in operating and staffing our shipping and customer service centers, including costs attributable to receiving, inspecting and warehousing our library. Fulfillment expenses also include credit card fees.

Subscription

The increase in cost of subscription revenues in absolute dollars for the three and six months ended June 30, 2006 in comparison with the same prior-year periods corresponds with the increase in the number of average paying subscribers offset in part by a decline in monthly movie rentals per average paying subscriber. The increase in average paying subscribers drove increases in number of DVDs mailed to paying subscribers and related postage and packaging expenses and revenue-sharing expenses. Additionally, DVD amortization increased due to increased acquisitions for our DVD library.

Our cost of subscription fluctuates based on several factors, including the level of acquisitions for our DVD library; the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers; revenue sharing costs per paid shipment and postage rates. In the first and second quarters of 2006, cost of subscription was impacted by the increase in the postage rates by 2 cents effective January 8, 2006.

Fulfillment expenses

The increase in fulfillment expenses in absolute dollars for the three and six months ended June 30, 2006 in comparison with the same prior-year periods was primarily attributable to the following factors:

Cost of Revenues

Cost of subscription revenues consists of revenue sharing expenses, amortization of our DVD library, amortization of intangible assets related to equity investments issued to studios, and postage and packaging expenses related to shipping titles to paying subscribers. Costs related to free-trial subscribers are allocated to marketing expenses. Fulfillment expenses represent those expenses incurred in operating and staffing our shipping and customer service centers, including costs attributable to receiving, inspecting and warehousing our library. Fulfillment expenses also include credit card fees.

Subscription

The increase in cost of subscription revenues in absolute dollars for the three months ended March 31, 2006 in comparison with the same prior-year period was primarily attributable to the following factors:

Fulfillment expenses

The increase in fulfillment expenses in absolute dollars for the three months ended March 31, 2006 in comparison with the same prior-year period was primarily attributable to an increase in credit card fees as a result

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of the increase in subscriptions, an increase in personnel-related costs resulting from the higher volume of activities in our customer service and shipping centers and an increase in facility-related costs resulting from expansion of certain of our shipping centers and the addition of new ones.