Netflix (NFLX)

Gross Margin

Three months ended March 31, 2009 as compared to the three months ended March 31, 2008

The increase in gross margin for the three months ended March 31, 2009 as compared to the same prior-year period was primarily attributable to the popularity of our lower priced plans, which have higher gross margins. In addition, our margins continue to benefit from increased utilization of catalog titles resulting from ongoing improvements in our merchandising and recommendation systems.

Three months ended March 31, 2009 as compared to the three months ended December 31, 2008

The decrease in gross margin for the three months ended March 31, 2009 as compared to the three months ended December 31, 2008 was primarily attributable to an increase in postage and packaging expenses resulting from an increase in monthly DVD rentals per average paying subscriber due to a seasonal increase in disc usage.

Gross Margin

The decrease in gross margin in 2008 as compared to 2007, and 2007 as compared to 2006, was primarily due to an increase in postage rates effective May 2008 and 2007 and a reduction in the prices of our most popular subscription plans during the second half of 2007. In addition, costs related to our streaming content have been included in cost of subscriptions beginning January 2007.

We anticipate that gross margin will decline in 2009, due to increased investment in content library coupled with an expected increase in postage rates effective May 2009.

Gross Margin

The decrease in gross margin in 2008 as compared to 2007, and 2007 as compared to 2006, was primarily due to an increase in postage rates effective May 2008 and 2007 and a reduction in the prices of our most popular subscription plans during the second half of 2007. In addition, costs related to our streaming content have been included in cost of subscriptions beginning January 2007.

We anticipate that gross margin will decline in 2009, due to increased investment in content library coupled with an expected increase in postage rates effective May 2009.

Gross Margin

The decrease in gross margin in 2008 as compared to 2007, and 2007 as compared to 2006, was
primarily due to an increase in postage rates effective May 2008 and 2007 and a reduction in the prices of our most popular subscription plans during the second half of 2007. In addition, costs related to our streaming content have been included in
cost of subscriptions beginning January 2007.

We anticipate that gross margin will decline in 2009, due to increased investment in content
library coupled with an expected increase in postage rates effective May 2009.

Gross Margin

The decrease in gross margin in 2008 as compared to 2007, and 2007 as compared to 2006, was
primarily due to an increase in postage rates effective May 2008 and 2007 and a reduction in the prices of our most popular subscription plans during the second half of 2007. In addition, costs related to our streaming content have been included in
cost of subscriptions beginning January 2007.

We anticipate that gross margin will decline in 2009, due to increased investment in content
library coupled with an expected increase in postage rates effective May 2009.

Gross Margin

The decrease in gross margin in 2008 as compared to 2007, and 2007 as compared to 2006, was
primarily due to an increase in postage rates effective May 2008 and 2007 and a reduction in the prices of our most popular subscription plans during the second half of 2007. In addition, costs related to our streaming content have been included in
cost of subscriptions beginning January 2007.

We anticipate that gross margin will decline in 2009, due to increased investment in content
library coupled with an expected increase in postage rates effective May 2009.

Gross Margin

Three and nine months ended September 30, 2008 as compared to the three and nine months ended September 30, 2007

The increase in gross margin for the three months ended September 30, 2008 as compared to the same prior-year period was primarily attributable to a decrease in content spending as a percentage of revenue, partly offset by an increase in postage and packaging expenses as a result of the increase in postage rates effective in May 2008.

The decrease in gross margin for the nine months ended September 30, 2008 as compared to the same prior-year period was primarily attributable to a reduction in the prices of our most popular subscription plans during the second half of 2007 and increases in postage rates effective May 2007 and May 2008.

Three months ended September 30, 2008 as compared to the three months ended June 30, 2008

The increase in gross margin for the three months ended September 30, 2008 as compared to the three months ended June 30, 2008 was primarily attributable to a decrease in content spending as a percentage of revenue, driven by a weak new release calendar. This was partly offset by an increase in postage and packaging expenses resulting from the increase in postage rates effective in May 2008.

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Gross Margin

Three and six months ended June 30, 2008 as compared to the three and six months ended June 30, 2007

The decrease in gross margin for the three and six months ended June 30, 2008 as compared to the same prior-year periods was primarily attributable to a reduction in the prices of our most popular subscription plans during the second half of 2007 and increases in postage rates effective May 2007 and May 2008.

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Three months ended June 30, 2008 as compared to the three months ended March 31, 2008

Gross margin for the three months ended June 30, 2008 as compared to the three months ended March 31, 2008 was relatively flat, due to a slight increase in content spending as a percentage of revenue, offset by a slight decline in shipping and packaging and fulfillment expenses as a percentage of revenue due to a seasonal decline in DVD usage.

Gross Margin

Three months ended March 31, 2008 as compared to the three months ended March 31, 2007

The decrease in gross margin for the three months ended March 31, 2008 as compared to the same prior-year period was primarily attributable to a reduction in the prices of our most popular subscription plans during the second half of 2007 and an increase in postage rates effective May 2007. In addition, the decrease in gross margin was due to increased cost attributable to content library acquisitions during this same period.

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Three months ended March 31, 2008 as compared to the three months ended December 31, 2007

The decrease in gross margin for the three months ended March 31, 2008 as compared to the three months ended December 31, 2007 was primarily attributable to an increase in monthly DVD rentals per average paying subscriber due to a seasonal increase in disc usage. In addition, the decrease in gross margin was due to increased cost attributable to content library acquisitions during this same period.

Gross Margin

The decrease in gross margin in 2007 as compared to 2006 was primarily due to an increase in postage rates effective May 2007 and a reduction in the prices of our most popular subscription plans during the second quarter of 2007. In addition, costs related to our instant-watching feature have been included in cost of subscriptions beginning January 2007.

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The increase in gross margin in 2006 as compared to 2005 was primarily due to a decrease in revenue sharing cost per paid shipment, which includes a decline in the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers, as well as an increase in revenue per paid shipment as a result of a decline in overall usage and the continued popularity of our lower priced plans. The increase in postage rates by 2 cents effective January 8, 2006 negatively impacted gross margin, however, this impact was offset by a decline in fulfillment costs as a result of increased operational efficiencies.

We anticipate that gross margin will decline in 2008, due to the impact of lower prices coupled with the postage rate increase of one cent, which is effective May 2008.

Gross Margin

The decrease in gross margin in 2007 as compared to 2006 was primarily due to an increase in
postage rates effective May 2007 and a reduction in the prices of our most popular subscription plans during the second quarter of 2007. In addition, costs related to our instant-watching feature have been included in cost of subscriptions beginning
January 2007.

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The increase in gross margin in 2006 as compared to 2005 was primarily due to a decrease in revenue
sharing cost per paid shipment, which includes a decline in the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers, as well as an increase in revenue per paid shipment as a result of a decline in overall usage and
the continued popularity of our lower priced plans. The increase in postage rates by 2 cents effective January 8, 2006 negatively impacted gross margin, however, this impact was offset by a decline in fulfillment costs as a result of increased
operational efficiencies.

We anticipate that gross margin will decline in 2008, due to the impact of lower prices coupled with the postage
rate increase of one cent, which is effective May 2008.

Gross Margin

Three and nine months ended September 30, 2006 as compared to the three and nine months ended September 30, 2007

The decrease in gross margin for the three and nine months ended September 30, 2007 as compared to the same prior-year periods was primarily due to the increase in the rate of first class postage in the amount of $0.02 in May 2007 and increases in content amortization associated with Internet-based delivery of content.

Three months ended June 30, 2007 as compared to the three months ended September 30, 2007

The decrease in gross margin for the three months ended September 30, 2007 as compared to the three months ended June 30, 2007 was primarily attributable to a decrease in revenues due to the lowered prices of three of our most popular subscription plans, as well as the increase in the rate of first class postage in May 2007.

We anticipate that gross margin will continue to decline as a result of our lower prices and our continued investment in content for Internet-based delivery.

Gross Margin

Three and six months ended June 30, 2006 as compared to the three and six months ended June 30, 2007

The decrease in gross margin for the three months ended June 30, 2007 as compared to the same prior-year period was primarily due to an increase in content amortization. Additionally, there was an increase in the rate of first class postage in the amount of $0.02 in May 2007.

The slight increase in gross margin for the six months ended June 30, 2007 as compared to the same prior-year period was primarily due to a decrease in revenue sharing cost per paid shipment, which includes a decline in the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers, as well as an increase in revenue per paid shipment as a result of a decline in overall usage.

Three months ended March 31, 2007 as compared to the three months ended June 30, 2007

The decrease in gross margin for the three months ended June 30, 2007 as compared to the three months ended March 31, 2007 was primarily attributable to an increase in content costs related to our instant viewing feature, as the instant viewing feature was rolled out to our entire subscriber base in the second quarter of 2007.

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If movie rentals per average paying subscriber increases or if we see more shipments of DVDs subject to revenue sharing and the revenue sharing cost per shipment does not decline, erosion in our gross margin will occur.

In January 2007, we introduced our instant-viewing feature. During 2007, we anticipate incurring at least $40 million in expenses related to our instant viewing feature, a portion of which will be expensed to cost of revenues. As a result, we anticipate that cost of subscription will increase as a percentage of revenues, resulting in a decline in gross margin in 2007.

Gross Margin

The increase in gross margin for the three months ended March 31, 2007 as compared to the same prior-year period was primarily due to a decrease in revenue sharing cost per paid shipment, which includes a decline in the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers, as well as an increase in revenue per paid shipment as a result of a decline in overall usage and the continued popularity of our lower priced plans.

If movie rentals per average paying subscriber increases or if we see more shipments of DVDs subject to revenue sharing and the revenue sharing cost per shipment does not decline, erosion in our gross margin will occur. Additionally, an increase in the rate of first class postage in the amount of $0.02 is expected to take place in May 2007. The anticipated increase in postage rates is expected to reduce our gross margin.

In January 2007, we introduced our instant-viewing feature. During 2007, we anticipate incurring at least $40 million in additional expenses related to our instant viewing feature, a portion of which will be expensed to cost of revenues. As a result, we anticipate that cost of subscription will increase as a percentage of revenue, resulting in a decline in gross margin in 2007.

Gross Margin

The increase in gross margin in 2006 as compared to 2005 was primarily due to a decrease in revenue sharing cost per paid shipment, which includes a decline in the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers, as well as an increase in revenue per paid shipment as a result of a decline in overall usage and the continued popularity of our lower-priced plans. The increase in postage rates by 2 cents effective January 8, 2006 negatively impacted gross margin, however, this impact was offset by a decline in fulfillment costs as a result of increased operational efficiencies.

The decline in gross margin in 2005 as compared to 2004 was primarily attributable to the increase in cost of subscription, offset in part by a decrease in fulfillment expenses as a percentage of revenue. Cost of subscription increased due to a decline in revenue per paid shipment as a result of the price decrease of our most popular service plan implemented in the fourth quarter of 2004, offset partially by the change in estimate related to the useful life of our back-catalog DVD library and the rapid growth of lower priced plans which produce a higher margin than our most popular subscription plan of $17.99 per month. In addition, the gross margin for 2004 was favorably impacted by certain credits received from studios resulting from amendments to revenue sharing agreements.

If movie rentals per average paying subscriber increases or if we see more shipments of DVDs subject to revenue sharing and the revenue sharing cost per shipment does not decline, erosion in our gross margin will occur. Additionally, in 2006, the U.S. Postal Service proposed an increase in the rate of first class postage in the amount of 3 cents. If approved, the increase is expected to take place in mid-2007. The anticipated increase in postage rates is expected to reduce our gross margin.

In January 2007, we introduced our instant-viewing feature which is being made available to subscribers in a phased roll-out. During 2007, we anticipate incurring at least $40 million in additional expenses related to our instant viewing feature. As a result, we anticipate that cost of subscription will increase as a percentage of revenue, resulting in a decline in gross margin in 2007.

Gross Margin

In the fourth quarter of 2005, in light of discussions with the Securities and Exchange Commission (“SEC”), we reclassified fulfillment expenses in our Consolidated Statements of Income as a component of Cost of revenues. In prior periods we had reported fulfillment expenses as a component of Operating expenses. Accordingly, Cost of revenues, Gross profit and Operating expenses in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005 have been reclassified to conform to this presentation. (See Note 1 of Notes to Condensed Consolidated Financial Statements).

The increase in gross margin in the three and nine months ended September 30, 2006 in comparison with the same prior-year period was primarily due to a decrease in revenue share cost per paid shipment, which includes a decline in the percentage of DVDs subject to revenue sharing agreements mailed to paying subscribers, as well as an increase in revenue per paid shipment as a result of a decline in overall usage and the continued popularity of our lower-priced plans. The increase in postage rates by 2 cents effective January 8, 2006 negatively impacted gross margin for the quarter, however, this impact was offset by a decline in fulfillment costs as a result of increased operational efficiencies.

If movie rentals per average paying subscriber increases or if we see more shipments of DVDs subject to revenue share and the revenue share cost per shipment does not decline, erosion in our gross margin could occur. Additionally, in May 2006, the USPS proposed an increase in the rate of first class postage by 3 cents to $0.42. If approved, the increase would likely be effective in May 2007. The anticipated increase in postage rates is expected to reduce our gross margin unless we offset the expected postage increase with other cost reductions.