attributable to investments in streaming content.



Fulfillment Expenses

Fulfillment expenses represent those expenses incurred in content processing, including operating and staffing our shipping centers, as well as receiving, encoding, inspecting and warehousing our content library. Fulfillment expenses also include operating and staffing our customer service centers and credit card fees.

 

The $33.4 million increase in fulfillment expenses was due to the following:

 

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Shipping and customer service centers expenses increased $13.4 million primarily due to a $12.4 million increase in personnel costs resulting from a 10.0% increase in headcount to support the higher volume of content delivery and growth in subscribers. In addition, encoding costs increased $7.0 million in support of the increasing number of titles and platforms offered for streaming content. These increases were partially offset by a $4.7 million increase in costs related to free-trials allocated to marketing due primarily to the 74.7% increase in gross subscriber additions.



 

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Credit card fees increased $20.0 million as a result of the 29.5% growth in revenues.



 

The $20.7 million increase in fulfillment expenses was due to the following:

 

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Shipping and customer service centers expenses increased $10.5 million primarily due to a 14.0% increase in headcount to support the higher volume of content delivery and growth in subscribers.



 

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Credit card fees increased $10.2 million as a result of the 22.4% growth in revenues.



Gross Margin

 

The 1.8 percentage point increase in gross margin was primarily due to lower DVD content acquisition expenses per DVD mailed and a 22.3% decline in monthly DVD rentals per average paying subscriber driven by the growing popularity of our lower priced plans and streaming. This decline in DVD usage was larger than the decline in average revenue per paying subscriber of 8.3%. The resulting increase to gross margin was offset partially by increased investments in our streaming content.

 

The 2.1 percentage point increase in gross margin was primarily due to lower DVD content acquisition expenses per DVD mailed and a 6.3% decline in monthly DVD rentals per average paying subscriber driven by the growing popularity of our lower priced plans. This decline was larger than the decline in average revenue per paying subscriber of 3.3%. The resulting increase to gross margin was offset partially by increased investments in our streaming content.

We have increased and expect to continue to increase investments in content, in particular streaming content. These investments would reduce our gross margin to the extent that increases in content acquisition and licensing expenses outpace growth in our revenues.

Operating Expenses

Technology and Development

Technology and development expenses consist of payroll and related costs incurred in making improvements to our service offering, including testing, maintaining and modifying our user interfaces, our recommendation and merchandising technology, as well as, telecommunications systems and infrastructure and other internal-use software systems. Technology