NetFlix 2008 Annual Report Download - page 16

and the Netflix Player by Roku. We intend to broaden our capability to instantly stream movies and TV episodes
to other platforms and partners over time. If we are not successful in maintaining existing and creating new
relationships, or if we encounter technological, content licensing or other impediments to our streaming content,
our ability to grow our business could be adversely impacted. Our agreements with our consumer electronics
partners are typically between one and three years in duration and our business could be adversely affected if,
upon expiration, our partners do not continue to provide access to our service or are unwilling to do so on terms
acceptable to us. For example, while the PC and Mac platforms constitute the largest number of devices used by
our subscribers to enjoy streaming content, the agreement covering the next largest number of devices will expire
in late 2009, unless the partner exercises its option to extend. If such agreement were to terminate, our subscriber
acquisition and retention could be adversely impacted. Furthermore, devices are manufactured and sold by
entities other than Netflix and while these entities should be responsible for the devices’ performance, the
connection between these devices and Netflix may nonetheless result in consumer dissatisfaction toward Netflix
and such dissatisfaction could result in claims against us or otherwise adversely impact our business. In addition,
technology changes to our watch instantly functionality may require that partners update their devices. If partners
do not update or otherwise modify their devices, our service and our subscribers use and enjoyment could be
negatively impacted.
If we experience increased demand for titles which we are unable to offset with increased subscriber
retention or operating margins, our operating results may be adversely affected.
With our unlimited plans, there is no established limit to the number of movies and TV episodes that
subscribers may rent on DVD or watch instantly. We are continually adjusting our service in ways that may
impact subscriber movie usage. Such adjustments include new Web site features and merchandising practices,
improvements in the technology that enable subscribers to instantly watch movies and TV episodes, an expanded
DVD distribution network and software and process changes. In addition, demand for titles may increase for a
variety of reasons beyond our control, including promotion by studios and seasonal variations or shifts in
consumer movie watching.
If our subscriber retention does not increase or our operating margins do not improve to an extent necessary to
offset the effect of any increased operating costs associated with increased usage, our operating results will be
adversely affected. In addition, our subscriber growth and retention may be adversely affected if we attempt to alter
our service or increase our monthly subscription fees to offset any increased costs of acquiring or delivering titles.
If our subscribers select titles or formats that are more expensive for us to obtain and deliver more
frequently, our expenses may increase.
Certain titles cost us more to purchase or result in greater revenue sharing expenses, depending on the
source from whom they are obtained and the terms on which they are obtained. If subscribers select these titles
more often on a proportional basis compared to all titles selected, our revenue sharing and other content
acquisition expenses could increase, and our gross margins could be adversely affected. In addition, films
released on Blu-ray and those released for streaming may be more expensive to obtain than in the standard
definition DVD format. The rate of customer acceptance and adoption of these new formats is uncertain. If
subscribers select these formats on a proportional basis more often than the existing standard definition DVD
format, our content acquisition expenses could increase, and our gross margins could be adversely affected.
If our efforts to build strong brand identity and improve subscriber satisfaction and loyalty are not
successful, we may not be able to attract or retain subscribers, and our operating results may be adversely
affected.
We must continue to build and maintain strong brand identity. To succeed, we must continue to attract and
retain a large number of subscribers who have relied on other rental outlets and persuade them to subscribe to our
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