Digital River 2006 Annual Report Download - page 22

companies like ours that engage in e-commerce, and they may seek to impose taxes retroactively on past
transactions that we believed were exempt from transaction tax liability. A successful assertion by one or more
tax jurisdictions that we should collect or were obligated to collect transaction taxes on the products we sell
could harm our results of operations.
We could be liable for fraudulent, improper or illegal uses of our platforms.
In recent years revenues from our “remote control” platforms have grown as a percentage of our overall
business, and we plan to continue to emphasize our self service e-commerce solutions. These platforms
typically have an automated structure that allows customers to use our e-commerce services without significant
participation from Digital River personnel. Despite our efforts to detect and contractually prohibit the sale of
inappropriate and illegal goods and services, the remote control nature of these platforms makes it more likely
that transactions involving the sale of unlawful goods or services or the violation of the proprietary rights of
others may occur before we become aware of them. Furthermore, unscrupulous individuals may offer illegal
products for sale via such platforms under innocuous names, further frustrating attempts to prevent inappropri-
ate use of our services. Failure to detect inappropriate or illegal uses of our platforms by third parties could
expose us to a number of risks, including fines, increased fees or termination of services by payment
processors or credit card associations, risks of lawsuits, and civil and criminal penalties.
Loss of our credit card acceptance privileges would seriously hamper our ability to process the sale of
merchandise.
The payment by end-users for the purchase of digital goods that we process is typically made by credit
card or similar payment method. As a result, we must rely on banks or payment processors to process
transactions, and must pay a fee for this service. From time to time, credit card associations may increase the
interchange fees that they charge for each transaction using one of their cards. Any such increased fees will
increase our operating costs and reduce our profit margins. We also are required by our processors to comply
with credit card association operating rules, and we have agreed to reimburse our processors for any fines they
are assessed by credit card associations as a result of processing payments for us. The credit card associations
and their member banks set and interpret the credit card rules. Visa, MasterCard, American Express, or
Discover could adopt new operating rules or re-interpret existing rules that we or our processors might find
difficult to follow. We have had payment processing agreements with certain of our payment processors
terminated due to violations of their rules, and although we have been able to successfully migrate to new
processors, such migrations require significant attention from our personnel, and often result in higher fees and
customer dissatisfaction. Any disputes or problems associated with our payment processors could impair our
ability to give customers the option of using credit cards to fund their payments. If we were unable to accept
credit cards, our business would be seriously damaged. We also could be subject to fines or increased fees
from MasterCard and Visa if we fail to detect that merchants are engaging in activities that are illegal or
activities that are considered “high risk,” primarily the sale of certain types of digital content. We may be
required to expend significant capital and other resources to monitor these activities.
Our failure to attract and retain software and digital products publishers, manufacturers, online retailers
and online channel partners as clients would cause our revenue and operating profits to decline.
We generate revenue by providing outsourced services to a wide variety of companies, primarily in the
software and high-tech products markets. If we cannot develop and maintain satisfactory relationships with
software and digital products publishers, manufacturers, online retailers and online channel partners on
acceptable commercial terms, we will likely experience a decline in revenue and operating profit. We also
depend on our software and digital publisher clients creating and supporting software and digital products that
end-users will purchase. If we are unable to obtain sufficient quantities of software and digital products for
any reason, or if the quality of service provided by these software and digital products publishers falls below a
satisfactory level, we could also experience a decline in revenue, operating profit and end-user satisfaction,
and our reputation could be harmed. Our contracts with our software and digital products publisher clients are
generally one to two years in duration, with an automatic renewal provision for additional one-year periods,
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