NetFlix 2002 Annual Report Download - page 31

2002 and are not expected to have a material effect on our financial statements. The disclosure requirements are effective for financial statements of interim or annual periods ending after
December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 . This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January
31, 2003. For public enterprises, such as us, with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation is applied to the enterprise no later than the
beginning of the first interim or annual reporting period beginning after June 15, 2003. The application of this Interpretation is not expected to have a material effect on our financial
statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that we will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective.
Factors that May Affect future Results of Operations
If any of the following risks actually occur, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline,
and you could lose all or part of your investment.
Risks Related to Our Business
If our efforts to attract subscribers are not successful, our revenues will be affected adversely.
We must continue to attract and retain subscribers. To succeed, we must continue to attract a large number of subscribers who have traditionally used video retailers, video rental outlets, pay
cable channels, such as HBO and Showtime, and pay−per−view and video−on−demand, or VOD, for in−home filmed entertainment. Our ability to attract and retain subscribers will depend
in part on our ability to consistently provide our subscribers a high quality experience for selecting, viewing, receiving and returning titles, including providing accurate recommendations
through our recommendation service. If consumers do not perceive our service offering to be of high quality, or if we introduce new services that are not favorably received by them, we may
not be able to attract or retain subscribers. In addition, many of our new subscribers originate from word−of−mouth advertising and referrals from existing subscribers. If our efforts to satisfy
our existing subscribers are not successful, we may not be able to attract new subscribers, and as a result, our revenues will be affected adversely.
We rely heavily on our proprietary technology to process deliveries and returns of our DVDs and to manage other aspects of our operations, and the failure of this technology to
operate effectively could adversely affect our business.
We use complex proprietary software to process deliveries and returns of our DVDs and to manage other aspects of our operations. Our proprietary technology is intended to allow our
shipping centers throughout the United States to be operated on an integrated basis. We continually enhance or otherwise modify the software used for our distribution operations. For
example, in early 2003 we introduced new software algorithms and procedures designed to enhance local delivery of available DVDs to our subscribers and to otherwise provide operational
efficiencies at our shipping centers. We cannot be sure that the enhancements or other modifications we make to our distribution operations will achieve the intended results or otherwise be
of value to our subscribers. If we are unable to maintain and enhance our technology to manage the processing of DVDs among our shipping centers in a timely and efficient manner, our
ability to retain existing subscribers and to add new subscribers may be impaired.
If we are not able to manage our growth, our business could be affected adversely.
We have expanded rapidly since we launched our Web site in April 1998. We anticipate further expanding our operations to help grow our subscriber base and to take advantage of favorable
market opportunities. Any
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