NetFlix 2002 Annual Report Download - page 36

If our recommendation service does not enable us to predict and recommend titles that our subscribers will enjoy or if we are unable to implement meaningful improvements, our personal
movie recommendation service will be less useful, in which event:
• our subscriber satisfaction may decrease, subscribers may perceive our service to be of lower value and our ability to attract and retain subscribers may be affected adversely;
• our ability to effectively merchandise and utilize our library will be affected adversely; and
• our subscribers may default to choosing titles from among new releases or other titles that cost us more to provide, and our margins may be affected adversely.
If we do not correctly anticipate our short and long−term needs for titles that we acquire pursuant to revenue sharing agreements, our subscriber satisfaction and results of
operations may be affected adversely.
Under our revenue sharing agreements, we generally pre−order titles prior to their release on DVD based on our anticipated needs. If we anticipate inaccurately and we acquire insufficient
copy depth for specific titles, it is generally impracticable for us to acquire additional copy depth for such titles while such titles are subject to revenue sharing. If we do not acquire sufficient
copies of titles, we may not satisfy subscriber demand, and our subscriber satisfaction and results of operations could be affected adversely. Conversely, if we attempt to mitigate this risk and
acquire more copies than needed to satisfy our subscriber demand, then our inventory utilization would become less effective and our gross margins would be affected adversely.
If our subscribers select titles that are more expensive for us to acquire and deliver on a more frequent basis, our expenses would increase.
Certain titles cost us more to acquire or result in greater revenue sharing expenses depending on the source from whom they are acquired and the terms on which they are acquired. If
subscribers select these more costly titles more often on a proportional basis compared to all titles selected, our revenue sharing and other DVD acquisition expenses could increase, and our
gross margins could be adversely affected.
If we are unable to offset increased demand for titles with increased subscriber retention or operating margins, our operating results may be affected adversely.
Subscribers to our service can view as many titles as they want every month and, depending on the service plan, may have out between two and eight titles at a time. Currently we operate 18
shipping centers and plan to open additional centers in 2003. With our use of these shipping centers and the associated software and procedural upgrades, there has been a reduction in the
transit time of DVDs. As a result, our subscribers have been able to exchange more titles per month, which has increased our operating costs. As we rollout additional shipping centers or
further refine our distribution process, we may see an increase in usage by our subscribers. If our subscriber retention does not increase or our operating margins do not improve to an extent
necessary to offset the effect of increased operating costs, our operating results will be adversely affected.
In addition, subscriber demand for titles may increase for a variety of other reasons beyond our control, including promotion by studios and seasonal variations in movie watching. Our
subscriber growth and retention may be affected adversely if we attempt to increase our monthly subscription fees to offset any increased costs of acquiring or delivering titles.
If we are unable to compete effectively, our business will be affected adversely.
The market for in−home filmed entertainment is intensely competitive and subject to rapid change. Many consumers maintain simultaneous relationships with multiple in−home filmed
entertainment providers and can easily shift spending from one provider to another. For example, consumers may subscribe to HBO, rent a DVD
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