NetFlix 2002 Annual Report Download - page 37

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from Blockbuster, buy a DVD from Wal−Mart and subscribe to Netflix, or some combination thereof, all in the same month. Competitors may be able to launch new businesses at relatively
low cost. DVDs represent only one of many existing and potential new technologies for viewing filmed entertainment. In addition, the growth in adoption of DVD technology is not mutually
exclusive from the growth of other technologies. If we are unable to successfully compete with current and new competitors and technologies, we may not be able to achieve adequate market
share, increase our revenues, or achieve and maintain profitability. Our principal competitors include, or could include:
• video rental outlets, such as Blockbuster and Hollywood Entertainment;
• movie retail stores, such as Best Buy, Wal−Mart and Amazon.com;
• subscription entertainment services, such as HBO and Showtime;
• pay−per−view and video−on−demand services;
• online DVD sites, such as FilmCaddy.com and Walmart.com;
• Internet movie providers, such as Movielink, backed by Columbia TriStar, Warner Bros. and a few other studios, Movies.com, backed by Walt Disney,
CinemaNow.com, backed by Blockbuster and Microsoft, and Movie Flix;
• cable providers, such as AOL Time Warner and Comcast; and
• direct broadcast satellite providers, such as DirectTV and Echostar.
Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Some
of our competitors have adopted, and may continue to adopt, aggressive pricing policies and devote substantially more resources to marketing and Web site and systems development than we
do. The rapid growth of our online entertainment subscription business since our inception may attract direct competition from larger companies with significantly greater financial resources
and national brand recognition. In October of 2002, Wal−Mart’s online affiliate Walmart.com announced that it was testing an online DVD subscription service, Wal−Mart DVD Rentals,
and that based on the result of such test, would likely rollout a service nationwide in 2003. Likewise, Blockbuster recently acquired an online DVD subscription service, FilmCaddy.com.
Blockbuster is also testing in−store DVD rental subscription programs. Increased competition may result in reduced operating margins, loss of market share and reduced revenues. In
addition, our competitors may form or extend strategic alliances with studios and distributors that could affect adversely our ability to obtain filmed entertainment on favorable terms.
If consumer adoption of DVD players slows, our business could be adversely affected.
The rapid adoption of DVD players has been fueled by strong retail support, strong studio support and falling DVD player prices. If retailers or studios reduce their support of the DVD
format, or if manufacturers raise prices, continued DVD adoption by consumers could slow. If new or existing technologies, such as D−VHS, were to become more popular at the expense of
the adoption or use of DVD technology, consumers may delay or avoid purchasing a DVD player. Our subscriber growth will be substantially influenced by future consumer adoption of
DVD players, and if such adoption slows, our subscriber growth may also slow.
We depend on studios to release titles on DVD for an exclusive time period following theatrical release.
Our ability to attract and retain subscribers is related to our ability to offer new releases of filmed entertainment on DVD prior to their release to other distribution channels. Except for
theatrical release, DVD and VHS currently enjoy a significant competitive advantage over other distribution channels, such as pay−per−view and VOD, because of the early timing of the
distribution window for DVD and VHS. The window for DVD and VHS rental and retail sales is generally exclusive against other forms of non−theatrical movie distribution, such as
pay−per−view, premium television, basic cable and network and syndicated television. The length of the exclusive window for movie rental and retail sales varies, typically ranging from 30
to 90 days.
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