NetFlix 2002 Annual Report Download - page 38

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Please find page 38 of the 2002 NetFlix annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

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Our business could suffer increased competition if:
• the window for rental were no longer the first following the theatrical release; or
• the length of this window were shortened.
The order, length and exclusivity of each window for each distribution channel is determined solely by the studio releasing the title, and we cannot assure you that the studios will not change
their policies in the future in a manner that would be adverse to our business and results of operations.
In addition, any conditions that adversely affect the movie industry, including constraints on capital, financial difficulties, regulatory requirements and strikes, work stoppages or other
disruptions involving writers, actors or other essential personnel, could affect adversely the availability of new titles, consumer demand for filmed entertainment and our business.
If we are unable to renegotiate our revenue sharing agreements when they expire on terms favorable to us, or if the cost to us of purchasing titles on a wholesale basis increases,
our gross margins may be affected adversely.
Since 2000, we have entered into over 50 revenue sharing arrangements with studios and distributors. These revenue sharing agreements generally have terms of up to five years. The length
of time we share revenue on each title ends after a fixed period. As our revenue sharing agreements expire, we may be required to negotiate new terms that could be disadvantageous to us.
During the course of our revenue sharing relationship with studios and distributors, various contract administration issues arise. To the extent that we are unable to resolve any of these issues
in an amicable manner, our relationship with the studios may be adversely impacted.
Titles that we do not acquire under a revenue sharing agreement are purchased on a wholesale basis from studios or other distributors. If the price of titles that we purchase wholesale
increases, our gross margin will be affected adversely.
If the sales price of DVDs to retail consumers decreases, our ability to attract new subscribers may be affected adversely.
The cost of manufacturing DVDs is substantially less than the price for which new DVDs are generally sold in the retail market. Thus, we believe that studios and other resellers of DVDs
have significant flexibility in pricing DVDs for retail sale. If the retail price of DVDs were to become significantly lower, consumers may choose to purchase DVDs rather than subscribe to
our service.
If disposable DVDs are adopted and supported as a method of content delivery by the studios, our business could be adversely affected.
Certain companies have developed disposable DVDs. As currently designed, disposable DVDs allow a consumer to view a DVD for an unlimited number of times during a given time
period, following which the DVD becomes unplayable by a chemical reaction, and is then disposable. For example, in November of 2002, scenes from the newly release James Bond film,
Die Another Day, were distributed to members of the media in a promotion of the movie. The discs were rendered unplayable 36 hours after being exposed to the air. If disposable DVDs
become a viable alternative method of content delivery supported by the studios, our business could be adversely affected.
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