NetFlix 2003 Annual Report Download - page 41

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. In December 2003, the FASB issued a revised Interpretation No.
46 (“FIN 46R”), which expands the criteria for consideration in determining whether a variable interest entity
should be consolidated. Public companies must apply FIN 46R to entities considered to be special purpose
entities no later than the end of the first reporting period that ended after December 15, 2003, and no later than
the first reporting period that ends after March 15, 2004 for all other entities. The application of FIN 46R is not
expected to have a material effect on our financial statements.
Factors That May Affect Future Results of Operations
If any of the following risks actually occurs, 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, cable channels, such as HBO and
Showtime, pay-per-view and 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.
If we experience excessive rates of subscriber churn, our revenues and business will be harmed.
We must minimize the rate of loss of existing subscribers while adding new subscribers. Subscribers cancel
their subscription to our service for many reasons, including a perception that they do not use the service
sufficiently, delivery takes too long, the service is a poor value and customer service issues are not satisfactorily
resolved. We must continually add new subscribers both to replace subscribers who cancel and to grow our
business beyond our current subscriber base. If too many of our subscribers cancel our service, or if we are
unable to attract new subscribers in numbers sufficient to grow our business, our operating results will be
adversely affected. Further, if excessive numbers of subscribers cancel our service, we may be required to incur
significantly higher marketing expenditures than we currently anticipate to replace these subscribers with new
subscribers.
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. With our use of multiple shipping centers and the
associated software and procedural upgrades, we have reduced the transit time of DVDs. As a result, our
subscribers have been able to exchange more titles each month, which has increased our operating costs. As we
establish additional shipping centers or further refine our distribution process, we may see a continued 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.
25