NetFlix 2003 Annual Report Download - page 42

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 our subscribers select titles that are more expensive for us to acquire and deliver more frequently, our
expenses will 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 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 our efforts to build strong brand identity and improve subscriber satisfaction and loyalty are not
successful, we may not be able to attract or retain subscribers, and our operating results will be affected
adversely.
The Netflix brand is young, and we must continue to build strong brand identity. To succeed, we must
continue to attract and retain a large number of owners of DVD players who have traditionally relied on store-
based rental outlets and persuade them to subscribe to our service through our Web site. We may be required to
incur significantly higher advertising and promotional expenditures than we currently anticipate to attract large
numbers of new subscribers. We believe that the importance of brand loyalty will increase with a proliferation of
DVD subscription services and other means of distributing titles, such as VOD. If our efforts to promote and
maintain our brand are not successful, our operating results and our ability to attract and retain subscribers will
be affected adversely.
If we are unable to manage the mix of subscriber acquisition sources, our subscriber levels may be affected
adversely and our marketing expenses may increase.
We utilize a mix of incentive-based and fixed-cost marketing programs to promote our service to potential
new subscribers. We obtain a large portion of our new subscribers through our online marketing efforts,
including third party banner ads, pop-under placements, direct links and permission-based e-mails as well as our
active affiliate program. In addition, we have engaged in various offline marketing programs, including DVD
player box insertions as well as point-of-sale programs with retailers. While we opportunistically adjust our mix
of incentive-based and fixed-cost marketing programs, we attempt to manage the marketing expenses to come
within a prescribed range of acquisition cost per subscriber. To date, we have been able to manage our
acquisition cost per subscriber; however, if we are unable to maintain or replace our sources of subscribers with
similarly effective sources, or if the cost of our existing sources increases, our subscriber levels may be affected
adversely and our cost of marketing may increase.
If we are unable to continue using our current marketing channels, our ability to attract new subscribers
may be affected adversely.
We may not be able to continue to support the marketing of our service by current means if such activities
are no longer available to us or are adverse to our business. Laws and regulations have recently been enacted
which impose restrictions on the use of commercial e-mail. We may discontinue use or support of e-mail and
other online activities if we become concerned that subscribers or potential subscribers deem such activities
intrusive, which could affect our goodwill or brand. In addition, we may be foreclosed from certain channels due
to competitive reasons. If companies that currently promote our service decide to enter our business or a similar
business, we may no longer be given access to such channels. If the available marketing channels are curtailed,
our ability to attract new subscribers may be affected adversely.
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