NetFlix 2003 Annual Report Download - page 43

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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
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 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 VOD services;
• online DVD sites, such as FilmCaddy.com and Walmart.com;
• Internet movie providers, such as Movielink, CinemaNow.com and MovieFlix;
• cable providers, such as AOL Time Warner and Comcast; and
• direct broadcast satellite providers, such as DIRECTV 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 2003, Wal-Mart’s online affiliate Walmart.com
launched an online DVD subscription service, Wal-Mart DVD Rentals. Likewise, Blockbuster acquired an online
DVD subscription service, FilmCaddy.com. In addition, Blockbuster has announced plans to roll out an online
subscription service in late 2004 and then integrate the online and store-based subscription programs sometime in
2005. 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
adversely affect our ability to obtain titles on favorable terms.
If we are not able to manage our growth, our business could be affected adversely.
We have expanded rapidly since we launched our Web site in April 1998. We anticipate further expanding
our operations to help grow our subscriber base and to take advantage of favorable market opportunities. Any
future expansion will likely place significant demands on our managerial, operational, administrative and
financial resources. If we are not able to respond effectively to new or increased demands that arise because of
our growth, or, if in responding, our management is materially distracted from our current operations, our
business may be affected adversely. In addition, if we do not have sufficient breadth and depth of the titles
necessary to satisfy increased demand arising from growth in our subscriber base, our subscriber satisfaction may
be affected adversely.
With our additional shipping centers, we have seen a decrease in the delivery and return time for DVDs to
our subscribers. In addition, we have experienced an increase in the exchange of titles by subscribers. The more
frequent exchange of titles has increased our shipping and delivery costs and revenue sharing expenses while at
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