NetFlix 2003 Annual Report Download - page 47

• our ability to effectively merchandise and utilize our library will be affected adversely; and
• our subscribers may default to choosing titles from among new releases or other titles that cost us more
to provide, and our margins may be affected adversely.
If we do not correctly anticipate our short and long-term needs for titles that we acquire pursuant to
revenue sharing agreements, our subscriber satisfaction and results of operations may be affected
adversely.
Under our revenue sharing agreements, we generally pre-order titles prior to their release on DVD based on
our anticipated needs. It is generally impracticable for us to acquire additional copy depth for titles while such
titles are subject to revenue sharing. If we do not acquire sufficient copies of titles, we may not satisfy subscriber
demand, and our subscriber satisfaction and results of operations could be affected adversely. Conversely, if we
attempt to mitigate this risk and acquire more copies than needed to satisfy our subscriber demand, our inventory
utilization would become less effective and our gross margins would be affected adversely.
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 and 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 were to become more
popular at the expense of the adoption or use of DVD technology, consumers may delay or avoid purchasing
DVD players. 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 DVDs prior to their release to other distribution channels. Except for theatrical release, DVDs
currently enjoy a significant competitive advantage over other distribution channels, such as pay-per-view and
VOD, because of the early distribution window for DVDs. The window for DVD 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. 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 was 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 adversely affect 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 of purchasing titles on a wholesale basis increases, our gross margins may be affected
adversely.
Since 2000, we have entered into numerous 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
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