NetFlix 2004 Annual Report Download - page 43

SFAS No. 123 and supersedes APB Opinion No. 25, Accounting for Stock-based compensation. This Standard
requires a public entity to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. This eliminates the exception to account for such
awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be
effective for interim or annual reporting periods beginning on or after June 15, 2005. We previously adopted the
fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, in the second
quarter of 2003, and restated prior periods at that time. Accordingly we believe SFAS No. 123(R) will not have a
material impact on our balance sheet or operating results.
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 new 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. In addition, direct competition to our
service, namely from services like Blockbuster Online, has increased significantly over the past year and will
likely impact our ability to attract subscribers. Our ability to attract 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. Furthermore, if our
competitors are able to offer similar service levels at lower prices, our ability to attract subscribers will be
adversely affected. 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 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 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, competitive services provide a better value and/
or experience, 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 compete effectively, our business will be affected adversely.
The market for in-home filmed entertainment is intensely competitive and subject to rapid change. 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. The rapid growth of our online
entertainment subscription business since our inception may continue to attract direct competition from larger
companies with significantly greater financial resources and national brand recognition. For example, we have
seen increased direct competition from Blockbuster, which launched its online service in August 2004, and could
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