NetFlix 2004 Annual Report Download - page 44

face competition from potential new entrants into the online DVD rental market such as Amazon.com. If we are
unable to successfully or profitably compete with current and new competitors, our business will be adversely
affected, and we may not be able to increase or maintain market share, revenues or profitability.
In addition, 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 Hollywood Entertainment, buy a DVD from Wal-Mart and subscribe to
Netflix, or some combination thereof, all in the same month. New 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:
• online DVD subscription rental sites, such as Blockbuster Online and Walmart.com;
• 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;
• 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.
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. There can be no
assurance that we will be able to compete effectively against current or new competitors at our new pricing levels
or at even lower price points in the future. Furthermore, we may need to adjust the level of service provided to
our subscribers and/or incur significantly higher marketing expenditures than we currently anticipate. As a result
of this increased competition, we have seen and may continue to see a reduction in operating margins and
market share.
If we are unable to offset increased demand for titles with increased subscriber retention or operating
margins, our operating results may be affected adversely.
There is no established limit to the number of movies that subscribers may rent. Historically, we have seen
the average number of movies rented per subscriber increase on an annual basis. We believe that this increase in
usage is influenced by improvements to our service as well as consumer usage habits. We have established a
nationwide network of distribution centers which provides subscribers with fast delivery of their rented DVDs.
We are continually enhancing our service in ways that may impact subscriber movie usage. Such improvements
include new product features on our Website as well as software and process upgrades. In addition, demand for
titles may increase for a variety of reasons beyond our control, including promotion by studios and seasonal
variations or shifts in consumer movie watching. Our subscribers may continue to increase their usage of our
service, which would increase our operating costs. 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.
In addition, 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.
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