NetFlix 2004 Annual Report Download - page 45

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 relatively new, 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. In addition, we
will have to compete for subscribers against other brands which have greater recognition than ours, such as
Blockbuster and Wal-Mart. We believe that the importance of brand loyalty will only increase in light of
competition both for online subscription services and other means of distributing titles, such as VOD. From time-
to-time, our subscribers express dissatisfaction with our service, including among others things, our inventory
allocation and delivery processing. To the extent such dissatisfaction is widespread or not adequately addressed,
our brand may be adversely impacted. 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
television and radio advertising, consumer package insertions as well as point-of-sale programs with retailers.
We also acquire a number of subscribers who rejoin our service having previously cancelled their membership.
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 new subscriber. 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 marketing expenses 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. If companies that currently promote our service
decide to enter our business or a similar business or decide to exclusively support our competitors, we may no
longer be given access to such channels. In addition, laws and regulations impose restrictions on the use of
certain channels, including commercial e-mail and direct mail. We may limit or discontinue use or support of e-
mail and other activities if we become concerned that subscribers or potential subscribers deem such activities
intrusive, which could affect our goodwill or brand. If the available marketing channels are curtailed, our ability
to attract new subscribers may be affected adversely.
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
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