NetFlix 2004 Annual Report Download - page 48

service to function most effectively, it must access a large database of user ratings. We cannot assure you that the
proprietary algorithms in our recommendation service will continue to function effectively to predict and
recommend titles that our subscribers will enjoy, or that we will continue to be successful in enticing subscribers
to rate enough titles for our database to effectively predict and recommend new or existing titles.
We are continually refining our recommendation service in an effort to improve its predictive accuracy and
usefulness to our subscribers. We may experience difficulties in implementing such refinements. In addition, we
cannot assure you that we will be able to continue to make and implement meaningful refinements to our
recommendation service.
If our recommendation service does not enable us to predict and recommend titles that our subscribers will
enjoy or if we are unable to implement meaningful improvements, our personal movie recommendation service
will be less useful, in which event:
• our subscriber satisfaction may decrease, subscribers may perceive our service to be of lower value and
our ability to attract and retain subscribers may be affected adversely;
• 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 our subscriber satisfaction and
results of operations may be affected adversely.
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.
32