NetFlix 2005 Annual Report Download - page 24

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Item 1A. Risk Factors
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, we face direct competition to
our service, namely from services like Blockbuster Online, that 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 with a valuable and 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 affected adversely. If
consumers do not perceive our service offering to be of value, 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. New
technologies for delivery of in-home filmed entertainment, such as VOD and downloading over the Internet,
continue to receive considerable media attention. 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 the entry of direct competition from Blockbuster, which launched its
online service in August 2004, and could face competition from potential new entrants into the online DVD
rental market. 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 Blockbuster, buy a DVD from Wal-Mart and subscribe to Netflix, or some
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