NetFlix 2005 Annual Report Download - page 25

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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:
• video rental outlets, such as Blockbuster and Movie Gallery;
• online DVD subscription rental sites, such as Blockbuster Online;
• pay-per-view and VOD services and alternative content delivery methods such as Apple’s video iPod
and MovieBeam;
• movie retail stores, such as Best Buy, Wal-Mart and Amazon.com;
• subscription entertainment services, such as HBO and Showtime;
• Internet movie providers, such as Movielink, CinemaNow.com and Vongo;
• Internet companies such as Yahoo! and Google;
• 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 existing 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 increased competition, we have seen and may continue to see a reduction in operating margins and
market share.
If VOD or other technologies are widely adopted and supported as a method of content delivery by the
studios and consumers, our business could be adversely affected.
Some digital cable providers and Internet content providers have implemented technology referred to as
VOD. This technology transmits movies and other entertainment content on demand with interactive capabilities
such as start, stop and rewind. High-speed Internet access has greatly increased the speed and quality of viewing
VOD content, including feature-length movies, on personal computers over the Internet. In addition, other
technologies have been developed that allow alternative means for consumers to receive and watch movies or
other entertainment, such as on cell phones or other handheld devices such as Apple’s iPod. If VOD or other
technologies become affordable and viable alternative methods of content delivery widely supported by studios
and adopted by consumers, our business could be adversely affected.
If the popularity of the DVD format decreases, our business could be adversely affected.
Consumers have rapidly adopted the DVD format for viewing in-home filmed entertainment. Over the past
several years DVD sales have grown and now surpassed the VHS format. In addition, DVD sales account for
more than 42% of studio revenues. We believe that the DVD format, including any successor formats such as
HD-DVD and BluRay, will be valuable long-term consumer propositions and studio profit centers. However, if
DVD sales were to decrease, whether because of a shift away from movie watching or because new or existing
technologies were to become more popular at the expense of DVD enjoyment, studios and retailers may reduce
their support of the DVD format. Our subscriber growth will be substantially influenced by future popularity of
the DVD format, and if such popularity wanes, our subscriber growth may also slow.
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