NetFlix 2005 Annual Report Download - page 26

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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. Currently, studios distribute their filmed
entertainment content approximately three to six months after theatrical release to the home video market, seven
to nine months after theatrical release to pay-per-view and VOD, one year after theatrical release to satellite and
cable, and two to three years after theatrical release to basic cable and syndicated networks. However, in what
continues to be an emerging trend, the major studios have shortened the release window on certain titles, in
particular the theatrical to home video window. In addition, some studios have discussed eliminating the release
window on certain titles, in particular releasing movies simultaneously on DVD and VOD.
If we are unable to offset increased demand for titles with increased subscriber retention or operating
margins, our operating results may be affected adversely.
With our unlimited plans, there is no established limit to the number of movies that subscribers may rent.
Historically, on a plan-by-plan basis, 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. 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.
We are continually adjusting our service in ways that may impact subscriber movie usage. Such adjustments
include new Web site features and merchandising practices, an expanded distribution network, as well as
software and process changes.
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 alter our service or
increase our monthly subscription fees to offset any increased costs of acquiring or delivering titles.
If our subscribers select titles or formats 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. In addition, films released on the
new high definition DVD formats, HD-DVD and BluRay, may be more expensive to acquire. The rate of
customer acceptance and adoption of these new formats is uncertain. If subscribers select these formats on a
proportional basis more often than the existing DVD format, our DVD acquisition expenses could increase, and
our gross margins could be adversely affected.
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