NetFlix 2005 Annual Report Download - page 30

Titles that we do not acquire under a revenue sharing agreement are purchased on a wholesale basis from
studios or other distributors. If the price of purchased titles increases, our gross margin will be affected adversely.
If the sales price of DVDs to retail consumers decreases, our ability to attract new subscribers may be
affected adversely.
The cost of manufacturing DVDs is substantially less than the price for which new DVDs are generally sold
in the retail market. Thus, we believe that studios and other resellers of DVDs have significant flexibility in
pricing DVDs for retail sale. If the retail price of DVDs decreases significantly, consumers may choose to
purchase DVDs instead of subscribing to our service.
We may need additional capital, and we cannot be sure that additional financing will be available.
Historically, we have funded our operations and capital expenditures through proceeds from private equity
and debt financings, equipment leases and cash flow from operations. Although we currently anticipate that the
proceeds from our May 2002 initial public offering, together with our available funds and cash flow from
operations, will be sufficient to meet our cash needs for the foreseeable future, we may require additional
financing. Our ability to obtain financing will depend, among other things, on our development efforts, business
plans, operating performance and condition of the capital markets at the time we seek financing. We cannot
assure you that additional financing will be available to us on favorable terms when required, or at all. If we raise
additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution.
Any significant disruption in service on our Web site or in our computer systems could result in a loss of
subscribers.
Subscribers and potential subscribers access our service through our Web site, where the title selection
process is integrated with our delivery processing systems and software. Our reputation and ability to attract,
retain and serve our subscribers is dependent upon the reliable performance of our Web site, network
infrastructure and fulfillment processes. Interruptions in these systems could make our Web site unavailable and
hinder our ability to fulfill selections. Much of our software is proprietary, and we rely on the expertise of our
engineering and software development teams for the continued performance of our software and computer
systems. Service interruptions or the unavailability of our Web site could diminish the overall attractiveness of
our subscription service to existing and potential subscribers.
Our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions and delays in our service and operations as well as loss, misuse or theft of data.
Our Web site periodically experiences directed attacks intended to cause a disruption in service. Any attempts by
hackers to disrupt our Web site service or our internal systems, if successful, could harm our business, be
expensive to remedy and damage our reputation. Our insurance does not cover expenses related to direct attacks
on our Web site or internal systems. Efforts to prevent hackers from entering our computer systems are expensive
to implement and may limit the functionality of our services. Any significant disruption to our Web site or
internal computer systems could result in a loss of subscribers and adversely affect our business and results of
operations.
Our communications hardware and the computer hardware used to operate our Web site are hosted at the
facilities of a third party provider. Hardware for our delivery systems is maintained in our shipping centers. Fires,
floods, earthquakes, power losses, telecommunications failures, break-ins and similar events could damage these
systems and hardware or cause them to fail completely. As we do not maintain entirely redundant systems, a
disrupting event could result in prolonged downtime of our operations and could adversely affect our business.
Problems faced by our third party Web hosting provider, with the telecommunications network providers with
whom it contracts or with the systems by which it allocates capacity among its customers, including us, could
impact adversely the experience of our subscribers.
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