NetFlix 2005 Annual Report Download - page 32

do not currently carry insurance against the risk of fraudulent credit card transactions. A failure to adequately
control fraudulent credit card transactions would harm our business and results of operations.
Increases in payment processing fees would increase our operating expenses and adversely affect our
results of operations.
Our subscribers pay for our subscription services predominately using credit cards and debit cards and, to a
lesser extent, electronic checks. Our acceptance of these payment methods requires our payment of certain fees.
From time to time, these fees may increase, either as a result of rate changes by the payment processing
companies or as a result in a change in our business practices which increase the fees on a cost-per-transaction
basis. These fees may increase in 2006. Such increase may adversely affect our results of operations.
If our trademarks and other proprietary rights are not adequately protected to prevent use or
appropriation by our competitors, the value of our brand and other intangible assets may be diminished,
and our business may be adversely affected.
We rely and expect to continue to rely on a combination of confidentiality and license agreements with our
employees, consultants and third parties with whom we have relationships, as well as trademark, copyright,
patent and trade secret protection laws, to protect our proprietary rights. Netflix is a registered trademark of
Netflix, Inc. in the United States and United Kingdom. We have also filed trademark applications in the United
States for the Friends and Profiles service marks and for the Netflix design logo, and have filed U.S. patent
applications for certain aspects of our technology. We have also filed a trademark application in the European
Union for the Netflix name. From time to time we expect to file additional trademark and patent applications.
Nevertheless, these applications may not be approved, third parties may challenge any patents issued to or held
by us, third parties may knowingly or unknowingly infringe our patents, trademarks and other proprietary rights,
and we may not be able to prevent infringement without substantial expense to us. If the protection of our
proprietary rights is inadequate to prevent use or appropriation by third parties, the value of our brand and other
intangible assets may be diminished, competitors may be able to more effectively mimic our service and methods
of operations, the perception of our business and service to subscribers and potential subscribers may become
confused in the marketplace and our ability to attract subscribers may be adversely affected
Intellectual property claims against us could be costly and result in the loss of significant rights related to,
among other things, our Web site, our recommendation service, title selection processes and marketing
activities.
Trademark, copyright, patent and other intellectual property rights are important to us and other companies.
Our intellectual property rights extend to our technology, business processes and the content on our Web site. We
use the intellectual property of third parties in merchandising our products and marketing our service through
contractual and other rights. From time to time, third parties allege that we have violated their intellectual
property rights. If we are unable to obtain sufficient rights or develop non-infringing intellectual property or
otherwise alter our business practices on a timely basis in response to claims against us for infringement,
misappropriation, misuse or other violation of third party intellectual property rights, our business and
competitive position may be affected adversely. Many companies are devoting significant resources to
developing patents that could potentially affect many aspects of our business. There are numerous patents that
broadly claim means and methods of conducting business on the Internet. We have not exhaustively searched
patents relative to our technology. Defending ourselves against intellectual property claims, whether they are
with or without merit or are determined in our favor, results in costly litigation and diversion of technical and
management personnel. It also may result in our inability to use our current Web site or our recommendation
service or inability to market our service or merchandise our products. As a result of a dispute, we may have to
develop non-infringing technology, enter into royalty or licensing agreements, adjust our merchandizing or
marketing activities or take other actions to resolve the claims. These actions, if required, may be costly or
unavailable on terms acceptable to us.
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