NetFlix 2006 Annual Report Download - page 19

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. At present,
DVD sales account for approximately 43% of studio revenues. While the growth of DVD sales has slowed, 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.
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. In what continues to
be an emerging trend, however, 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 U.S. Copyright law were altered to amend or eliminate the First Sale Doctrine or if studios were to
release titles on DVD in a manner that attempts to circumvent or limit the affects of the First Sale
Doctrine, our business could be adversely affected.
Under U.S. Copyright Law, once a copyright owner sells a copy of his work to another, the copyright owner
relinquishes all further rights to sell or otherwise dispose of that copy. While the copyright owner retains the
underlying copyright to the expression fixed in the work, the copyright owner gives up his ability to control the
fate of the work once it had been sold. As such, once a DVD is sold into the market, those obtaining the DVD are
permitted to re-sell it, rent it or otherwise dispose of it. If Congress or the courts were to change or substantially
limit this First Sale Doctrine, our ability to obtain content and then rent it could be adversely affected. Likewise,
if studios agree to limit the sale of their content in ways that try to limit the affects of the First Sale Doctrine, our
business could be adversely affected. For example, in late 2006, the Weinstein Company announced an
arrangement with Blockbuster by which Weinstein would distribute content on DVDs for rental exclusively by
Blockbuster. In so doing, they contractually prohibited certain distributors from selling the DVDs to rental
establishments. Nonetheless, the content was being distributed to retail vendors and distributors. While this
structure does not prohibit us from obtaining and renting Weinstein DVDs under the First Sale Doctrine, it does
impact our ability to obtain Weinstein content in the most efficient manner and, in some cases, in enough
quantities to satisfy demand. If such arrangements were to become more commonplace or if additional
impediments to obtaining content were created, our ability to obtain content could be impacted and our business
could be adversely affected.
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