NetFlix 2006 Annual Report Download - page 20

If we experience increased demand for titles which we are unable to offset with increased subscriber
retention or operating margins, our operating results may be adversely affected.
With our unlimited plans, there is no established limit to the number of movies that subscribers may rent.
We are continually adjusting our service in ways that may impact subscriber movie usage. Such adjustments
include new Web site features and merchandising practices, computer-based instant viewing of select titles
through our instant-viewing feature, an expanded DVD distribution network and software and process changes.
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.
If our subscriber retention does not increase or our operating margins do not improve to an extent necessary
to offset the effect of any increased operating costs associated with increased usage, our operating results will be
adversely affected. In addition, our subscriber growth and retention may be adversely affected 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 may 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 content 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, and those released for online delivery may be more
expensive to acquire than in DVD format. 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.
If our efforts to build strong brand identity and improve subscriber satisfaction and loyalty are not
successful, we may not be able to attract or retain subscribers, and our operating results may be adversely
affected.
The Netflix brand is still developing, and we must continue to build strong brand identity. To succeed, we
must continue to attract and retain a large number of owners of DVD players who have traditionally relied on
store-based rental outlets and persuade them to subscribe to our service through our Web site. In addition, we
will have to compete for subscribers against other brands which have greater recognition than ours, such as
Blockbuster. We believe that the importance of brand loyalty will only increase in light of competition, both for
online subscription services and other means of distributing titles, such as VOD. From time-to-time, our
subscribers express dissatisfaction with our service, including among other things, our inventory allocation and
delivery processing. To the extent dissatisfaction with our service is widespread or not adequately addressed, our
brand may be adversely impacted. If our efforts to promote and maintain our brand are not successful, our
operating results and our ability to attract and retain subscribers may be adversely affected.
If we are unable to manage the mix of subscriber acquisition sources, our subscriber levels and marketing
expenses may be adversely affected.
We utilize a broad mix of marketing programs to promote our service to potential new subscribers. We
obtain new subscribers through our online marketing efforts, including third party banner ads, pop-under
placements, direct links and permission-based e-mails as well as our active affiliate program. In addition, we
have engaged in various offline marketing programs, including television and radio advertising, direct mail and
print campaigns, consumer package and mailing insertions. We also acquire a number of subscribers who rejoin
our service having previously cancelled their membership. We maintain an active public relations program to
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