NetFlix 2006 Annual Report Download - page 27

governmental agencies and their designees. The regulation of domain names in the United States may change in
the near future. Governing bodies may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or
maintain relevant domain names. Furthermore, the relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear. We may be unable, without significant
cost or at all, to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise
decrease the value of our trademarks and other proprietary rights.
Forecasting film revenue and associated gross profits from our films prior to release is extremely difficult
and may result in significant write-offs.
We are required to amortize capitalized film production costs over the expected revenue streams as we
recognize revenue from the associated films. The amount of film production costs that will be amortized each
period depends on how much future revenue we expect to receive from each film. Unamortized film production
costs are evaluated for impairment each reporting period on a film-by-film basis. If estimated remaining revenue
is not sufficient to recover the unamortized film production costs, the unamortized film production costs will be
written down to fair value. In any given period, if we lower our previous forecast with respect to total anticipated
revenue from any individual film, we would be required to accelerate amortization of related film costs. Such
accelerated amortization would adversely impact our business, operating results and financial condition. In
addition, we base our estimates of revenue on performance of comparable titles and our knowledge of the
industry. If the information is incorrect, the amount of revenue and related expenses that we recognize from our
films could be wrong, which could result in fluctuations in our earnings.
If we become subject to liability for content that we publish or distribute through our service, our results
of operations would be adversely affected.
As a publisher of content, a host of third party content and a distributor of content, we face potential liability
for negligence, copyright, patent or trademark infringement or other claims based on the nature and content of
materials that we publish or distribute. For example, our wholly-owned subsidiary, Red Envelope Entertainment,
LLC, which is dedicated to acquiring and funding original content productions, may be exposed to liability for
copyright infringement and other claims relating to the original content. We also may face potential liability for
content uploaded from our users in connection with our community-related content or movie reviews.
If we become liable, then our business may suffer. Litigation to defend these claims could be costly and the
expenses and damages arising from any liability could harm our results of operations. We cannot assure you that
we are adequately insured to cover claims of these types or to indemnify us for all liability that may be imposed
on us.
If government regulation of the Internet or other areas of our business changes or if consumer attitudes
toward use of the Internet change, we may need to change the manner in which we conduct our business,
or incur greater operating expenses.
The adoption or modification of laws or regulations relating to the Internet or other areas of our business
could limit or otherwise adversely affect the manner in which we currently conduct our business. In addition, the
growth and development of the market for online commerce may lead to more stringent consumer protection
laws, which may impose additional burdens on us. If we are required to comply with new regulations or
legislation or new interpretations of existing regulations or legislation, this compliance could cause us to incur
additional expenses or alter our business model.
The manner in which Internet and other legislation may be interpreted and enforced cannot be precisely
determined and may subject either us or our customers to potential liability, which in turn could have an adverse
effect on our business, results of operations and financial condition. The adoption of any laws or regulations that
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