NetFlix 2007 Annual Report Download - page 14

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Item 1A. Risk Factors
If any of the following risks actually occurs, our business, financial condition and results of operations
could be harmed. In that case, the trading price of our common stock could decline, and you could lose all or
part of your investment.
Risks Related to Our Business
If our efforts to attract subscribers are not successful, our revenues will be adversely affected.
We must continue to attract subscribers to our service. Our ability to attract subscribers will depend in part
on our ability to consistently provide our subscribers with a valuable and quality experience for selecting,
viewing, receiving and returning titles, including providing accurate recommendations through our
recommendation service. Furthermore, the relative service levels, pricing and related features of competitors to
our service may adversely impact our ability to attract subscribers. Competitors include video retailers, video
rental outlets, kiosk services, Internet content providers, including online DVD rental services, cable channels,
such as HBO, Showtime and Starz, pay per-view and VOD. If consumers do not perceive our service offering to
be of value, or if we introduce new services that are not favorably received by them, we may not be able to attract
subscribers. In addition, many of our subscribers are rejoining our service, originate from word-of-mouth
advertising and are directly referred to our service from existing subscribers. If our efforts to satisfy our existing
subscribers are not successful, we may not be able to attract subscribers, and as a result, our revenues will be
adversely affected.
If the market segment for online DVD rentals saturates, our business will be adversely affected.
We have experienced rapid growth of our online DVD rental subscription business since our inception. We
have attracted a large number of subscribers who have traditionally used video retailers, video rental outlets,
cable channels, pay-per-view and VOD for their in-home filmed entertainment. While the market segment for
online DVD rental has grown significantly, we saw our growth slow in 2007. Our slowing growth appears
primarily to be the result of the rapid growth of our direct competitor, Blockbuster Online. Even with the
apparent reduced competitive threat from Blockbuster Online, our rate of growth may continue to slow. Such
slowing growth could indicate that the market segment for online rentals is beginning to saturate. While we
believe that online DVD rentals will continue to grow for the foreseeable future, if this market segment were to
saturate, our business would be adversely affected.
If we experience excessive rates of churn, our revenues and business will be harmed.
We must minimize the rate of loss of existing subscribers while adding new subscribers. Subscribers cancel
their subscription to our service for many reasons, including a perception that they do not use the service
sufficiently, delivery takes too long, the service is a poor value, competitive services provide a better value or
experience and customer service issues are not satisfactorily resolved. We must continually add new subscribers
both to replace subscribers who cancel and to grow our business beyond our current subscriber base. If too many
of our subscribers cancel our service, or if we are unable to attract new subscribers in numbers sufficient to grow
our business, our operating results will be adversely affected. If we are unable to successfully compete with
current and new competitors in both retaining our existing subscribers and attracting new subscribers, our churn
will likely increase and our business will be adversely affected. Further, if excessive numbers of subscribers
cancel our service, we may be required to incur significantly higher marketing expenditures than we currently
anticipate to replace these subscribers with new subscribers.
If we are unable to compete effectively, our business will be adversely affected.
The market for in-home filmed entertainment is intensely competitive and subject to rapid change. New
technologies for delivery of in-home filmed entertainment, such as VOD and Internet delivery of content,
continue to receive considerable media and investor attention. Many of our competitors have longer operating
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