NetFlix 2007 Annual Report Download - page 16

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. While the
growth of DVD sales has slowed, we believe that the DVD format, including any successor formats such as
Blu-ray, will be valuable long-term consumer propositions and studio profit centers. However, if DVD sales were
to decrease, 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.
If U.S. Copyright law were altered to amend or eliminate the First Sale Doctrine or if studios were to
release or distribute 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, 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 or distribution 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 and again in late 2007, Blockbuster
announced arrangements with certain content owners pursuant to which Blockbuster would receive content on
DVDs for rental exclusively by Blockbuster. To the extent this content is to be distributed exclusively to
Blockbuster and not to retail vendors or distributors, we could be prevented from obtaining such content. To the
extent the content is also sold to retail vendors or distributors, we would not be prohibited from obtaining and
renting such content pursuant to the First Sale Doctrine. Nonetheless, it does impact our ability to obtain such
content in the most efficient manner and, in some cases, in sufficient quantity to satisfy demand. If such
arrangements were to become more commonplace or if additional impediments to obtaining content were created
(such as an exclusive rental window), our ability to obtain content could be impacted and our business could be
adversely affected.
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;
• the length of this window was shortened; or
• the window was not exclusive as to other channels.
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, four to
seven months after theatrical release to pay-per-view and VOD, one year after theatrical release to premium
television and two to three years after theatrical release to basic cable and network television. Over the past
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