NetFlix 2007 Annual Report Download - page 17

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several years, 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 exclusive DVD release window on
certain titles, in particular releasing movies simultaneously on DVD and VOD.
We depend on studios to license us content for Internet delivery in order to operate our instant-watching
feature.
Internet delivery of content involves the licensing of rights which are separate from and independent of the
rights we obtain when acquiring DVD content. Our ability to provide our instant-watching feature therefore
depends on studios licensing us content specifically for Internet delivery. The license periods and the terms and
conditions of such licenses vary by studio. If the studios change their terms and conditions or are no longer
willing or able to provide us licenses, our ability to provide Internet delivered content to our subscribers will be
adversely affected. Unlike DVD, Internet delivered content is not subject to the First Sale Doctrine. As such we
are completely dependent on the studios providing us licenses in order to access and distribute Internet delivered
content. In addition, the studios have great flexibility in licensing content. They may elect to license content
exclusively to a particular provider or otherwise limit the types of services that can deliver Internet delivered
content. For example, HBO licenses content from studios like Warner Bros., and the license provides HBO with
the exclusive right to such content against other subscription services, including Netflix. As such, Netflix cannot
license certain Warner Bros. content for delivery to its subscribers while Warner Bros. may nonetheless license
the same content to transactional VOD providers. This ability to carve-up distribution rights is unique to digital
content. If we are unable to secure rights to content and to obtain such content upon terms that are acceptable to
us, our ability to operate our instant-watching feature will be adversely impacted, and our subscriber satisfaction
with this feature will also be adversely impacted.
We intend to rely on a number of partners to deliver our Internet delivered content to various devices.
We currently offer Internet delivered content only to PCs. We intend to broaden the distribution capability
of our instant-watching feature to other platforms and partners over time. In January 2008, we announced our
development arrangement with LG Electronics. While the terms of this arrangement have not been finalized, we
anticipate developing, in conjunction with LG, a set-top box device that will enable our instant-watching feature
to be viewed directly through subscribers’ televisions. We intend to enter other deals with additional partners for
distribution of our content to various devices. If we are not successful in creating these relationships, or if we
encounter technological, content licensing or other impediments, our ability to grow our instant-watching feature
could be adversely impacted.
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 on
DVD or, as we recently announced, watch through our instant-watching feature. 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 watching of select titles through our instant-watching 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.
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