NetFlix 2007 Annual Report Download - page 18

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, Blu-ray and HD DVD, and those released for Internet 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 content 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 increase awareness of
our service and drive subscriber acquisition. We opportunistically adjust our mix of marketing programs to acquire
new subscribers at a reasonable cost with the intention of achieving overall financial goals. If we are unable to
maintain or replace our sources of subscribers with similarly effective sources, or if the cost of our existing sources
increases, our subscriber levels and marketing expenses may be adversely affected.
If we are unable to continue using our current marketing channels, our ability to attract new subscribers
may be adversely affected.
We may not be able to continue to support the marketing of our service by current means if such activities
are no longer available to us, become cost prohibitive or are adverse to our business. If companies that currently
promote our service decide to enter our business or a similar business or decide to exclusively support our
competitors, we may no longer be given access to such channels. In addition, if ad rates increase, we may curtail
marketing expenses or otherwise experience an increase in our cost per subscriber. Laws and regulations impose
restrictions on the use of certain channels, including commercial e-mail and direct mail. We may limit or
discontinue use or support of e-mail and other activities if we become concerned that subscribers or potential
subscribers deem such activities intrusive, which could affect our goodwill or brand. If the available marketing
channels are curtailed, our ability to attract new subscribers may be adversely affected.
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