NetFlix 2007 Annual Report Download - page 19

If we are not able to manage our growth, our business could be adversely affected.
We have expanded rapidly since we launched our Web site in April 1998. Many of our systems and
operational practices were implemented when we were at a smaller scale of operations. If we are not able to
refine or revise these legacy systems as we grow, if they fail or, if in responding to any other issues related to
growth, our management is materially distracted from our current operations, our business may be adversely
affected.
We rely heavily on our proprietary technology to process deliveries and returns of our DVDs and to
manage other aspects of our operations, including our instant-watching feature, and the failure of this
technology to operate effectively could adversely affect our business.
We use complex proprietary software to process deliveries and returns of our DVDs and to manage other
aspects of our operations, including our instant-watching feature. Our proprietary technology is intended to allow
our nationwide network of shipping centers to be operated on an integrated basis. We continually enhance or
modify the software used for our distribution operations. We cannot be sure that any enhancements or other
modifications we make to our distribution operations will achieve the intended results or otherwise be of value to
our subscribers. Future enhancements and modifications to our proprietary technology could consume
considerable resources. If we are unable to maintain and enhance our technology to manage the processing of
DVDs among our shipping centers in a timely and efficient manner, our ability to retain existing subscribers and
to add new subscribers may be impaired. In addition, through our instant-watching feature, our subscribers will
access titles on our Web site through our proprietary movie player software and must maintain their connection
to our Web site for an uninterrupted viewing experience. If this proprietary software fails to satisfactorily display
the available titles, our ability to retain existing subscribers and to add new subscribers may be impaired. Also,
any harm to our subscribers’ personal computers caused by the proprietary software could have an adverse effect
on our business, results of operations and financial condition.
If we experience delivery problems or if our subscribers or potential subscribers lose confidence in the
U.S. mail system, we could lose subscribers, which could adversely affect our operating results.
We rely exclusively on the U.S. Postal Service to deliver DVDs from our shipping centers and to return
DVDs to us from our subscribers. We are subject to risks associated with using the public mail system to meet
our shipping needs, including delays or disruptions caused by inclement weather, natural disasters, labor
activism, health epidemics or bioterrorism. Our DVDs are also subject to risks of breakage during delivery and
handling by the U.S. Postal Service. The risk of breakage is also impacted by the materials and methods used to
replicate our DVDs. If the entities replicating our DVDs use materials and methods more likely to break during
delivery and handling or we fail to timely deliver DVDs to our subscribers, our subscribers could become
dissatisfied and cancel our service, which could adversely affect our operating results. In addition, increased
breakage rates for our DVDs will increase our cost of acquiring titles.
Increases in the cost of delivering DVDs could adversely affect our gross profit.
Increases in postage delivery rates could adversely affect our gross profit if we elect not to raise our
subscription fees to offset the increase. The U.S. Postal Service increased the rate for first class postage on
January 8, 2006 by 2 cents, from 37 cents to 39 cents, and then again in May 2007 by another 2 cents. The U.S.
Postal Service has announced an increase in the rate for first class postage effective in May 2008 by one cent to
42 cents and it is also expected that the U.S. Postal Service will raise rates again in subsequent years in
accordance with the powers recently given the U.S. Postal Service in connection with the postal reform
legislation. The U.S. Postal Service continues to focus on plans to reduce its costs and make its service more
efficient. If the U.S. Postal Service were to change any policies relative to the requirements of first-class mail,
including changes in size, weight or machinability qualifications of our DVD envelopes, such changes could
result in increased shipping costs or higher breakage for our DVDs, and our gross margin could be adversely
affected. For example, the Office of Inspector General at the U.S. Postal Service recently issued a report
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