NetFlix 2007 Annual Report Download - page 21

If we are unable to renew or renegotiate our revenue sharing agreements when they expire on terms
favorable to us, or if the cost of purchasing titles on a wholesale basis increases, our gross margins may be
adversely affected.
We acquire DVDs through a mix of revenue sharing agreements as well as direct purchase arrangements.
Whether we enter into a direct purchase or revenue sharing arrangement depends on the economic terms we can
negotiate as well as studio preferences. Starting in 2000, we entered into numerous revenue sharing arrangements
with studios and distributors which typically enabled us to increase our copy depth of DVDs on an economical
basis because of a low initial payment with additional payments made only if our subscribers rent the DVD.
During the course of our revenue sharing relationships, various contract administration issues can arise. To the
extent that we are unable to resolve any of these issues in an amicable manner, our relationship with the studios
and distributors may be adversely impacted.
As the revenue sharing agreements expire, we must renegotiate new terms or shift to direct purchasing
arrangements, under which we must pay the full wholesale price regardless of whether the DVD is rented. We
have seen the purchase mix shift toward direct purchasing arrangements as revenue sharing agreements expire. If
we cannot renegotiate purchasing arrangements on favorable terms, the cost of acquiring content could increase
and our gross margins may be adversely affected. In addition, the risk associated with accurately predicting title
demand could increase if we are required to directly purchase more titles.
If the sales price of DVDs to retail consumers decreases, our ability to attract new subscribers may be
adversely affected.
The cost of manufacturing DVDs is substantially less than the price for which new DVDs are generally sold
in the retail market. Thus, we believe that studios and other resellers of DVDs have significant flexibility in
pricing DVDs for retail sale. If the retail price of DVDs decreases significantly, consumers may choose to
purchase DVDs instead of subscribing to our service.
We may seek additional capital that may result in stockholder dilution or that may have rights senior to
those of our common stockholders.
From time to time, we may seek to obtain additional capital, either through equity, equity-linked or debt
securities. The decision to obtain additional capital will depend, among other things, on our development efforts,
business plans, operating performance and condition of the capital markets. If we raise additional funds through
the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges
senior to the rights of our common stock, and our stockholders may experience dilution.
Any significant disruption in service on our Web site or in our computer systems could result in a loss of
subscribers.
Subscribers and potential subscribers access our service through our Web site, where the title selection
process is integrated with our delivery processing systems and software. Our reputation and ability to attract,
retain and serve our subscribers is dependent upon the reliable performance of our Web site, network
infrastructure and fulfillment processes. Interruptions in these systems could make our Web site unavailable and
hinder our ability to fulfill selections. Much of our software is proprietary, and we rely on the expertise of our
engineering and software development teams for the continued performance of our software and computer
systems. In addition, through our instant-watching feature, our subscribers 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. Service interruptions, errors in our software or the unavailability of our Web site could
diminish the overall attractiveness of our subscription service to existing and potential subscribers.
Our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions and delays in our service and operations as well as loss, misuse or theft of data.
Our Web site periodically experiences directed attacks intended to cause a disruption in service. Any attempts by
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