NetFlix 2007 Annual Report Download - page 23

Our reputation and relationships with subscribers would be harmed if our billing data were to be accessed
by unauthorized persons.
To secure transmission of confidential information obtained by us for billing purposes, including
subscribers’ credit card data, we rely on licensed encryption and authentication technology. In conjunction with
the payment processing companies, we take measures to protect against unauthorized intrusion into our
subscribers’ data. If, despite these measures, we experience any unauthorized intrusion into our subscribers’ data,
current and potential subscribers may become unwilling to provide the information to us necessary for them to
become subscribers, and our business could be adversely affected. Similarly, if a well-publicized breach of the
consumer data security of any other major consumer Web site were to occur, there could be a general public loss
of confidence in the use of the Internet for commerce transactions which could adversely affect our business.
In addition, because we obtain subscribers’ billing information on our Web site, we do not obtain signatures
from subscribers in connection with the use of credit cards by them. Under current credit card practices, to the
extent we do not obtain cardholders’ signatures, we are liable for fraudulent credit card transactions, even when
the associated financial institution approves payment of the orders. From time to time, fraudulent credit cards are
used on our Web site to obtain service and access our DVD inventory. Typically, these credit cards have not been
registered as stolen and are therefore not rejected by our automatic authorization safeguards. While we do have a
number of other safeguards in place, we nonetheless experience some loss from these fraudulent transactions. We
do not currently carry insurance against the risk of fraudulent credit card transactions. A failure to adequately
control fraudulent credit card transactions would harm our business and results of operations.
Increases in payment processing fees or changes to operating rules would increase our operating expenses
and adversely affect our business and results of operations.
Our subscribers pay for our subscription services predominately using credit cards and debit cards. Our
acceptance of these payment methods requires our payment of certain fees. From time to time, these fees may
increase, either as a result of rate changes by the payment processing companies or as a result in a change in our
business practices which increase the fees on a cost-per-transaction basis. These fees may increase in 2008. Such
increases may adversely affect our results of operations.
We are subject to rules, regulations and practices governing our accepted payment methods, which are
predominately credit cards and debit cards. These rules, regulations and practices could change or be
reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or
requirements, we may be subject to fines and higher transaction fees and lose our ability to accept these payment
methods, and our business and results of operations would be adversely affected.
If our trademarks and other proprietary rights are not adequately protected to prevent use or
appropriation by our competitors, the value of our brand and other intangible assets may be diminished,
and our business may be adversely affected.
We rely and expect to continue to rely on a combination of confidentiality and license agreements with our
employees, consultants and third parties with whom we have relationships, as well as trademark, copyright,
patent and trade secret protection laws, to protect our proprietary rights. We may also seek to enforce our
proprietary rights through court proceedings. Netflix is a registered trademark of Netflix, Inc. in the United
States, Canada, the United Kingdom, Japan and Australia. We have also registered the Netflix design logo and
the service mark, “Friends,” in the United States and have filed U.S. patent applications for certain aspects of our
technology. We have also filed a trademark application in the European Union for the Netflix name. From time
to time we expect to file additional trademark and patent applications. Nevertheless, these applications may not
be approved, third parties may challenge any patents issued to or held by us, third parties may knowingly or
unknowingly infringe our patents, trademarks and other proprietary rights, and we may not be able to prevent
infringement without substantial expense to us. If the protection of our proprietary rights is inadequate to prevent
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