NetFlix 2007 Annual Report Download - page 24

use or appropriation by third parties, the value of our brand and other intangible assets may be diminished,
competitors may be able to more effectively mimic our service and methods of operations, the perception of our
business and service to subscribers and potential subscribers may become confused in the marketplace, and our
ability to attract subscribers may be adversely affected.
Intellectual property claims against us could be costly and result in the loss of significant rights related to,
among other things, our Web site, our recommendation service, title selection processes and marketing
activities.
Trademark, copyright, patent and other intellectual property rights are important to us and other companies.
Our intellectual property rights extend to our technology, business processes and the content on our Web site. We
use the intellectual property of third parties in merchandising our products and marketing our service through
contractual and other rights. From time to time, third parties allege that we have violated their intellectual property
rights. If we are unable to obtain sufficient rights, successfully defend our use, or develop non-infringing intellectual
property or otherwise alter our business practices on a timely basis in response to claims against us for infringement,
misappropriation, misuse or other violation of third party intellectual property rights, our business and competitive
position may be adversely affected. Many companies are devoting significant resources to developing patents that
could potentially affect many aspects of our business. There are numerous patents that broadly claim means and
methods of conducting business on the Internet. We have not exhaustively searched patents relative to our
technology. Defending ourselves against intellectual property claims, whether they are with or without merit or are
determined in our favor, results in costly litigation and diversion of technical and management personnel. It also
may result in our inability to use our current Web site or our recommendation service or inability to market our
service or merchandise our products. As a result of a dispute, we may have to develop non-infringing technology,
enter into royalty or licensing agreements, adjust our merchandising or marketing activities or take other actions to
resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us.
If we are unable to protect our domain names, our reputation and brand could be adversely affected.
We currently hold various domain names relating to our brand, including Netflix.com. Failure to protect our
domain names could adversely affect our reputation and brand and make it more difficult for users to find our
Web site and our service. The acquisition and maintenance of domain names generally are regulated by
governmental agencies and their designees. The regulation of domain names in the United States may change in
the near future. Governing bodies may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or
maintain relevant domain names. Furthermore, the relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear. We may be unable, without significant
cost or at all, to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise
decrease the value of our trademarks and other proprietary rights.
Forecasting film revenue and associated gross profits from our films prior to release is extremely difficult
and may result in significant write-offs.
We are required to amortize capitalized film production costs over the expected revenue streams as we
recognize revenue from the associated films. The amount of film production costs that will be amortized each
period depends on how much future revenue we expect to receive from each film. Unamortized film production
costs are evaluated for impairment each reporting period on a film-by-film basis. If estimated remaining revenue
is not sufficient to recover the unamortized film production costs, the unamortized film production costs will be
written down to fair value. In any given period, if we lower our previous forecast with respect to total anticipated
revenue from any individual film, we would be required to accelerate amortization of related film costs. Such
accelerated amortization would adversely impact our business, operating results and financial condition. In
addition, we base our estimates of revenue on performance of comparable titles and our knowledge of the
industry. If the information is incorrect, the amount of revenue and related expenses that we recognize from our
films could be wrong, which could result in fluctuations in our earnings.
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