NetFlix 2008 Annual Report Download - page 20

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.
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, or with the Internet in general, could
make our Web site unavailable and hinder our ability to fulfill selections. For example, in August 2008, we
suffered a service interruption that impacted our ability to ship and receive DVDs as well as stream movies to our
subscribers. 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. 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 hackers to
disrupt our Web site service or our internal systems, if successful, could harm our business, be expensive to remedy
and damage our reputation. Our insurance does not cover expenses related to direct attacks on our Web site or
internal systems. Efforts to prevent hackers from entering our computer systems are expensive to implement and
may limit the functionality of our services. In certain instances, we have voluntarily provided affected subscribers
with a credit during periods of extended outage. Any significant disruption to our Web site or internal computer
systems could result in a loss of subscribers and adversely affect our business and results of operations.
Our communications hardware and the computer hardware used to operate our Web site and our streaming
of content are hosted at the facilities of a third party provider. Hardware for our delivery systems is maintained in
our shipping centers. Fires, floods, earthquakes, power losses, telecommunications failures, break-ins and similar
events could damage these systems and hardware or cause them to fail completely. As we do not maintain
entirely redundant systems, a disrupting event could result in prolonged downtime of our operations and could
adversely affect our business. Problems faced by our third party Web hosting provider, with the
telecommunications network providers with whom it contracts or with the systems by which it allocates capacity
among its customers, including us, could adversely impact the experience of our subscribers.
In the event of an earthquake or other natural or man-made disaster, our operations could be adversely
affected.
Our executive offices and data center are located in the San Francisco Bay Area. We have shipping centers
located throughout the United States, including earthquake and hurricane-sensitive areas. Our business and
operations could be adversely affected in the event of these natural disasters as well as from electrical blackouts,
fires, floods, power losses, telecommunications failures, break-ins or similar events. We may not be able to
effectively shift our fulfillment and delivery operations to handle disruptions in service arising from these events.
Because the San Francisco Bay Area is located in an earthquake-sensitive area, we are particularly susceptible to
the risk of damage to, or total destruction of, our executive offices and data center. We are not insured against
any losses or expenses that arise from a disruption to our business due to earthquakes and may not have adequate
insurance to cover losses and expenses from other natural disasters.
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