NetFlix 2009 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. Also, as we grow, we
have implemented new systems and software to help run our operations. If we are not able to refine or revise our
legacy systems or implement new systems and software 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 streaming of movies and TV episodes to our
subscribers, and the failure of this technology to operate effectively could adversely affect our business.
We use complex proprietary and other technology to process deliveries and returns of our DVDs and to
manage other aspects of our operations, including streaming of movies and TV episodes to our subscribers. We
continually enhance or modify the technology 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 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 or the streaming of movies and TV episodes to our subscribers
in a timely and efficient manner, our ability to retain existing subscribers and to add new subscribers may be
impaired. In addition, if our technology or that of third parties we utilize in our operations fails or otherwise
operates improperly, our ability to retain existing subscribers and to add new subscribers may be impaired. Also,
any harm to our subscribers’ personal computers or other devices caused by software used in our operations
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 and theft during our
processing of shipments as well as 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 and theft 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
May 12, 2008 to 42 cents and again in May 2009 to 44 cents. It is expected that the U.S. Postal Service will raise
rates again in subsequent years in accordance with the powers given the U.S. Postal Service in connection with
the 2007 postal reform legislation. However, in October 2009, the U.S. Postal Service announced that it would
not raise rates in 2010. 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 (“OIG”) at the U.S. Postal Service issued a
report in November 2007 recommending that the U.S. Postal Service revise the machinability qualifications for
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