NetFlix 2009 Annual Report Download - page 20

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first class mail related to DVDs or to charge DVD mailers who don’t comply with the new regulations a 17 cent
surcharge on all mail deemed unmachinable. In addition, a by-mail game rental company filed a complaint with
the Postal Regulatory Commission alleging that the U.S. Postal Service unreasonably discriminated against it in
favor of Netflix and Blockbuster. To the extent this proceeding was to result in operational or regulatory changes
impacting our mail processing, our gross margins and business operations could be adversely affected. We do not
anticipate any material impact to our operational practices or postage delivery rates arising from the OIG report
or the proceeding. Also, if the U.S. Postal Service curtails its services, such as by closing facilities or
discontinuing or reducing Saturday delivery service, our ability to timely deliver DVDs could diminish, and our
subscriber satisfaction could be adversely affected.
Studios also release films in high definition format on Blu-ray. This high definition format DVD has higher
damage rates than we currently experience with standard definition DVDs. If we were to see a significant
increase in the number of Blu-ray DVDs we ship or an increase in the percentage of Blu-ray DVDs our
subscribers take and the damage rates remained higher than standard definition DVDs, our gross margins,
profitability and cash flow could be adversely affected.
If we are unable to effectively utilize our recommendation and merchandising technology, our business
may suffer.
Our proprietary recommendation and merchandising technology enables us to predict and recommend titles
and effectively merchandise our library to our subscribers. We believe that in order for our recommendation and
merchandising technology to function most effectively, it must access a large database of user ratings. We cannot
assure that our recommendation and merchandising technology will continue to function effectively to predict
and recommend titles that our subscribers will enjoy, or that we will continue to be successful in enticing
subscribers to rate enough titles for our database to effectively predict and recommend new or existing titles.
We are continually refining our recommendation and merchandising technology in an effort to improve its
predictive accuracy and usefulness to our subscribers. We may experience difficulties in implementing
refinements. In addition, we cannot assure that we will be able to continue to make and implement meaningful
refinements to our recommendation technology.
If our recommendation and merchandising technology does not enable us to predict and recommend titles
that our subscribers will enjoy or if we are unable to implement meaningful improvements, our personal movie
recommendation service will be less useful, in which event:
• our subscriber satisfaction may decrease, subscribers may perceive our service to be of lower value and
our ability to attract and retain subscribers may be adversely affected;
• our ability to effectively merchandise and utilize our library will be adversely affected; and
• our subscribers may default to choosing titles from among new releases or other titles that cost us more
to provide, and our margins may be adversely affected.
If we do not acquire sufficient DVD titles, our subscriber satisfaction and results of operations may be
adversely affected.
If we do not acquire sufficient copies of DVDs, either by not correctly anticipating demand or by
intentionally acquiring fewer copies than needed to fully satisfy demand, we may not appropriately satisfy
subscriber demand, and our subscriber satisfaction and results of operations could be adversely affected.
Conversely, if we attempt to mitigate this risk and acquire more copies than needed to satisfy our subscriber
demand, our inventory utilization would become less effective and our gross margins would be adversely
affected. Our ability to accurately predict subscriber demand as well as market factors such as exclusive
distribution arrangements may impact our ability to acquire appropriate quantities of certain DVDs.
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