NetFlix 2009 Annual Report Download - page 21

If we are unable to renew or renegotiate our revenue sharing agreements when they expire on terms
favorable to us, or if the cost of obtaining titles on a wholesale basis increases, our gross margins may be
adversely affected.
We obtain DVDs through a mix of revenue sharing agreements and direct purchases. The type of agreement
depends on the economic terms we can negotiate as well as studio preferences. We have entered into numerous
revenue sharing arrangements with studios and distributors which typically enabled us to increase our copy depth
of DVDs on an economical basis because of a low initial payment with additional payments made only if our
subscribers rent the DVD. During the course of our revenue sharing relationships, various contract administration
issues can arise. To the extent that we are unable to resolve any of these issues in an amicable manner, our
relationship with the studios and distributors or our access to content may be adversely impacted.
As the revenue sharing agreements expire, we must renegotiate new terms or shift to direct purchasing
arrangements, under which we must pay the full wholesale price regardless of whether the DVD is rented. If we
cannot renegotiate purchasing on favorable terms, the cost of obtaining content could increase and our gross
margins may be adversely affected. In addition, the risk associated with accurately predicting title demand could
increase if we are required to directly purchase more titles.
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 our computer systems or those of third parties that we utilize in our
operations could result in a loss or degradation of service and could adversely impact our business.
Subscribers and potential subscribers access our service through our Web site or a Netflix Ready Device.
Our reputation and ability to attract, retain and serve our subscribers is dependent upon the reliable performance
of our computer systems and those of third parties that we utilize in our operations. Interruptions in these
systems, or with the Internet in general, including discriminatory network management practices, could make our
service unavailable or degraded or otherwise hinder our ability to fulfill DVD selections or deliver streaming
content. 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 computer systems
used in our operations could diminish the overall attractiveness of our subscription service to existing and
potential subscribers.
Our servers and those of third parties we use in our operations 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 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 service or internal computer systems could result in a loss of subscribers
and adversely affect our business and results of operations.
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