NetFlix 2010 Annual Report Download - page 10

popularity of the DVD as indicated by declining sales or a reduction in price leading to consumers purchasing
instead of using our service, could result in our business could be adversely affected.
If U.S. Copyright law were altered to amend or eliminate the First Sale Doctrine or if studios were to
release or distribute titles on DVD in a manner that attempts to circumvent or limit the affects of the First
Sale Doctrine, our business could be adversely affected.
Under U.S. Copyright Law, once a copyright owner sells a copy of his work, the copyright owner
relinquishes all further rights to sell or otherwise dispose of that copy. While the copyright owner retains the
underlying copyright to the expression fixed in the work, the copyright owner gives up his ability to control the
fate of the work once it had been sold. As such, once a DVD is sold into the market, those obtaining the DVD are
permitted to re-sell it, rent it or otherwise dispose of it. If Congress or the courts were to change or substantially
limit this First Sale Doctrine, our ability to obtain content and then rent it could be adversely affected. By way of
example, the Court of Appeals for the 9th Circuit recently ruled that the First Sale Doctrine did not apply to sales
of software that contained contractual limitations on resales. To the extent such a ruling were extended to DVD
sales, our ability to obtain content for subsequent rental could be adversely impacted. Likewise, if content
providers agree to limit the sale or distribution of their content in ways that try to limit the affects of the First
Sale Doctrine, our business could be adversely affected. For example, we have entered into agreements with
several studios to delay the availability of new release DVDs for rental for a brief period of time following the
DVDs release to the retail market and, in connection therewith, these studios have prohibited certain of their
wholesalers from selling DVDs to us prior to such availability. Furthermore, certain content owners, from time to
time, have established exclusive rental windows with particular outlets. This happened in late 2006 and again in
late 2007 when Blockbuster announced arrangements with certain content owners pursuant to which Blockbuster
would receive content on DVDs for rental exclusively by Blockbuster. To the extent content is to be distributed
exclusively and not to retail vendors or distributors, we could be prevented from obtaining such content, and
those or our competitors who access such content could enjoy a corresponding competitive advantage. To the
extent the content is also sold to retail vendors or distributors, under current law, we would not be prohibited
from obtaining and renting such content pursuant to the First Sale Doctrine. Nonetheless, to the extent content
owners do not distribute to us directly or through their wholesalers or otherwise establish exclusive rental
windows, it will impact our ability to obtain such content in the most efficient manner and, in some cases, in
sufficient quantity to satisfy demand. If such arrangements were to become more commonplace or if additional
impediments to obtaining content were created, our ability to obtain content could be impacted and our business
could be adversely affected.
Increased availability of new releases of entertainment video to other distribution channels prior to, or on
parity with, the release on DVD, coupled with delayed availability of such DVDs through our service,
could adversely affect our business.
Except for theatrical release, DVDs currently enjoy a competitive advantage over other distribution
channels, such as pay-per-view and VOD, because of the early distribution window on the DVD format. The
window for new releases on DVD is generally exclusive against other forms of non-theatrical movie distribution,
such as pay-per-view, Internet delivery, premium TV, basic cable and network and syndicated TV. The length of
the exclusive window for movie rental and retail sales varies and the order, length and exclusivity of each
window for each distribution channel are determined solely by the studio releasing the title. Over the past several
years, the major studios have shortened the release windows and have increasingly made new release movies
available simultaneously on DVD and VOD. If other distribution channels were to receive priority over, or parity
with, DVD, coupled with delayed availability of such DVD through our service, our subscribers might find these
other distribution channels of more value than our service and our business could be adversely affected.
Delayed availability of new release DVDs for rental could adversely affect our business.
Our licensing agreements with several studios require that we do not rent new release DVDs until some
period of time, typically twenty-eight days- after such DVDs are first made available for retail sale. These
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