NetFlix 2010 Annual Report Download - page 11

agreements provide us with less expensive content as well as deeper copy depth than we might otherwise have
absent the delay, thus improving both our business and consumer experience. While several competitors have
used the delayed availability of DVD content through our service to differentiate their own services, we do not
believe that this delayed availability has materially impacted our subscriber growth or satisfaction. Nonetheless,
it is possible that the delay in obtaining new release content could impact consumer perception of our service or
otherwise negatively impact subscriber satisfaction. Furthermore, if the studios were to increase the period of
delay, which some studios have suggested, we may yet experience these impacts, in which case our business
could be adversely impacted.
We could be subject to increased costs arising from our acquisition of DVD content and our subscribers’
demand for DVD titles that could adversely affect our operations and financial performance
We obtain DVDs through a mix of revenue sharing agreements and direct purchases. The type of agreement
we utilize to acquire DVD content depends on the economic terms we can negotiate as well as studio preferences.
If we are unable to negotiate favorable terms to acquire the DVDs our operating margins may be adversely
affected. Furthermore, during the course of our agreements, 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. Direct purchase of DVDs requires us
to be able to accurately forecast demand in order to ensure that we have enough copies of a title to satisfy but not
exceed demand so that our subscriber satisfaction is not negatively impacted. However, if we purchase excess
copies of title or experience an increase in usage of a title without a corresponding increase in subscriber
retention and growth, our content and fulfillment costs will increase disproportionately to revenues thus
adversely affecting our operating results. Our content costs as a percentage of revenues can also increase if our
subscribers select titles that were acquired under more expensive revenue share arrangements more often than
they select other titles acquired through direct purchase or lower cost revenue share arrangements.
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 their TVs, computers or
mobile devices. 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 deliver streaming
content or fulfill DVD selections. From time to time, we experience service interruptions and have voluntarily
provided affected subscribers with a credit during periods of extended outage. 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 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. 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.
We utilize our own communications and computer hardware systems located either in our facilities or in that
of a third-party Web hosting provider. In addition, we utilize third-party Internet-based or “cloud” computing
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