NetFlix 2010 Annual Report Download - page 13

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 streaming of TV
shows and movies to our subscribers in a timely and efficient manner and/or the processing of DVDs among our
shipping centers, 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 on May 11, 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. 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 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. 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.
If government regulations relating to the Internet or other areas of our business change, we may need to
alter the manner in which we conduct our business, or incur greater operating expenses.
The adoption or modification of laws or regulations relating to the Internet or other areas of our business
could limit or otherwise adversely affect the manner in which we currently conduct our business. In addition, the
growth and development of the market for online commerce may lead to more stringent consumer protection
laws, which may impose additional burdens on us. If we are required to comply with new regulations or
legislation or new interpretations of existing regulations or legislation, this compliance could cause us to incur
additional expenses or alter our business model.
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