NetFlix 2010 Annual Report Download - page 9

for Internet delivery. The license periods and the terms and conditions of such licenses vary. If the studios and
other content distributors change their terms and conditions or are no longer willing or able to license us content,
our ability to stream content to our subscribers will be adversely affected. Unlike DVD, streaming content is not
subject to the First Sale Doctrine. As such, we are completely dependent on the studio or other content distributor
to license us content in order to access and stream content. Many of the licenses provide for the studios or other
content distributor to withdraw content from our service relatively quickly. Because of these provisions as well
as other actions we may take, content available through our service can be withdrawn on short notice. In addition,
the studios and other content distributors have great flexibility in licensing content. They may elect to license
content exclusively to a particular provider or otherwise limit the types of services that can deliver streaming
content. For example, HBO licenses content from studios like Warner Bros. and the license provides HBO with
the exclusive right to such content against other subscription services, including Netflix. As such, Netflix cannot
license certain Warner Bros. content for delivery to its subscribers while Warner Bros. may nonetheless license
the same content to transactional VOD providers. If we are unable to secure and maintain rights to streaming
content or if we cannot otherwise obtain such content upon terms that are acceptable to us, our ability to stream
TV shows and movies to our subscribers will be adversely impacted, and our subscriber acquisition and retention
could also be adversely impacted. As streaming content license agreements expire, we must renegotiate new
terms which may not be favorable to us. If this happens, the cost of obtaining content could increase and our
margins may be adversely affected. As we grow, we are able to spend an increasingly larger amount for the
licensing of streaming content. We believe that the streaming content we make available to our subscribers is
sufficiently diversified, such that we will not be forced to pay licensing fees for content in excess of our desired
operational margins. We believe that any failure to secure content will manifest in lower subscriber acquisition
and retention and not in materially reduced margins. Nonetheless, given the multiple-year duration and largely
fixed nature of content licenses, if we do not experience subscriber acquisition and retention as forecasted, our
margins may be impacted by these fixed content licensing costs. During the course of our license relationship,
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 other content distributors or our access to content may
be adversely impacted.
We rely upon a number of partners to offer instant streaming of content from Netflix to various devices.
We currently offer subscribers the ability to receive streaming content through their PCs, Macs and other
Internet-connected devices, including Blu-ray players and TVs, digital video players, game consoles and mobile
devices. We intend to continue to broaden our capability to instantly stream TV shows and movies to other
platforms and partners over time. If we are not successful in maintaining existing and creating new relationships,
or if we encounter technological, content licensing or other impediments to our streaming content, our ability to
grow our business could be adversely impacted. Our agreements with our consumer electronics partners are
typically between one and three years in duration and our business could be adversely affected if, upon
expiration, a number our partners do not continue to provide access to our service or are unwilling to do so on
terms acceptable to us. Furthermore, devices are manufactured and sold by entities other than Netflix and while
these entities should be responsible for the devices’ performance, the connection between these devices and
Netflix may nonetheless result in consumer dissatisfaction toward Netflix and such dissatisfaction could result in
claims against us or otherwise adversely impact our business. In addition, technology changes to our streaming
functionality may require that partners update their devices. If partners do not update or otherwise modify their
devices, our service and our subscribers use and enjoyment could be negatively impacted.
If the popularity of the DVD format continues to slow or if the retail sales prices of DVDs decline, our
business could be adversely affected.
Although the growth of DVD sales continues to slow, we believe that the DVD will continue to be a
valuable consumer proposition and studio profit center for the next several years. As DVD sales begin to decline,
studios and other resellers may significantly lower prices to encourage consumers to continue to utilize the
format. Unless we are successful at retaining our subscribers with our streaming offerings, a decline in the
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