NetFlix 2011 Annual Report Download - page 11

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 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.
DVDs currently enjoy a competitive advantage over certain other distribution channels, such as
pay-per-view and some types of VOD distribution, because of the early distribution window on the DVD format.
The window for new releases on DVD is generally exclusive against and earlier than certain other forms of
non-theatrical movie distribution, such as pay-per-view, regular (“non-premium”) VOD, SVOD, premium pay
TV, and other forms of TV exploitation. The length and exclusivity of each window for each distribution channel
are determined solely by the studio releasing the title. Over the past several years, we have seen distributors
adjust and experiment with the traditional distribution channels and timing. For example, certain other forms of
non-theatrical distribution have been developed for certain new movie releases, resulting in their non-theatrical
availability prior to and during the DVD window. In addition, the major studios have shortened certain release
windows and/or have increasingly made new release movies available on VOD simultaneously or prior to the
release on DVD e.g. via “premium VOD”, and in a limited number of instances, simultaneously with theatrical
release. If other distribution channels were to receive priority over, or parity with, the DVD window, coupled
with delayed availability of such DVD through our service, subscriber’s perception of value in our service could
decrease and our business could be adversely affected. Further, as these distribution channels shift, our relative
position to them, either in DVD or streaming, may impact our subscribers’ perception of or value in 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 after such DVDs are first made available for retail sale. These 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, in January 2012, Warner Home Entertainment announced it was
increasing the period of delay to fifty-six days. If other studios were to increase the period of delay and /or if our
subscriber satisfaction is negatively impacted by this increase in the Warner delay, 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 contribution profits 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
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