NetFlix 2011 Annual Report Download - page 9

If we become subject to liability for content that we distribute through our service, our results of
operations would be adversely affected.
As a distributor of content, we face potential liability for negligence, copyright, patent or trademark
infringement or other claims based on the nature and content of materials that we distribute. We also may face
potential liability for content uploaded from our users in connection with our community-related content or
movie reviews. If we become liable, then our business may suffer. Litigation to defend these claims could be
costly and the expenses and damages arising from any liability could harm our results of operations. We cannot
assure that we are insured or indemnified to cover claims of these types or liability that may be imposed on us.
If studios and other content distributors refuse to license streaming content to us upon acceptable terms,
our business could be adversely affected.
Streaming content over the Internet involves the licensing of rights which are separate from and independent
of the rights we acquire when obtaining DVD content. Our ability to provide our subscribers with content they
can watch instantly therefore depends on studios and other content distributors licensing us content specifically
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as other actions we may take, content available through our service can be withdrawn on short notice.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
contribution profit targets. We believe that any failure to secure content will manifest in lower subscriber
acquisition and retention and not in materially reduced margins. 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. For example, as a result of events over the past
several months, we have experienced slower growth than anticipated and our margins have been negatively
impacted. 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
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