NetFlix 2012 Annual Report Download - page 14

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 of our partners do not continue to provide access to our service or are unwilling to do so on
terms acceptable to us, which terms may include the degree of accessibility and prominence of our service.
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 subscriptions to our Domestic DVD segment decline faster than anticipated, our business could be
adversely affected
The number of subscriptions to our DVD-by-mail offering is declining, and we anticipate that this decline
will continue. We believe, however, that the domestic DVD business will continue to generate significant
contribution profit for our business. In addition, we believe that DVD will be a valuable consumer proposition
and studio profit center for the next several years, even as DVD sales decline. The contribution profit generated
by our domestic DVD business will help provide capital resources to fund losses arising from our growth
internationally. To the extent that the rate of decline in our DVD-by-mail business is greater than we anticipate,
our business could be adversely affected. Because we are primarily focused on building a global streaming
service, the resources allocated to maintaining DVD operations and the level of management focus on our DVD
business are limited. We do not anticipate increasing resources to our DVD operations and the technology used
in its operations will not be meaningfully improved. To the extent that we experience service interruptions or
other degradations in our DVD-by-mail service, subscribers’ satisfaction could be negatively impacted and we
could experience an increase in DVD-by-mail subscriber cancellations, which could adversely impact our
business.
If U.S. Copyright law were altered to amend or eliminate the First Sale Doctrine, our business could be
adversely affected.
Under U.S. Copyright Law, once a DVD is sold into the market, those obtaining the DVD are permitted to
re-sell it, rent it or otherwise dispose of it. This is commonly referred to as the First Sale Doctrine. While the vast
majority of our DVD content acquisitions are direct from content providers, the First Sale Doctrine provides us
with an option to acquire content from other third parties should the content providers refuse to deal with us on
acceptable terms. If Congress or the courts were to change or substantially limit this First Sale Doctrine, our
ability to obtain DVD content and then rent it could be adversely affected.
Increased availability of new releases to other distribution channels prior to, or on parity with, the release
on DVD, and/or the delayed availability of such DVDs through our service, could adversely affect our
business.
Over the past several years, we have seen content providers adjust and experiment with the various
distribution channels and content release timing. Further, 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 shifting distribution channels, their associated timing and/or the delayed availability of such
DVDs through our service may negatively impact subscribers’ perception of value in our service, which could
adversely affect our business. Moreover, if we are unable to negotiate favorable terms to acquire DVDs, our
contribution profits may be adversely affected.
10