NetFlix 2012 Annual Report Download - page 16

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established. Given our size and growth, we believe it makes economic sense to have our own specialized
CDN. We will continue to work with our commercial CDN partners for the next few years, but eventually we
expect the vast majority of our streaming bits will be served by Open Connect. Open Connect will provide the
Netflix bits at no cost to the locations the ISP desires, or ISPs can choose to get the Netflix bits at common
Internet exchanges. To the extent ISPs do not interconnect with Open Connect or if we experience difficulties in
operating the Open Connect CDN service, our ability to efficiently and effectively deliver our streaming content
to our subscribers could be adversely impacted and our business and results of operation could be adversely
affected. Failure to implement Open Connect could require us to engage third-party solutions to deliver our
content to ISPs, which could increase our costs and negatively affect our operating results.
If we are unable to effectively utilize our recommendation and merchandising technology or develop user
interfaces that maintain or increase subscriber engagement with our service, our business may suffer.
Our proprietary recommendation and merchandising technology enables us to predict and recommend titles
and effectively merchandise our library to our subscribers. We also develop, test and implement various user
interfaces across multiple devices, in an effort to maintain and increase subscriber engagement with our service.
We are continually refining our recommendation and merchandising technology as well as our various user
interfaces in an effort to improve the predictive accuracy of our TV show and movie recommendations and the
usefulness of and engagement with our service by our subscribers. We may experience difficulties in
implementing refinements or other, third party recommendation or merchandising technology or interfaces may
become more popular with or useful to our subscribers. In addition, we cannot assure that we will be able to
continue to make and implement meaningful refinements to our recommendation technology.
If our recommendation and merchandising technology does not enable us to predict and recommend titles
that our subscribers will enjoy or if we are unable to implement meaningful improvements thereto or otherwise
improve our user interfaces, our service may be less useful to our subscribers. Such failures could lead to the
following:
• our subscriber satisfaction may decrease, subscribers may perceive our service to be of lower value and
our ability to attract and retain subscribers may be adversely affected; and
• our ability to effectively merchandise and utilize our library will be adversely affected.
We rely heavily on our proprietary technology to stream TV shows and movies and to manage other
aspects of our operations, and the failure of this technology to operate effectively could adversely affect
our business.
We continually enhance or modify the technology used for our operations. We cannot be sure that any
enhancements or other modifications we make to our operations will achieve the intended results or otherwise be
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.
Changes in U.S. Postal rates or operations could adversely impact our operating results and subscriber
satisfaction.
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. Increases in postage delivery rates could adversely affect our Domestic DVD
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