NetFlix 2012 Annual Report Download - page 18

have an incentive to use their network infrastructure in a manner adverse to our continued growth and success.
For example, Comcast exempted certain of its own Internet video traffic (e.g., Streampix videos to the Xbox 360)
from a bandwidth cap that applies to all unaffiliated Internet video traffic (e.g., Netflix videos to the Xbox 360).
While we believe that consumer demand, regulatory oversight and competition will help check these incentives,
to the extent that network operators are able to provide preferential treatment to their data as opposed to ours or
otherwise implement discriminatory network management practices, our business could be negatively impacted.
In international markets, especially in Latin America, these same incentives apply however, the consumer
demand, regulatory oversight and competition may not be as strong as in our domestic market.
Privacy concerns could limit our ability to leverage our subscriber data and our disclosure of subscriber
data could adversely impact our business and reputation.
In the ordinary course of business and in particular in connection with merchandising our service to our
subscribers, we collect and utilize data supplied by our subscribers. We currently face certain legal obligations
regarding the manner in which we treat such information. Other businesses have been criticized by privacy
groups and governmental bodies for attempts to link personal identities and other information to data collected on
the Internet regarding users’ browsing and other habits. Increased regulation of data utilization practices,
including self-regulation or findings under existing laws, that limit our ability to use collected data, could have an
adverse effect on our business. In addition, if we were to disclose data about our subscribers in a manner that was
objectionable to them, our business reputation could be adversely affected, and we could face potential legal
claims that could impact our operating results. As our business evolves and as we expand internationally, we may
become subject to additional and/or more stringent legal obligations concerning our treatment of customer
information. Failure to comply with these obligations could subject us to liability, and to the extent that we need
to alter our business model or practices to adapt to these obligations, we could incur additional expenses.
Our reputation and relationships with subscribers would be harmed if our subscriber data, particularly
billing data, were to be accessed by unauthorized persons.
We maintain personal data regarding our subscribers, including names and, in many cases, mailing
addresses. With respect to billing data, such as credit card numbers, we rely on licensed encryption and
authentication technology to secure such information. We take measures to protect against unauthorized intrusion
into our subscribers’ data. If, despite these measures, we, or our payment processing services, experience any
unauthorized intrusion into our subscribers’ data, current and potential subscribers may become unwilling to
provide the information to us necessary for them to become subscribers, we could face legal claims, and our
business could be adversely affected. Similarly, if a well-publicized breach of the consumer data security of any
other major consumer Web site were to occur, there could be a general public loss of confidence in the use of the
Internet for commerce transactions which could adversely affect our business.
In addition, we do not obtain signatures from subscribers in connection with the use of credit and debit cards
(together, “payment cards”) by them. Under current payment card practices, to the extent we do not obtain
cardholders’ signatures, we are liable for fraudulent payment card transactions, even when the associated
financial institution approves payment of the orders. From time to time, fraudulent payment cards are used on our
Web site to obtain service and access our DVD inventory and streaming. Typically, these payment cards have not
been registered as stolen and are therefore not rejected by our automatic authorization safeguards. While we do
have a number of other safeguards in place, we nonetheless experience some loss from these fraudulent
transactions. We do not currently carry insurance against the risk of fraudulent credit card transactions. A failure
to adequately control fraudulent credit card transactions would harm our business and results of operations.
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