NetFlix 2013 Annual Report Download - page 7

The long-term and fixed cost nature of our content licenses may limit our operating flexibility and could
adversely affect our liquidity and results of operation.
In connection with obtaining streaming content, we typically enter into multi-year licenses with studios and
other content providers, the payment terms of which are not tied to member usage or the size of our member base
(“fixed cost”) but which may be tied to such factors as titles licensed and/or theatrical exhibition receipts. Such
commitments are included in the Contractual Obligations section of Item 7 Management’s Discussion and
Analysis of Financial Condition and Results of Operations. Given the multiple-year duration and largely fixed
cost nature of content licenses, if member acquisition and retention do not meet our expectations, our margins
may be adversely impacted. Payment terms for streaming licenses, especially programming that is initially
available in the applicable territory on our service (“original programming”) or that is considered output content,
will typically require more up-front cash payments than other licensing agreements. To the extent member and/or
revenue growth do not meet our expectations, our liquidity and results of operations could be adversely affected
as a result of content licensing commitments and accelerated payment requirements of certain licenses. In
addition, the long-term and fixed cost nature of our content licenses may limit our flexibility in planning for, or
reacting to changes in our business and the market segments in which we operate. As we expand internationally,
we must license content in advance of entering into a new geographical market. If we license content that is not
favorably received by consumers in the applicable territory, acquisition and retention may be adversely impacted
and given the long-term and fixed cost nature of our content licenses, we may not be able to adjust our content
offering quickly and our results of operation may be adversely impacted.
If we are not able to manage change and growth, our business could be adversely affected.
We are expanding our operations internationally, scaling our streaming service to effectively and reliably
handle anticipated growth in both members and features related to our service, as well as continuing to operate
our DVD service within the U.S. As we expand internationally, we are managing our business to address varied
content offerings, consumer customs and practices, in particular those dealing with e-commerce and Internet
video, as well as differing legal and regulatory environments. As we scale our streaming service, we are
developing technology and utilizing third-party Internet-based or “cloud” computing services. If we are not able
to manage the growing complexity of our business, including improving, refining or revising our systems and
operational practices related to our streaming operations, our business may be adversely affected.
If our efforts to build strong brand identity and improve member satisfaction and loyalty are not
successful, we may not be able to attract or retain members, and our operating results may be adversely
affected.
We must continue to build and maintain strong brand identity. We believe that strong brand identity will be
important in attracting and retaining members who have a number of choices from which to obtain entertainment
video. To build a strong brand we believe we must continue to offer content and service features that our
members value and enjoy. We also believe that these must be coupled with effective consumer communications,
such as marketing, customer service and public relations. If our efforts to promote and maintain our brand are not
successful, our ability to attract and retain members may be adversely affected. Such a result, coupled with the
increasingly long-term and fixed cost nature of our content acquisition licenses, may adversely affect our
operating results.
With respect to our expansion into international markets, we will also need to establish our brand and to the
extent we are not successful, our business in new markets may be adversely impacted.
Changes in our member acquisition sources could adversely affect our marketing expenses and member
levels may be adversely affected.
We utilize a broad mix of marketing and public relations programs, including social media sites such as
Facebook and Twitter, to promote our service to potential new members. We may limit or discontinue use or
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