NetFlix 2014 Annual Report Download - page 6

Table of Contents
If any of the following risks actually occur, our business, financial condition and results of operations could be harmed. In that case, the
trading price of our common stock could decline, and you could lose all or part of your investment.
Risks Related to Our Business
If our efforts to attract and retain members are not successful, our business will be adversely affected.
We have experienced significant member growth over the past several years. Our ability to continue to attract members will depend in
part on our ability to consistently provide our members with compelling content choices, as well as a quality experience for selecting and
viewing TV shows and movies. Furthermore, the relative service levels, content offerings, pricing and related features of competitors to our
service may adversely impact our ability to attract and retain members. Competitors include other entertainment video providers, such as
MVPDs, Internet-
based movie and TV content providers (including those that provide pirated content) and DVD rental outlets. If consumers do
not perceive our service offering to be of value, including if we introduce new or adjust existing features, adjust pricing or service offerings, or
change the mix of content in a manner that is not favorably received by them, we may not be able to attract and retain members. In addition,
many of our members are rejoining our service or originate from word-of-
mouth advertising from existing members. If our efforts to satisfy our
existing members are not successful, we may not be able to attract members, and as a result, our ability to maintain and/or grow our business
will be adversely affected. Members cancel our service for many reasons, including a perception that they do not use the service sufficiently,
the need to cut household expenses, availability of content is unsatisfactory, competitive services provide a better value or experience and
customer service issues are not satisfactorily resolved. We must continually add new members both to replace members who cancel and to
grow our business beyond our current member base. If growth rates slow faster than expected, given, in particular that our content costs are
largely fixed in nature and contracted over several years, we may not be able to adjust our expenditures or increase our (per member) revenues
commensurate with the lowered growth rate such that our margins, liquidity and results of operation may be adversely impacted. If we are
unable to successfully compete with current and new competitors in both retaining our existing members and attracting new members, our
business will be adversely affected. Further, if excessive numbers of members cancel our service, we may be required to incur significantly
higher marketing expenditures than we currently anticipate to replace these members with new members.
Changes in competitive offerings for entertainment video, including the potential rapid adoption of piracy-based video offerings, could
adversely impact our business.
The market for entertainment video is intensely competitive and subject to rapid change. Through new and existing distribution channels,
consumers have increasing options to access entertainment video. The various economic models underlying these channels include
subscription, transactional, ad-supported and piracy-based models. All of these have the potential to capture meaningful segments of the
entertainment video market. Piracy, in particular, threatens to damage our business, as its fundamental proposition to consumers is so
compelling and difficult to compete against: virtually all content for free. Furthermore, in light of the compelling consumer proposition, piracy
services are subject to rapid global growth. Traditional providers of entertainment video, including broadcasters and cable network operators,
as well as Internet based e-commerce or entertainment video providers are increasing their Internet-based video offerings. Several of these
competitors have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other
resources. They may secure better terms from suppliers, adopt more aggressive pricing and devote more resources to product development,
technology, infrastructure, content acquisitions and marketing. New entrants may enter the market or existing providers may adjust their
services with unique offerings or approaches to providing entertainment video. Companies also may enter into business combinations or
alliances that strengthen their competitive positions. If we are unable to successfully or profitably compete with current and new competitors,
our business will be adversely affected, and we may not be able to increase or maintain market share, revenues or profitability.
The long-term and fixed cost nature of our content commitments may limit our operating flexibility and could adversely affect our
liquidity and results of operations.
In connection with obtaining streaming content, we typically enter into multi-year commitments 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 and Note 6, Commitments and Contingencies
in Item
8 . Given the multiple-year duration and largely fixed cost nature of content commitments, if member acquisition and retention do not meet our
expectations, our margins may be adversely impacted. Payment terms for certain content commitments, such as programming that is initially
available in the
3
Item 1A.
Risk Factors