Shutterfly 2008 Annual Report Download - page 21

Capacity constraints and system failures could prevent access to our website, which could harm our reputation and negatively affect our net revenues.
Our business requires that we have adequate capacity in our computer systems to cope with the high volume of visits to our website. As our operations grow in size and scope, we
will need to improve and upgrade our computer systems and network infrastructure to ensure reliable access to our website, in order to offer customers enhanced and new products,
services, capacity, features and functionality. The expansion of our systems and infrastructure may require us to commit substantial financial, operational and technical resources before
the volume of our business increases, with no assurance that our net revenues will increase.
Our ability to provide high-
quality products and service depends on the efficient and uninterrupted operation of our computer and communications systems. If our systems cannot
be expanded in a timely manner to cope with increased website traffic, we could experience disruptions in service, slower response times, lower customer satisfaction, and delays in the
introduction of new products and services. Any of these problems could harm our reputation and cause our net revenues to decline.
Our technology, infrastructure and processes may contain undetected errors or design faults that could result in decreased production, limited capacity or reduced demand.
Our technology, infrastructure and processes may contain undetected errors or design faults. These errors or design faults may cause our website to fail and result in loss of, or
delay in, market acceptance of our products and services. If we experience a delay in a website release that results in customer dissatisfaction during the period required to correct errors
and design faults, we would lose revenue. In the future, we may encounter scalability limitations, in current or future technology releases, or delays in the commercial release of any
future version of our technology, infrastructure and processes that could seriously harm our business.
We currently depend on third party suppliers for our photographic print paper, printing machines and other supplies, which expose us to risks if these suppliers fail to perform
under our agreements with them.
We have historically relied on an exclusive supply relationship with Fuji Photo Film U.S.A. to supply all of our photographic paper for silver halide print production, such as 4×6
prints. We have an agreement with Fuji that expires in April 2010, but if Fuji fails to perform in accordance with the terms of our agreement and if we are unable to secure a paper
supply from a different source in a timely manner, we would likely fail to meet customer expectations, which could result in negative publicity, damage our reputation and brand and
harm our business and results of operations. We purchase other photo-
based supplies from third parties on a purchase order basis, and, as a result, these parties could increase their
prices, reallocate supply to others, including our competitors, or choose to terminate their relationship with us. In addition, we purchase or rent the machines used to produce certain of
our photo-based products from Hewlett-
Packard, which is one of our primary competitors in the area of online digital photography services. This competition may influence their
willingness to provide us with additional products or services. If we were required to switch vendors of machines for photo-
based products, we may incur delays and incremental costs,
which could harm our operating results.
We currently outsource some of our production of photo-based products to third parties, which exposes us to risks if these parties fail to perform under our agreements with them.
We currently outsource the production of some our photo-
based products to third parties. If these parties fail to perform in accordance with the terms of our agreements and if we
are unable to secure another outsource partner in a timely manner, we would likely fail to meet customer expectations, which could result in negative publicity, damage our reputation
and brand and harm our business and results of operations.
If we are unable to develop, market and sell new products and services that address additional market opportunities, our results of operations may suffer. In addition, we may need
to expand beyond our current customer demographic to grow our business.
Although historically we have focused our business on consumer markets for silver halide prints, such as 4×6 prints, and photo-
based products, such as photo books and calendars,
we intend to address, and demand may shift to, new products and services. In addition, we believe we may need to address additional markets and expand our customer demographic in
order to further grow our business. We may not successfully expand our existing services or create new products and services, address new market segments or develop a significantly
broader customer base. Any failure to address additional market opportunities could result in loss of market share, which would harm our business, financial condition and results of
operations.
We may undertake acquisitions to expand our business, which may pose risks to our business and dilute the ownership of our existing stockholders.
A key component of our business strategy includes strengthening our competitive position and refining the customer experience on our website through internal development.
However, from time to time, we may selectively pursue acquisitions of businesses, like our June 2007 acquisition of Make it About Me! (“MIAM”),
our January 2008 acquisition of
Nexo Systems (
“Nexo”)
and other technologies or services. Integrating any newly acquired businesses, technologies or services is likely to be expensive and time consuming. To
finance any acquisition, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to
us, and, in the case of equity financings, would result in dilution to our stockholders. Also, the value of our stock may be insufficient to attract acquisition candidates. If we do
complete any acquisitions, we may be unable to operate the acquired businesses profitably or otherwise implement our strategy successfully. If we are unable to integrate MIAM, Nexo,
or any other newly acquired entities, technologies or services effectively, our business and results of operations will suffer.
The time and expense associated with finding suitable and
compatible businesses, technologies or services could also disrupt our ongoing business and divert our management’
s attention. Future acquisitions by us could also result in large and
immediate write-offs or assumptions of debt and contingent liabilities, any of which could substantially harm our business and results of operations.
Our net revenues and results of operations are affected by the level of vacation and other travel by our customers, and any declines or disruptions in the travel industry could harm
our business.
Because vacation and other travel is one of the primary occasions in which our customers utilize their digital cameras, our net revenues and results of operations are affected by the
level of vacation and other travel by our customers. Accordingly, downturns or weaknesses in the travel industry could harm our business. Travel expenditures are sensitive to business
and personal discretionary spending levels and tend to decline during general economic downturns. Events or weakness in the travel industry that could negatively affect the travel
industry include price escalation in the airline industry or other travel-
related industries, airline or other travel related strikes, safety concerns, including terrorist activities, inclement
weather and airline bankruptcies or liquidations. In addition, high gasoline prices may lead to reduced travel in the United States. Any decrease in vacation or travel could harm our net
revenues and results of operations.
Failure to adequately protect our intellectual property could substantially harm our business and results of operations.
We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our intellectual property. These protective measures afford
only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our website features and functionalities or to obtain and
use information that we consider proprietary, such as the technology used to operate our website, our production operations and our trademarks.
As of December 31, 2007, we had 21 patents issued and more than 30 patent applications pending in the United States. We intend to pursue corresponding patent coverage in other
countries to the extent we believe such coverage is appropriate and cost efficient. We cannot ensure that any of our pending applications will be granted. In addition, third parties have
in the past and could in the future bring infringement, invalidity, co-
inventorship or similar claims with respect to any of our currently issued patents or any patents that may be issued
to us in the future. Any such claims, whether or not successful, could be extremely costly, could damage our reputation and brand and substantially harm our business and results of
operations.
Our primary brand is “Shutterfly.”
We hold registrations for the Shutterfly service mark in our major markets of the United States and Canada, as well as in the European
Community, Mexico, Japan, Australia and New Zealand. An additional application for the Shutterfly mark is pending in Brazil. Our competitors may adopt names similar to ours,
thereby impeding our ability to build brand identity and possibly leading to customer confusion. In addition, there could be potential trade name or trademark infringement claims
brought by owners of marks that are similar to Shutterfly or one of our other marks. The Shutterfly brand is a critical component of our marketing programs. If we lose the ability to use
the Shutterfly service mark in any particular market, we could be forced to either incur significant additional marketing expenses within that market, or elect not to sell products in that
market. Any claims or customer confusion related to our marks could damage our reputation and brand and substantially harm our business and results of operations.