Shutterfly 2009 Annual Report Download - page 30

In 2006, the Board authorized three automatic annual increases to our stock option pool. Each annual increase is limited to a) 4.62% of
common stock issued and outstanding on the December 31 immediately prior to the date of increase or b) a lesser number as determined by the
Board. After the last annual increase in January 2010, the provision will expire. In order to attract key personnel, in 2007 and in 2008, the
Board authorized 515,000 additional inducement stock option grants and restricted stock awards to supplement our option pool. Inducement
stock options and awards are granted to certain employees upon hire, which do not require shareholder approval. In the future, attracting key
personnel may require a level of option grants in excess of the amount available in our option pool. Accordingly the Board may authorize
additional inducement grants which could further dilute existing shareholders.
If we are unable to attract customers in a cost
-effective manner, or if we were to become subject to e-
mail blacklisting, traffic to our website
would be reduced and our business and results of operations would be harmed.
Our success depends on our ability to attract customers in a cost-
effective manner. We rely on a variety of methods to bring visitors to our
website and promote our products, including paying fees to third parties who drive new customers to our website, purchasing search results from
online search engines, e-mail and direct mail. We pay providers of online services, search engines, directories and other website and e-
commerce
businesses to provide content, advertising banners and other links that direct customers to our website. We also use e-
mail and direct mail to
offer free products and services to attract customers, and we offer substantial pricing discounts to encourage repeat purchases. Our
methods of
attracting customers, including acquiring customer lists from third parties, can involve substantial costs, regardless of whether we acquire new
customers. Even if we are successful in acquiring and retaining customers, the cost involved in these efforts impacts our results of operations.
Customer lists are typically recorded as intangible assets and may be subject to impairment charges if the fair value of that list exceeds its
carrying value. These potential impairment charges could harm our results from operations. If we are unable to enhance or maintain the
methods we use to reach consumers, if the costs of attracting customers using these methods significantly increase, or if we are unable to develop
new cost-
effective means to obtain customers, our ability to attract new customers would be harmed, traffic to our website would be reduced and
our business and results of operations would be harmed.
In addition, various private entities attempt to regulate the use of e-
mail for commercial solicitation. These entities often advocate standards
of conduct or practice that significantly exceed current legal requirements and classify certain e-
mail solicitations that comply with current legal
requirements as unsolicited bulk e-mails, or “spam.” In addition, we have noted unauthorized “spammers”
utilize our domain name to solicit
spam. Some of these entities maintain blacklists of companies and individuals, and the websites, Internet service providers and Internet protocol
addresses associated with those entities or individuals that do not adhere to what the blacklisting entity believes are appropriate standards of
conduct or practices for commercial e-mail solicitations. If a company’s Internet protocol addresses are listed by a blacklisting entity, e-
mails
sent from those addresses may be blocked if they are sent to any Internet domain or Internet address that subscribes to the blacklisting entity’
s
service or purchases its blacklist. From time to time we are blacklisted, sometimes without our knowledge, which could impair our ability to
market our products and services, communicate with our customers and otherwise operate our business.
We may not succeed in promoting, strengthening and continuing to establish the Shutterfly brand, which would prevent us from acquiring
new customers and increasing revenues.
A component of our business strategy is the continued promotion and strengthening of the Shutterfly brand. Due to the competitive nature of
the digital photography products and services markets, if we are unable to successfully promote the Shutterfly brand, we may fail to substantially
increase our net revenues. Customer awareness of and the perceived value of our brand will depend largely on the success of our marketing
efforts and our ability to provide a consistent, high-
quality customer experience. To promote our brand, we have incurred, and will continue to
incur, substantial expense related to advertising and other marketing efforts.
Our ability to provide a high-
quality customer experience also depends, in large part, on external factors over which we may have little or no
control, including the reliability and performance of our suppliers and third-
party Internet and communication infrastructure providers. For
example, some of our products, such as select photo-based merchandise, are produced and shipped to customers by our third-
party vendors, and
we rely on these vendors to properly inspect and ship these products. In addition, we rely on third-
party shippers, including the U.S. Postal
Service and United Parcel Service, to deliver our products to customers. Strikes or other service interruptions affecting these shippers could
impair our ability to deliver merchandise on a timely basis. Our products are also subject to damage during delivery and handling by our third-
party shippers. Our failure to provide customers with high-
quality products in a timely manner for any reason could substantially harm our
reputation and our efforts to develop Shutterfly as a trusted brand. The failure of our brand promotion activities could adversely affect our ability
to attract new customers and maintain customer relationships, which would substantially harm our business and results of operations.
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