Shutterfly 2010 Annual Report Download - page 19

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.”
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. In addition, we have noted that unauthorized “spammers”
utilize our domain name to solicit spam, which increases the frequency and
likelihood that we may be blacklisted.
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.
If either facility where our computer and communications hardware is located fails or if our production facilities fail, our business and
results of operations would be harmed.
Our ability to successfully receive and fulfill orders and to provide high-
quality customer service depends in part on the efficient and
uninterrupted operation of our computer and communications systems. Substantially all of the computer hardware necessary to operate our
website is located at two third-
party hosting facilities in Santa Clara, California, and our production facilities are located in Charlotte, North
Carolina and Phoenix, Arizona. Our systems and operations could suffer damage or interruption from human error, fire, flood, power loss,
insufficient power availability, telecommunications failure, break-
ins, terrorist attacks, acts of war and similar events. In addition, Santa Clara is
located near a major fault line increasing our susceptibility to the risk that an earthquake could significantly harm the operations of these
facilities. We maintain business interruption insurance, however, this insurance may be insufficient to compensate us for losses that may occur,
particularly from interruption due to an earthquake which is not covered under our current policy. We do not presently have redundant systems
in multiple locations. In addition, the impact of any of these disasters on our business may be exacerbated by the fact that we are still in the
process of developing our formal disaster recovery plan and we do not have a final plan in place.
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 continually 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.
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