Shutterfly 2010 Annual Report Download - page 20

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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 4x6 prints. We have an agreement with Fuji that expires in April 2010. If that agreement is not renewed
before it expires, or 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 a majority of 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 customer service activities and 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 some of our customer service activities and the production of some of our print and 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 4x6 prints, and photo-
based
products, such as photo books, stationery cards and calendars, we continually evaluate the demand for new products and services and the need to
address these trends. 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.
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