Shutterfly 2012 Annual Report Download - page 26

renewed our supply agreement with Fuji which now expires in August 2015. If that agreement is not
renewed before it expires in August 2015, 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 brands 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 substantial portion 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 off-line and on-line marketing, our customer service activities and some of our
production of print and 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 off-line and on-line marketing, 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 brands and 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 slowdowns such as those experienced in the U.S. and worldwide.
Events or weaknesses 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, pandemic disease (including the influenza virus), 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 websites, our production operations and our trademarks.
As of December 31, 2012, Shutterfly had 55 patents issued, and had more than 40 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
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