Home Shopping Network 2011 Annual Report Download - page 12

Our long-term success depends, in large part, on our continued ability to attract new and retain existing
customers in a cost-effective manner.
In an effort to attract and retain customers, we engage in various marketing and merchandising initiatives,
which involve the expenditure of considerable money and resources, particularly in the case of the production
and distribution of HSN television programming and Cornerstone catalogs and, to a lesser but increasing extent,
online advertising. We have spent, and expect to continue to spend, increasing amounts of money on, and devote
greater resources to, certain of these initiatives, particularly in connection with the growth and maintenance of
our brands generally, as well as in the continuing efforts of our businesses to increasingly engage customers
through online channels. These initiatives, however, may not resonate with existing customers or consumers
generally or may not be cost-effective. In addition, we believe that costs associated with the production and
distribution of HSN television programming, paper and printing costs for Cornerstone catalogs and costs
associated with online marketing, including search engine marketing (primarily the purchase of relevant
keywords) are likely to increase in the foreseeable future and, if significant, could have an adverse effect on our
business, financial condition and results of operations to the extent that they do not result in corresponding
increases in sales.
We depend on relationships with pay television operators and adverse changes in these relationships
could result in an interruption, material decrease or even the cessation of carriage of the HSN television
networks.
We are dependent upon the pay television operators with whom we enter into distribution and affiliation
agreements to carry the HSN television networks. We currently have contracts with many local and national pay
television operators to distribute HSN television programming. Some of HSN’s larger pay television operators
include Comcast, DirecTV, Echostar/DISH and Time Warner. The two largest pay television operators represent
over 40% of our subscribers. The cessation of carriage of the HSN television networks by a major pay television
operator or a significant number of smaller pay television operators for a prolonged period of time could
adversely affect our business, financial condition and results of operations. While we believe that we will be able
to continue to successfully manage the distribution process in the future, certain changes in distribution levels, as
well as increases in commission rates and/or other fees payable for carriage, could occur notwithstanding these
efforts.
We typically seek to enter into long-term distribution and affiliation agreements with these major pay
television operators; however, in some cases, renewals are not agreed upon prior to the expiration of a given
agreement and the HSN television networks continue to be carried by the relevant pay television operator without
an effective agreement in place. We currently provide service to approximately 48.1% of our total subscribers
pursuant to month-to-month contracts or contracts that have expired. In addition, another 7.9% of our subscribers
are represented by contracts that expire within one year. Renewal and negotiation processes with pay television
operators are typically lengthy. No assurance can be given that we will be successful in negotiating renewals with
all these operators or that the financial and other terms of renewal will be on acceptable terms. The failure to
successfully renew or negotiate new distribution and affiliation agreements covering a material portion of these
existing cable and satellite households on acceptable terms could adversely affect our growth, sales revenue and
earnings.
We depend on relationships with vendors, manufacturers and other third parties; any adverse changes in
these relationships could result in a failure to meet customer expectations which could result in lost sales.
We purchase merchandise from a wide variety of third party vendors, manufacturers and other sources
pursuant to short- and long-term contracts and purchase orders. Our ability to identify and establish relationships
with these parties, as well as access quality merchandise in a timely and efficient manner on acceptable terms and
at acceptable costs, can be challenging. In particular, we purchase a significant amount of merchandise from
vendors and manufacturers abroad and have experienced (and expect to continue to experience) increased costs
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