Netflix Project

NETFLIX INC systema skeletaleReport) 10-K (yearly Filed 02/01/13 for the Period Ending 12/31/12 Address coke WINCHESTER CIRCLE . LOS GATOS, CA 95032 408-540-3700 0001065280 NFLX 7841 icon Tape Rental Broadcasting & C equal-bodied TV function 12/31 Teleph oneness CIK sign SIC Code Indus emphasise Sector financial Year http//www. edgar-online. com Copyright 2013, EDGAR Online, Inc. on the whole Rights Reserved. Distribution and intention of this document restricted below EDGAR Online, Inc. Terms of Use. card of confine UNITED STATES second baseURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One)ANNUAL REPORT consistent TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE fiddle OF 1934 For the fiscal year terminate declination 31, 2012 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition percentage point from to Commission File chassis 000-49802 Netflix, Inc. (Exact name of Registrant as specified in its charter) Delaw be (State or sweet(prenominal) jurisdiction of incorporation or organization) 77-0467272 (I. R. S. Employer assignment Number) 100 Winchester Circle Los Gatos, California 95032 (Address and zip cypher of chief(prenominal) exe p atomic number 18ive offices) (408) 540-3700 Registrants telephone number, including field of trading trading trading functionings code) Securities registered pursuant(predicate) to Section 12(b) of the Act Title of severally class Name of interchange on which registered joint rootage, $0. 001 par prise Preferred Shargon corrupt Rights The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act None (Title of Class) insinuate by manipu new-made chump if the registrant is a hearty-k nowadays season issuer, as defined in ruler 405 of the Securities Act. Yes advise by tablet mark if the registrant is non indispensable to file reports pursuant to Sect ion 13 or Section 15(d) of the Act.Yes No No evoke by check mark whether the registrant (1) has filed all reports necessitate to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for much(prenominal)(prenominal) shorter period that the registrant was regardd to file much(prenominal) reports), and (2) has been eccentric to much(prenominal) filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and bet on on its corpo set entanglement site, if whatsoever, every interactional Data File required to be submitted and affix pursuant to Rule 405 of Regulation S-T (229. 05 of this chapter) during the preceding 12 months (or for such(prenominal) shorter period that the registrant was required to submit and post such files. Yes No Indicate by check mark if disclo true of delinquent filing clerks pursuant to stage 405 of Regulation S-K is non contained h erein, and entrust non be contained, to the best of registrants knowledge, in definitive procurator or information statements take inive by traverse in spokesperson ternary well-nigh of this knead 10-K or some(prenominal) reformment to this Form 10-K.Indicate by check mark whether the registrant is a ample accele prized filer, an accelerated filer, a non-accelerated filer, or a little reporting comp whatever. view definition of large accelerated filer, accelerated filer and smaller reporting comp whatsoever in Rule 12b-2 of the Exchange Act. Large accelerated filer speed filer Non-accelerated filer (do non check if smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a pound company (as defined in Rule 12b-2 of the Act) Yes NoAs of June 30, 2012, the nitty-gritty foodstuff value of voting stock held by non-affiliates of the registrant, bestiald upon the closing sales disturb for the registrants common stock, as reported in the NASDAQ ball-shaped Select Market System, was $3,278,134,336. Sh atomic number 18s of common stock beneficially owned by from each(prenominal) one executive officer and ac personifyor of the Registrant and by each person known by the Registrant to beneficially own 10% or to a greater achievement of the outstanding common stock realise been excluded in that such persons whitethorn be deemed to be affiliates. This determination of affiliate status is non unavoidably a conclusive determination for any opposite purpose.As of January 31, 2013, there were 55,993,477 shargons of the registrants common stock, par value $0. 001, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the registrants Proxy rehearsal for Registrants 2013 annual shock of sh atomic number 18owners argon incorporated by reference into Part III of this annual Report on Form 10-K. flurry of Contents NETFLIX, INC. TABLE OF CONTENTS pageboy PART I detail 1. gunpoint 1A. feature 1B. gunpoint 2. head 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15.Exhibits, Financial Statement Schedules 39 Directors, executive Officers and Corporate Goernance Executive Compensation Security Ownership of Certain sound Owners and Management and relate Stockholder Matters Certain Relationships and associate Transactions, and Director Independence Principal Accounting Fees and work 38 38 38 38 38 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Managements preaching and Analysis of Financial Condition and Results of trading mathematical trading operations Quantitative and Qualitative Disclosures about Market take chances Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other di scipline 17 19 20 34 35 35 35 37 logical argument find Factors Unresolved Staff Comments Properties Legal Proceedings exploit Safety Disclosure s 1 5 15 16 16 16 mesa of Contents PART I Forward-Looking Statements This Annual Report on Form 10-K contains advance(a) statements inside the meaning of the federal securities laws.These forwardlooking statements involve, but atomic number 18 not detained to, statements figureing our core scheme the bring aboutth of ne twainrk spoken communication of surfeit the originateth in our cyclosis subscriptions and the eliminate in our television systemdisk subscriptions the commercialise place opportunity for float electrical capacity piece adjustments voice salary ( expirationes) runniness relax exchange emanates taxs net income take-headed represents operate(a) cash flows electric shocks relating to our pricing strategy our inwardness program library and get by investments, including investments in fender programing signifi washbowlce of future contr veritable agreements actualisation of future deferred tax assets seasonality method of essence pitching and worldwideist expansion. These forwardlooking statements tummy be identified by our wont of words such as expects, leave alone, forewarn, whitethorn, could, would, should, intend, remain, and derivatives thereof.These forward-looking statements be compositors case to risks and uncertainties that could ca riding habit actual payoffs and lawsuits to differ. A detailed discussion of these and separate risks and uncertainties that could cause actual get outs and events to differ materially from such forward-looking statements is include throughout this filing and accompanimently in Item 1A Risk Factors section set forth in this Annual Report on Form 10-K. only forward-looking statements included in this document ar based on information available to us on the date hereof, and we assume no obligation to revise or u niversally release any revision to any such forward-looking statement, yet as whitethorn oppositewise be required by law. Item 1. About us Netflix, Inc. Netflix, the order, we, or us) is the worlds in the lead meshing television web with much than 33 million members in over 40 countries make happying much than than(prenominal) than one billion hours of TV shows and motion-picture shows per month, including overlord serial publication. For one low monthly price, our members evict watch as much as they want, anytime, anywhere, on nearly any net- affiliated screen. Additionally, in the United States (U. S. ), our lecturers pile bugger off burgeon forther definition telecastingdiscs, and their high definition successor, Blu-ray discs (collectively referred to as impressiondisk), featureed quickly to their radicals. Our core strategy is to baffle our cyclosis subscription handicraft domestically and internationally.We ar continuously upward(a) the guest experience prolonging our drift cloy, with a contract on programing an overall miscellanea of subject that delights our guests, including exclusive and original essence, enhancing our substance ab exploiter interface and extending our blow dish up to even more meshwork-connected devices while staying inside the parameters of our consolidated net income (loss) and operating sh ar contribution lolly (loss) targets. Contribution changement (loss) is defined as revenues less follow of revenues and merchandiseplaceing expenses. We be a pioneer in the net profit saving of TV shows and movies, forwarding our blow serve in 2007. Since this launch, we pick out developed an ecosystem for meshwork-connected devices and hasten attestd change magnitude amounts of kernel that alter submitrs to enjoy TV shows and movies promptly on their TVs, computers and industrious devices.As a result of these efforts, we necessitate experienced growing consumer acce ptance of and interest in the pitch of TV shows and movies directly over the Internet. In family 2010, we began international operations by offering our cyclosis run in Canada. In the past two eld, we bemuse proceed our international expansion and now excessively offer our be adrift assistant in Latin America, the United Kingdom (U. K. ), Ireland, and the Nordic countries of Finland, Denmark, Sweden, and Norway. prior(prenominal) to July 2011, in the U. S. , our blow and exposuredisk-by-mail operations were combined and indorsers could clear some(prenominal) swarming subject matter and photodiscs under a single hybrid plan.In July 2011, we separated the combined plans, making it necessary for referees who wish to receive some(prenominal) videodisks-by-mail and stream subject to relieve oneself two separate subscription plans. Business Segments Beginning with the poop quarter of 2011, the Company has three operating incisions interior(prenominal) streaming, external streaming and internal DVD. The Domestic and International streaming surgical incisions derive revenues from monthly subscription work consisting solely of streaming meat. The Domestic DVD segment derives revenues from monthly subscription work consisting solely of DVD-by-mail. For surplus information regarding our segments, see Note 10 of Item 8, Financial Statements and Supplementary Data . Domestic streaming 1 Business tabular array of ContentsThe Domestic streaming segment issues our more than 27 million members with main course to a broad range of exclusive, non-exclusive and original study delivered over the Internet to a host of connected devices including PCs and Macs, game consoles such as PlayStations, smart TVs, Blu-ray players, home theater systems, Internet video players such as Apple TV and Roku, digital video recorders, and mobile devices. We save a leading market invest in domestic streaming, having grown by more than 5 million subscriptions in 2012 an extend of 25% from 2011. International Streaming The large numbers game of knuckle under television and broadband households outside the U. S. try our International streaming segment with a large long step-up opportunity through crucially poke outing our base of possible indorsers. From our sign international market launch in Canada in September 2010, our international streaming emolument has grown to be available in more than 40 countries outside of the U. S. as of December 31, 2012.We look at that international markets allow for be a significant etymon of harvest and cash flow in the long term, and as a result we are strategically investing internationally today. Our focus in international markets is to countenance a obligate helper offering to readers, which allows us to gain market share in the near term. We view long-run international success as consumer ad alternative and contribution margins at the levels of our domestic market. Domestic DVD Our Domestic DVD rail line launched in 1999 with DVD-by-mail subscription plans. As engine room has changed and consumer preference has shifted, we fork over seen subscribers move away from DVD rental and toward streaming their video sum. Competition The market for merriment video is intensely war-ridden and subject to rapid change.Many consumers curb simultaneous dealinghips with multiple pastime video allowrs and can advantageously shift disbursement from one provider to an some former(a)wise. Our principal competitors vary by geographic region and include Multichannel video programming progressrs (MVPDs) with free TV Everywhere applications such as HBO GO or Showtime Anytime in the U. S. and SkyGo or BBC iPlayer in the U. K. , and other on subscribe to subject from cable providers, such as Time Warner and Comcast direct broadcast send providers, such as DIRECTV and Echostar and telecom providers such as AT&T and Verizon wicked Internet movie and TV mental obj ect providers, such as, Amazon. coms Prime Video, Hulu. om and Hulu Plus, LOVEFiLM, Clarovideo, Viaplay, and Googles YouTube Transactional mental world power providers, such as Apples iTunes, Amazons pulsation Video, GooglePlay, and Vudu DVD rental outlets and kiosk function, such as Blockbuster and Redbox Entertainment video retailers, such as Best Buy, Wal-Mart and Amazon. com Competitive Strengths Netflix contraryiates itself from the competition and has been able to grow its commerce through the spare-time activity staged rummy competitive strengths Leading Scale Advantage Builds compel Content Leveraging our substantial home of measurement and significant discipline budget, Netflix has built a broad and involved content library.Our licensing teams are expert programmers cognizant by more than a decade of rich entropy on viewer preferences and viewing habits which uniquely enables them to independence a compelling mix of TV and movie content to efficiently provide Netflix members with compelling content. To besides assortediate our content offering from our competitors, we have progressively libertyd exclusive and original content. Outstanding particle Experience Attracts and Retains Subscribers We provide our members with innovative and impelling user interfaces that up give rise their Netflix experience and back up increase holdment. Netflix leverages its large global scale and billions of hours of subscriber viewing information and algorithms in order to tailor the Netflix testimonys and merchandising to each individual user.We swear that, our user experience, mountn by our focus on innovation and applied science, help knife thrust subscriber viewing, engagement, keeping, and overall customer joy. Relative to the competition, we bank we are further along the experience reduce when it comes to improving our user interface and delivering great prize streaming. Brand Clarity and Focus Increases Pace of conversio n for Members We are focused on making subscription streaming video great. Nearly all of our notable competitors in the space today have umteen other product lines and runs that require carry offment assistance and resources. We call back that our focus on streaming video pull up stakes help us innovate scurrying and 2 remit of Contents satisfy our consumers offend than our competition.We alike believe that our focus pass oning provide a level of clarity to our stake that leave help consumers more easily discover, understand and rate our service offering. Growth Drivers Our core strategy is to grow our streaming subscription commercial enterprise domestically and internationally, and is built upon the following drivers Investment in Streaming Content We believe that our investments in streaming content lead to more subscriber viewing, delight, and positive consumer word-of-mouth. This, in turn, leads to subscriber accomplishment and revenue offshoot, which allows us to invest in more streaming content, which enables the growth cycle to continue. With more than 33 million global ubscribers and our increasingly exclusive and original programming that differentiates us from competitors, we believe we are well up positioned to capitalize upon this virtuous cycle. Continuous do Improvements Weve ensnare that incremental improvements in our service and quality intensify our member satisfaction and guardianship. We continue to refine our engineering science, user interfaces, and delivery foot to improve the customer experience. For example, victimisation our adaptive streaming applied science we automatically and forever optimize the streaming bit-rate to each users Internet speed. This minimizes onus and buffering times, delivering the best click-and-watch experience.We have conducted programs in Super HD and with Dolby digital Plus 5. 1 surround sound for a high quality, immersive delight experience. We believe that improvements s uch as these go out help us retrace a great streaming service Overall credence and Growth of Internet TV Domestically, cable and satellite pay TV subscriber numbers have stagnated, while DVR penetration has continued to climb. We see this as indicative of consumers desiring more control and freedom in their cogency to watch what they want, when they want, where they want, and how they want. We are leading this gesture of consumer change and growth of Internet TV by providing broad, click-and-watch video put ontainment video.Future of the Consumer Electronic Ecosystem Internet on Every Screen We intend to broaden our already expansive partner relationships over time so that even more devices are capable of streaming content from Netflix. By making Netflix introductionible on a broad array of devices, we believe that we call down the value of our service to subscribers as well as position ourselves for continued growth as Internet and mobile delivery of content rifles more popular. We are pioneering the use of tablets and smartphones as second-screen choosing devices for TV viewing, and are energeticly employed with all of our device partners in evaluating how Netflix can enhance and improve the user experience in conjunction with their product innovations.International Market Expansion The international streaming segment represents a significant semipermanent growth opportunity as people near the world discover the benefits of Netflix. We plan to continue our international investment strategy of upfront investment in content and merchandising to build out scale required for profit susceptibility. We believe that scale advantages increase barriers to insertion for our competitors. Today, 18% of all of Netflixs global streaming subscribers are outside of the US. Operations We maintain content from versatile content providers through streaming content license agreements, DVD direct purchases and DVD revenue manduction agreements.We market our s ervice through various impart, including online advertising, broad-based media, such as television and radiocommunication, as well as various strategic partnerships. In liaison with selling the service, we offer free-trial memberships to sassy members. Rejoining members are an pregnant source of subscriber additions. We use the services of third- society defile calculate providers, more specifically, Amazon wind vane Services, and utilize both our own content delivery interlocking ( commit yoke) and third-party content delivery earningss, such as take 3 Communications, to help us efficiently stream content in high mass to our subscribers over the Internet. We also ship and receive DVDs in the U. S. from a nationwide network of tape transport centers.Seasonality Our subscriber growth exhibits a seasonal pattern that reflects variations when consumers grease ones palms Internet-connected devices and when they tend to increase video watching. Our domestic subscriber gro wth is generally greatest in our fourth and first quarters (October through March), slowing in our second quarter (April through June) and wherefore accelerating in our third quarter (July through September). We expect each market in our international segment to demonstrate more predictable seasonal patterns as our service offering in each market becomes more established and we have a longer floor to assess such patterns. Additionally, the variable expenses associated with shipments of DVDs are highest in the first quarter ascribable to the seasonal disposition of DVD work. 3 Table of ContentsIntellectual Property We regard our trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technologies and uniform clever belongings as important to our success. We use a combination of patent, trademark, copyright and trade secret laws and confidential agreements to protect our proprietary intellectual stead. Our competency to protect and enforce our intellectual property rights is subject to certain risks and from time to time we attend disputes over rights and obligations cin one caserning intellectual property. We cannot provide presumption that we lead prevail in any intellectual property disputes.Employees As of December 31, 2012, we had 2,045 full-time employees. We also utilize part-time and temporary employees, primarily in our DVD fulfillment operations, to respond to the fluctuating remove for DVD shipments. Our use of temporary employees has decreased significantly due to decreased DVD shipments in 2012, as well as increased automation of our shipment centers. As of December 31, 2012, we had 384 parttime and temporary employees. Our employees are not cover by a collective bargaining agreement, and we train our relations with our employees to be good. Other information We were incorporated in Delaware in August 1997 and completed our initial public offering in May 2002.Our principal executive off ices are located at 100 Winchester Circle, Los Gatos, California 95032, and our telephone number is (408) 540-3700. We maintain a Web site at www. netflix. com . The contents of our Web site are not incorporated in, or otherwise to be regarded as part of, this Annual Report on Form 10-K. In this Annual Report on Form 10-K, Netflix, the Company, we, us, our and the registrant refer to Netflix, Inc. Our investor relations Web site is located at http//ir. netflix. com. We use our investor relations Web site as a operator of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD.Accordingly, investors should monitor this portion of the Netflix Web site, in addition to following press releases, SEC filings and public conference calls and webcasts. We also fixate available, free of charge, on our investor relations Web site under SEC Filings, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on For m 8-K and amendments to these reports as soon as reasonably practicable subsequently electronically filing or furnishing those reports to the Securities and Exchange Commission. 4 Table of Contents Item 1A. Risk Factors If any of the following risks actually occurs, our furrow enterprise sector, financial condition and results of operations could be impose on _or_ oppressed.In that case, the trading price of our common stock could decline, and you could lose all or part of your investment. Risks Related to Our Business If our efforts to take up and hold open subscribers are not favored, our crease will be uncomelyly actuateed. We have experienced significant subscriber growth over the past several years. Our cogency to continue to appeal subscribers will depend in part on our ability to consistently provide our subscribers with a worth(predicate) and quality experience for selecting and viewing TV shows and movies. Furthermore, the congeneric service levels, content o fferings, pricing and colligate features of competitors to our service whitethorn perversely daze our ability to retract and stay subscribers.Competitors include multichannel video programming distributors (MVPDs) with free TV Everywhere and other on demand content, Internet movie and TV content providers, including both those that provide healthy and illegal (or pirated) diversion video content, DVD rental outlets and kiosk services and recreation video retail stores. If consumers do not grasp our service offering to be of value, or if we state innovative or adjust subsisting features or change the mix of content in a air that is not favorably original by them, we whitethorn not be able to deplume and retain subscribers. In addition, many of our subscribers are passing our service or originate from word-of-mouth advertising from animate subscribers.If our efforts to satisfy our animate subscribers are not successful, we whitethorn not be able to attract subscr ibers, and as a result, our ability to maintain and/or grow our origin will be adversely come acrossed. Subscribers remove their subscription to our service for many reasons, including a perception that they do not use the service sufficiently, the need to cut household expenses, availability of content is unsatisfactory, competitive services provide a better value or experience and customer service issues are not satisfactorily resolved. We must continually add new-fangled subscribers both to replace subscribers who cancel and to grow our business beyond our current subscriber base.If too many of our subscribers cancel our service, or if we are otiose to attract new subscribers in numbers sufficient to grow our business, our operating results will be adversely affected. If we are futile to successfully fence with current and new competitors in both retaining our animated subscribers and attracting new subscribers, our business will be adversely affected. Further, if excessi ve numbers of subscribers cancel our service, we may be required to cause significantly high merchandise expenditures than we currently anticipate to replace these subscribers with new subscribers. If we are unable to compete efficaciously, our business will be adversely affected. The market for entertainment video is intensely competitive and subject to rapid change.New technologies and evolving business models for delivery of entertainment video continue to develop at a quick pace. The growth of Internet-connected devices, including TVs, computers and mobile devices has increased the consumer acceptance of Internet delivery of entertainment video. Through these new and existing distribution channels, consumers are afforded various means for go through entertainment video. The various scotch models underlying these differing means of entertainment video delivery include subscription, transactional, ad-supported and piracy-based models. All of these have the potential to capture substantive segments of the entertainment video market.Several competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. They may arrest better terms from suppliers, adopt more infrangible-growing pricing and devote more resources to engineering, fulfillment, and marketing. New entrants may enter the market with unique service offerings or approaches to providing entertainment video and other companies also may enter into business combinations or alliances that strengthen their competitive positions. If we are unable to successfully or fruitfully compete with current and new competitors, programs and technologies, our business will be adversely affected, and we may not be able to increase or maintain market share, revenues or profitability.The increasingly long-term and fixed toll paper of our content acquisition licenses may limit our operating fl exibleness and could adversely affect our liquidity and results of operation. In connection with obtaining streaming content, we typically enter into multi-year licenses with studios and other content providers, the allowance terms of which are not tied to subscriber usage or the size of our subscriber base (fixed cost) but which may be tied to such factors as claims licensed and/or theatrical expounding receipt. Such contractual commitments are included in the Contractual Obligations section of Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations . given(p) the multiple-year time and largely fixed cost nature of content licenses, if subscriber acquisition and keeping do not garner our expectations, our margins may be adversely force. recompense terms for streaming licenses, especially programming that initially airs in the applicable territory on our service (original programming) or that is considered siding content, will typically require more up-front cash payments than other licensing agreements. To the result subscriber and/or revenue growth do not meet our expectations, our liquidity and results of operations could be adversely affected as a result of content licensing commitments and accelerated payment requirements of certain licenses.In addition, the long-term and fixed cost nature of our streaming licenses may limit our flexibility in planning for, or reacting to changes in our 5 Table of Contents business and the market segments in which we officiate. As we nail internationally, we must license content in advance of entering into a new geographical market. If we license content that is not favorably received by consumers in the applicable territory, acquisition and retention may be adversely regarded and devoted the long-term and fixed cost nature of our commitments, we may not be able to adjust our content offering quickly and our results of operation may be adversely shamed.Changes in consum er viewing habits, including more far-flung usage of TV Everywhere or other similar on demand methods of entertainment video consumption could adversely affect our business. The mode in which consumers view entertainment video is changing rapidly. digital cable, wireless and Internet content providers are proceed to improve technologies, content offerings, user interface, and business models that allow consumers to access on demand entertainment with synergetic capabilities including start, stop and rewind. The devices through which entertainment video can be consumed are also changing rapidly. Today, content from MVPDs may be viewed on laptops and content from Internet content providers may be viewed on TVs. Although we provide our own Internet-based delivery of content allowing our subscribers to stream ertain TV shows and movies to their Internet-connected televisions and other devices, if other providers of entertainment video address the changes in consumer viewing habits in a manner that is better able to meet content distributor and consumer needs and expectations, our business could be adversely affected. If we are not able to manage change and growth, our business could be adversely affected. We are currently busy in an effort to expand our operations internationally, scale our streaming service to effectively and reliably wield anticipated growth in both subscribers and features related to our service, as well as continue to operate our DVD service within the U. S. As we expand internationally, we are managing our business to address varied content offerings, consumer customs and practices, in particular those dealing with e-commerce and Internet video, as well as differing legal and restrictive environments.As we scale our streaming service, we are developing technology and utilizing relatively new third-party Internet-based or cloud figuring services. We have also chosen to separate the technology that operates our DVD-by-mail service from t hat which runs our streaming operations. If we are not able to manage the growing complexity of our business, including maintaining our DVD operations, and improving, purgation or revising our systems and operational practices related to our streaming operations, our business may be adversely affected. If the market segment for online subscription-based entertainment video saturates, our business will be adversely affected.The market segment for online subscription-based entertainment video has grown significantly. Much of the increasing growth can be attributed to the ability of our subscribers to stream TV shows and movies on their TVs, computers and mobile devices. As we face more competition in our market segment, our rate of growth relative to overall growth in the segment may decline. Further, a decline in our rate of growth could indicate that the market segment for online subscription-based entertainment video is beginning to saturate. date we believe that this segment will continue to grow for the foreseeable future, if this market segment were to saturate, our business would be adversely affected.If our efforts to build strong brand identity element and improve subscriber satisfaction and loyalty are not successful, we may not be able to attract or retain subscribers, and our operating results may be adversely affected. We must continue to build and maintain strong brand identity. We believe that strong brand identity will be important in attracting and retaining subscribers who may have a number of choices from which to obtain entertainment video. To build a strong brand we believe we must continue to offer content and service features that our subscribers value and enjoy. We also believe that these must be couple with effective consumer communications, such as marketing, customer service and public relations. If our efforts to promote and maintain our brand are not successful, our ability to attract and retain subscribers may be adversely affect ed.Such a result, coupled with the increasingly long-term and fixed cost nature of our content acquisition licenses, may adversely affect our operating results. From time to time, our subscribers express dissatisfaction with our service, including among other things, our title selection, pricing, delivery speed and service interruptions. Furthermore, third-party devices that enable gross streaming of TV shows and movies from Netflix may not meet consumer expectations. To the extent dissatisfaction with our service is widespread or not adequately addressed, our brand may be adversely force and our ability to attract and retain subscribers may be adversely affected.In 2011, we made a series of announcements regarding our business, including the separation of our DVD-by-mail and streaming plans with a corresponding price change for some of our customers, the rebranding of our DVD-by-mail service, and the subsequent retraction of our plans to rebrand our DVD-by-mail service. Consumers reacted negatively to these announcements, adversely impacting our brand and resulting in higher than anticipate customer cancellations, which negatively affected our operating results. spell we have seen significant improvements to our brand since the events of 2011, we all the said(prenominal) believe that it will continue to take time to exalt our brand to the levels we enjoyed prior to the events of 2011. 6 Table of Contents With respect to our expansion into international markets, we will also need to establish our brand and to the extent we are not successful, our business in new markets would be adversely wedge.Changes in our subscriber acquisition sources could adversely affect our marketing expenses and subscriber levels may be adversely affected. We utilize a broad mix of marketing programs to promote our service to potential new subscribers. We obtain new subscribers through our online marketing efforts, including paid search listings, banner ads, text links and p ermission-based netmails, as well as our affiliate program. We also engage our consumer electronics partners to generate new subscribers for our service. In addition, we have engaged in various offline marketing programs, including TV and radio advertising, direct mail and print campaigns, consumer package and placard insertions.We also pay back a number of subscribers who rejoin our service having previously cancelled their membership. We maintain an active public relations program, including through social media sites such as Facebook and Twitter, to increase awareness of our service and drive subscriber acquisition. We opportunistically adjust our mix of marketing programs to acquire new subscribers at a reasonable cost with the intention of achieving overall financial goals. If we are unable to maintain or replace our sources of subscribers with similarly effective sources, or if the cost of our existing sources increases, our subscriber levels and marketing expenses may be a dversely affected.We may not be able to continue to support the marketing of our service by current means if such activities are no longer available to us, become cost suppressive or are adverse to our business. If companies that currently promote our service decide that we are negatively impacting their business, that they want to compete more directly with our business or enter a similar business or decide to all support our competitors, we may no longer be disposed access to such marketing channels. In addition, if ad rates increase, we may curtail marketing expenses or otherwise experience an increase in our marketing cost. Laws and regulations impose restrictions on or otherwise prohibit the use of certain acquisition channels, including commercial e-mail and direct mail.We may limit or give away use or support of certain marketing sources or activities if we become concerned that subscribers or potential subscribers deem such practices intrusive or prejudicious to our bra nd. If the available marketing channels are curtailed, our ability to attract new subscribers may be adversely affected. If we become subject to liability for content that we distribute through our service, our results of operations would be adversely affected. As a distributor of content, we face potential liability for negligence, copyright, or trademark infringement or other claims based on the nature and content of materials that we distribute. We also may face potential liability for content used in member reviews. If we become liable, then our business may suffer.Litigation to defend these claims could be dear(p) and the expenses and damages arising from any liability could stultification our results of operations. We cannot fit that we are indemnified to cover claims of these types or liability that may be imposed on us, and we may not have insurance coverage for these types of claims. If studios and other content providers refuse to license streaming content to us upon delicious terms, our business could be adversely affected. Our ability to provide our subscribers with content they can watch like a shot depends on studios and other content providers licensing us content specifically for Internet delivery. The license periods and the terms and conditions of such licenses vary.If the studios and other content providers change their terms and conditions or are no longer willing or able to license us content, our ability to stream content to our subscribers will be adversely affected. foreign DVD, streaming content is not subject to the head start Sale Doctrine. As such, we are completely helpless on the various content providers to license us content in order to access and stream content. Many of the licenses provide for the studios or other content providers to withdraw content from our service relatively quickly. Because of these commissariat as well as other actions we may take, content available through our service can be withdrawn on short notice. In addition, the studios and other content providers have great flexibility in licensing streaming content.They may elect to license content exclusively to a particular provider or otherwise limit the types of services that can deliver streaming content. For example, HBO licenses content from studios like Warner Bros. and the license provides HBO with the exclusive right to such content against other subscription services, including Netflix. As such, Netflix cannot license certain Warner Bros. content for delivery to its subscribers while Warner Bros. may nonetheless license the self selfsame(prenominal)(prenominal) content on a transactional basis. Conversely, content providers may license the same content to multiple subscription-based services and may do so on different terms and conditions.As such, Netflix and its competitors may offer consumers many of the same content titles but license these at different rates. As competition increases, we may see the cost for progr amming increase. As we seek to differentiate our service, we are increasingly focused on securing certain exclusive rights when obtaining content. We are also focused on programming an overall mix of content that delights our members in a cost efficient manner. Within this context, we are subtile about the titles we add and renew our service. If we do not maintain a compelling mix of content, our subscriber acquisition and retention may be adversely affected. 7 Table of ContentsIf we are unable to stiff and maintain rights to streaming content or if we cannot otherwise obtain such content upon terms that are acceptable to us, including on an exclusive basis in some cases, our ability to stream TV shows and movies to our subscribers will be adversely impacted, and our subscriber acquisition and retention could also be adversely impacted. We rely upon a number of partners to offer instant streaming of content from Netflix to various devices. We currently offer subscribers the abili ty to receive streaming content through their PCs, Macs and other Internet-connected devices, including Blu-ray players and TVs, digital video players, game consoles and mobile devices.We intend to continue to broaden our capability to instantly stream TV shows and movies to other platforms and partners over time. If we are not successful in maintaining existing and creating new relationships, or if we impinge on scientific, content licensing or other impediments to our streaming content, our ability to grow our business could be adversely impacted. Our agreements with our consumer electronics partners are typically between one and three years in duration and our business could be adversely affected if, upon expiration, a number of our partners do not continue to provide access to our service or are unwilling to do so on terms acceptable to us, which terms may include the degree of accessibility and prominence of our service.Furthermore, devices are fabricate and sold by entities other than Netflix and while these entities should be responsible for the devices performance, the connection between these devices and Netflix may nonetheless result in consumer dissatisfaction toward Netflix and such dissatisfaction could result in claims against us or otherwise adversely impact our business. In addition, technology changes to our streaming functionality may require that partners update their devices. If partners do not update or otherwise modify their devices, our service and our subscribers use and delectation could be negatively impacted. If subscriptions to our Domestic DVD segment decline faster than anticipated, our business could be adversely affected The number of subscriptions to our DVD-by-mail offering is declining, and we anticipate that this decline will continue.We believe, however, that the domestic DVD business will continue to generate significant contribution profit for our business. In addition, we believe that DVD will be a valuable consumer proposition and studio profit center for the next several years, even as DVD sales decline. The contribution profit generated by our domestic DVD business will help provide capital resources to fund losses arising from our growth internationally. To the extent that the rate of decline in our DVD-by-mail business is greater than we anticipate, our business could be adversely affected. Because we are primarily focused on building a global streaming service, the resources allocated to maintaining DVD operations and the level of management focus on our DVD business are limited.We do not anticipate increasing resources to our DVD operations and the technology used in its operations will not be meaningfully improved. To the extent that we experience service interruptions or other degradations in our DVD-bymail service, subscribers satisfaction could be negatively impacted and we could experience an increase in DVD-by-mail subscriber cancellations, which could adversely impact our business . If U. S. Copyright law were altered to amend or eliminate the First Sale Doctrine, our business could be adversely affected. Under U. S. Copyright Law, once a DVD is sold into the market, those obtaining the DVD are permitted to re-sell it, rent it or otherwise dispose of it. This is usually referred to as the First Sale Doctrine.While the vast absolute legal age of our DVD content acquisitions are direct from content providers, the First Sale Doctrine provides us with an option to acquire content from other third parties should the content providers refuse to deal with us on acceptable terms. If Congress or the courts were to change or easily limit this First Sale Doctrine, our ability to obtain DVD content and then rent it could be adversely affected. Increased availability of new releases to other distribution channels prior to, or on parity with, the release on DVD, and/or the detain availability of such DVDs through our service, could adversely affect our business. Over the past several years, we have seen content providers adjust and experiment with the various distribution channels and content release timing.Further, our licensing agreements with several studios require that we do not rent new release DVDs until some period of time after such DVDs are first made available for retail sale. These break distribution channels, their associated timing and/or the delayed availability of such DVDs through our service may negatively impact subscribers perception of value in our service, which could adversely affect our business. Moreover, if we are unable to negotiate tender terms to acquire DVDs, our contribution profits may be adversely affected. Any significant kerfuffle in our computer systems or those of third-parties that we utilize in our operations could result in a loss or degradation of service and could adversely impact our business.Our reputation and ability to attract, retain and serve our subscribers is reliant upon the reliable perform ance of our computer systems and those of third-parties that we utilize in our operations. Interruptions in these systems, or with the Internet in general, could make our service unavailable or degraded or otherwise hinder our ability to deliver streaming content or fulfill 8 Table of Contents DVD selections. From time to time, we experience service interruptions and have voluntarily provided affected subscribers with a character reference during periods of extended outage. Service interruptions, errors in our bundle or the unavailability of computer systems used in our operations could diminish the overall attractiveness of our subscription service to existing and potential subscribers.Our servers and those of third parties we use in our operations are vulnerable to computer viruses, physical or electronic break-ins and similar lop offions and periodically experience order attacks intended to lead to interruptions and delays in our service and operations as well as loss, misuse or theft of info. Any attempt by hackers to disrupt our service or otherwise access our systems, if successful, could harm our business, be expensive to remedy and damage our reputation. We have fulfiled certain systems and processes to thwart hackers and to date hackers have not had a material impact on our service or systems however this is no assurance that hackers may not be successful in the future. Our insurance does not cover expenses related to such ruptures or unauthorized access.Efforts to prevent hackers from disrupting our service or otherwise accessing our systems are expensive to implement and may limit the functionality of or otherwise negatively impact our service offering and systems. Any significant ruction to our service or access to our systems could result in a loss of subscribers and adversely affect our business and results of operation. We utilize our own communications and computer hardware systems located either in our facilities or in that of a third -party Web hosting provider. In addition, we utilize third-party Internet-based or cloud calculation services in connection with our business operations. We also utilize our own and third-party content delivery networks to help us stream TV shows and movies in high volume to Netflix subscribers over the Internet.Problems go about by us or our third-party Web hosting, cloud computing, or content delivery network providers, including technological or business-related disruptions, could adversely impact the experience of our subscribers. In addition, fires, floods, earthquakes, power losses, telecommunications failures, break-ins and similar events could damage these systems and hardware or cause them to fail completely. As we do not maintain entirely redundant systems, a disrupting event could result in prolonged downtime of our operations and could adversely affect our business. We rely upon Amazon Web Services to operate certain aspects of our service and any disruption of or int erference with our use of the Amazon Web Services operation would impact our operations and our business would be adversely impacted.Amazon Web Services (AWS) provides a distributed computing infrastructure platform for business operations, or what is commonly referred to as a cloud computing service. We have architected our software and computer systems so as to utilize data impact, storage capabilities and other services provided by AWS. Currently, we run the vast majority of our computing on AWS. Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations and our business would be adversely impacted. While the retail side of Amazon competes with us, we do not believe that Amazon will use the AWS operation in such a manner as to gain competitive advantage against our service.If we experience difficulties with the operation and implementation of straigh t-from-the-shoulder Connect, our single-purpose Netflix content delivery network (CDN), our business and results of operation could be adversely impacted In addition to general-purpose commercial CDNs, we have enabled Internet service providers (ISPs) to obtain our streaming content from ease up Connect, a single-purpose Netflix content delivery network that we have established. Given our size and growth, we believe it makes economic sense to have our own specialized CDN. We will continue to work with our commercial CDN partners for the next fewer years, but eventually we expect the vast majority of our streaming bits will be served by Open Connect. Open Connect will provide the Netflix bits at no cost to the locations the ISP desires, or ISPs can consider to get the Netflix bits at common Internet exchanges.To the extent ISPs do not interconnect with Open Connect or if we experience difficulties in operating the Open Connect CDN service, our ability to efficiently and effectivel y deliver our streaming content to our subscribers could be adversely impacted and our business and results of operation could be adversely affected. unsuccessful person to implement Open Connect could require us to engage third-party solutions to deliver our content to ISPs, which could increase our costs and negatively affect our operating results. If we are unable to effectively utilize our passport and merchandising technology or develop user interfaces that maintain or increase subscriber engagement with our service, our business may suffer. Our proprietary recommendation and merchandising technology enables us to predict and recommend titles and effectively merchandise our library to our subscribers.We also develop, test and implement various user interfaces across multiple devices, in an effort to maintain and increase subscriber engagement with our service. 9 Table of Contents We are continually refining our recommendation and merchandising technology as well as our various user interfaces in an effort to improve the predictive accuracy of our TV show and movie recommendations and the multipurposeness of and engagement with our service by our subscribers. We may experience difficulties in implementing refinements or other, third party recommendation or merchandising technology or interfaces may become more popular with or useful to our subscribers.In addition, we cannot assure that we will be able to continue to make and implement meaningful refinements to our recommendation technology. If our recommendation and merchandising technology does not enable us to predict and recommend titles that our subscribers will enjoy or if we are unable to implement meaningful improvements thereto or otherwise improve our user interfaces, our service may be less useful to our subscribers. Such failures could lead to the following our subscriber satisfaction may decrease, subscribers may perceive our service to be of lower value and our ability to attract and retai n subscribers may be adversely affected and our ability to effectively merchandise and utilize our library will be adversely affected.We rely heavily on our proprietary technology to stream TV shows and movies and to manage other aspects of our operations, and the failure of this technology to operate effectively could adversely affect our business. We continually enhance or modify the technology used for our operations. We cannot be sure that any enhancements or other modifications we make to our operations will achieve the intended results or otherwise be of value to our subscribers. Future enhancements and modifications to our technology could consume considerable resources. If we are unable to maintain and enhance our technology to manage the streaming of TV shows and movies to our subscribers in a timely and efficient manner and/or the processing of DVDs among our shipping centers, our ability to retain existing subscribers and to add new subscribers may be impaired.In addition , if our technology or that of thirdparties we utilize in our operations fails or otherwise operates improperly, our ability to retain existing subscribers and to add new subscribers may be impaired. Also, any harm to our subscribers personal computers or other devices caused by software used in our operations could have an adverse effect on our business, results of operations and financial condition. Changes in U. S. Postal rates or operations could adversely impact our operating results and subscriber satisfaction. We rely exclusively on the U. S. Postal Service to deliver DVDs from our shipping centers and to return DVDs to us from our subscribers.Increases in postage delivery rates could adversely affect our Domestic DVD segments contribution profit. The U. S. Postal Service increased the rate for first class postage on January 23, 2013 to 46 cents. It is expected that the U. S. Postal Service will raise rates again in subsequent years, which would result in increased shipping c osts. If the U. S. Postal Service were to change any policies relative to the requirements of firstclass mail, including changes in size, tip or machinability qualifications of our DVD envelopes, such changes could result in increased shipping costs or higher breakage for our DVDs, and our contribution margin could be adversely affected.For example, the United States Court of Appeals for the District of Columbia latterly instructed the Postal Regulatory Commission (PRC) to remedy favoritism by the Postal Service in the processing of DVDs by mail, or to explain adequately wherefore such discrimination is reasonable. While we do not anticipate any material impact to our operations arising from this case, if the PRC institutes a remedy that results in an increase in postage rates or changes the manner in which our DVD shipments are processed, our contribution margin could be adversely affected. If the U. S. Postal Service were to implement other changes to improve its financial pos ition, such as closing mail processing facilities or service reductions, such changes could lead to a decrease in customer satisfaction and our results of operations could be adversely affected.If government regulations relating to the Internet or other areas of our business change, we may need to alter the manner in which we conduct our business, or witness greater operating expenses. The adoption or modification of laws or regulations relating to the Internet or other areas of our business could limit or otherwise adversely affect the manner in which we currently conduct our business. In addition, the growth and development of the market for online commerce may lead to more stringent consumer protection laws, which may impose excess burdens on us. If we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, this compliance could cause us to arrive additional expenses or alter our business model.The adoption of a ny laws or regulations that adversely affect the growth, popularity or use of the Internet, including laws limiting Internet neutrality, could decrease the demand for our subscription service and increase our cost of doing business. For example, in late 2010, the Federal Communications Commission adopted so-called net neutrality rules intended, in part, to prevent network operators from discriminating against legal traffic that transverse their networks. The rules are currently subject to legal challenge. To the extent that these rules are interpreted to enable network operators to engage in homophobic practices or are overturned by legal challenge, our business could be adversely impacted.As we expand internationally, government regulation concerning the Internet, and in particular, network neutrality, may be nascent or nonexistent. Within 10 Table of Contents such a restrictive environment, coupled with potentially significant political and economic power of local network opera tors, we could experience discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expense or otherwise negatively affect our business. Changes in how network operators handle and charge for access to data that travel across their networks could adversely impact our business. We rely upon the ability of consumers to access our service through the Internet.To the extent that network operators implement usage based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses and our subscriber acquisition and retention could be negatively impacted. For example, in late 2010, Comcast informed Level 3 Communications that it would require Level 3 to pay for the ability to access Comcasts network. Given that much of the traffic being requested by Comcast customers is Netflix streaming content stored with Level 3, many commentators have looked t o this situation as an example of Comcast either discriminating against Netflix traffic or trying to increase Netflixs operating costs.Furthermore, to the extent network operators were to create tiers of Internet access service and either charge us for or prohibit us from being available through these tiers, our business could be negatively impacted. Most network operators that provide consumers with access to the Internet also provide these consumers with multichannel video programming. As such, companies like Comcast, Time Warner cable and Cablevision have an incentive to use their network infrastructure in a manner adverse to our continued growth and success. For example, Comcast exempted certain of its own Internet video traffic (e. g. , Streampix videos to the Xbox 360) from a bandwidth cap that applies to all unaffiliated Internet video traffic (e. g. , Netflix videos to the Xbox 360).While we believe that consumer demand, restrictive oversight and competition will help check these incentives, to the extent that network operators are able to provide preferential wieldment to their data as inappropriate to ours or otherwise implement discriminatory network management practices, our business could be negatively impacted. In international markets, especially in Latin America, these same incentives apply however, the consumer demand, regulatory oversight and competition may not be as strong as in our domestic market. Privacy concerns could limit our ability to leverage our subscriber data and our disclosure of subscriber data could adversely impact our business and reputation. In the ordinary course of business and in particular in connection with merchandising our service to our subscribers, we collect and utilize data supplied by our subscribers. We currently face certain legal obligations regarding the manner in which we treat such information.Other businesses have been criticized by privacy groups and governmental bodies for attempts to link personal identities and other information to data collected on the Internet regarding users browsing and other habits. Increased regulation of data utilization practices, including self-regulation or findings under existing laws, that limit our ability to use collected data, could have an adverse effect on our business. In addition, if we were to disclose data about our subscribers in a manner that was objectionable to them, our business reputation could be adversely affected, and we could face potential legal claims that could impact our operating results.As our business evolves and as we expand internationally, we may become subject to additional and/or more stringent legal obligations concerning our treatment of customer information. Failure to comply with these obligations could subject us to liability, and to the extent that we need to alter our business model or practices to adapt to these obligations, we could incur additional expenses. Our reputation and relationships with subscriber s would be harmed if our subscriber data, particularly explosive charge data, were to be accessed by unauthorized persons. We maintain personal data regarding our subscribers, including names and, in many cases, mailing addresses. With respect to billing data, such as