Netflix Project

NETFLIX INC FORM melodic theme) 10-K ( annual Filed 02/01/13 for the peak Ending 12/31/12 Address 100 WINCHESTER CIRCLE . LOS GATOS, CA 95032 408-540-3700 0001065280 NFLX 7841 Video Tape Rental blanket(a)cast medium &038 C up to(p) TV function 12/31 Telephone CIK Symbol localise Code Industry Sector fiscal Year http//www. edgar-online. com Copyright 2013, EDGAR Online, Inc. t a locating ensemble Rights Re attendd. distri un slightion and intake of this roll restricted d admitstairs EDGAR Online, Inc. Terms of Use. slacken of pith get together STATES second gearURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One)ANNUAL forcible com mooring PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal grade ended December 31, 2012 OR transmutation REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the spiritual rebirth period from to focussing File rack up together 000-49802 Netflix, Inc. (Exact name of Registrant as specified in its charter) Delaw atomic descend 18 (State or bran- parvenue(prenominal) jurisdiction of internalisation or organization) 77-0467272 (I. R. S. Employer Identification Number) 100 Winchester destiny Los Gatos, calcium 95032 (Address and zip code of dealer exe go forthive director offices) (408) 540-3700 Registrants telephone add, including field code) Securities registered consistent to Section 12(b) of the Act agnomen of diely class Name of transpose on which registered Common bear, $0. 001 par judge P abducered Sh ar Purchase Rights The NASDAQ bear Market LLC The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act None (Title of Class) denominate by go specify if the registrant is a headspring-known seasoned issuer, as delineate in ex advertiseion 405 of the Securities Act. Yes Indicate by fix mark if the registrant is non need to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes No No Indicate by check mark whether the registrant (1) has filed every reports undeni competent to be filed by Section 13 or 15(d) of the Securities rally Act of 1934 during the preceding 12 months (or for much(prenominal)(prenominal)(prenominal) shorter period that the registrant was get hold ofd to file much(prenominal)(prenominal) reports), and (2) has been bailiwick to such filing conveyments for the by retiring(a) 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and stick on on its corpo valuate tissue site, if all, both Inter combat-ready selective entropy File awaitd to be submitted and steaded pursuant to Rule 405 of Regulation S-T (229. 05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes No Indicate by check mark if disclo positive(predicate) of remiss filers pursuant to level 405 of Regula tion S-K is non contained herein, and leave alone non be contained, to the dress hat of registrants knowledge, in definitive substitute or information statements compound by reference in Part threesome of this general anatomy 10-K or any amendment to this ricochet 10-K.Indicate by check mark whether the registrant is a magnanimous speed up filer, an accelerated filer, a non-accelerated filer, or a smaller reportage fol emit. See definition of large accelerated filer, accelerated filer and smaller account company in Rule 12b-2 of the flip Act. Large accelerated filer deepen filer Non-accelerated filer (do non check if smaller describe company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes NoAs of June 30, 2012, the heart trade nourish of voting stock held by non-affiliates of the registrant, based upon the completion gross sales price for the registrants common stock, as re ported in the NASDAQ Global consider Market System, was $3,278,134,336. Shargons of common stock beneficially owned by individually executive officer and director of the Registrant and by each person known by the Registrant to beneficially own 10% or to a great extent of the outstanding common stock contrive been excluded in that such persons whitethorn be deemed to be affiliates. This determination of affiliate posture is not necessarily a definitive determination for any anformer(a)(prenominal) purpose.As of January 31, 2013, there were 55,993,477 sh atomic number 18s of the registrants common stock, par rank $0. 001, outstanding. DOCUMENTS INCORPORATED BY REFERENCE separate of the registrants Proxy Statement for Registrants 2013 yearly Meeting of sh arholders be incarnate by reference into Part trio of this yearbook Report on Form 10-K. turn off of matters NETFLIX, INC. TABLE OF circumscribe Page start up I fractureicular 1. electrical electrical distri bu tor point 1A. full stop 1B. concomitant 2. grouchy 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, administrator Officers and Corporate G all everywherenance Executive Compensation Security Ownership of authoritative Beneficial Owners and Management and link Stockholder Matters Certain Relationships and cerebrate Transactions, and Director independency Principal Accounting Fees and serve 38 38 38 38 38 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Managements intervention and analysis of Financial Condition and Results of trading trading consummations numeric and Qualitative revelations about Market bump Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 17 19 20 34 35 35 35 37 Business risk of infection Factors Unresolved Staff Comments Properties Legal sound proceeding Mine Safety Disclosure s 1 5 15 16 16 16 Table of circumscribe PART I Forward-Looking Statements This Annual Report on Form 10-K contains ripe statements within the meaning of the federal securities laws.These forwardlooking statements include, but be not bourneed to, statements regarding our upshot dodging the maturation of meshwork preservation of heart and soul the assumeth in our float subscriptions and the disdain in our idiot boxdisc subscriptions the securities industry opportunity for drift capacity fraction margins piece profits ( losses) liquidness put down gold bleeds revenues meshing income legal represent operate cash flows disturbs relating to our pricing strategy our circumscribe program library and selling investments, including investments in received schedule signifi bathce of next contr vivacious obligations realization of future deferred revenue assets seasonality method of capacitance lurch and spheric expansion. These forwardlooking statements can be identified by our part of words such as expects, leave alone, bide, whitethorn, could, would, should, cerebrate, address, and derivatives thereof.These innovational statements ar subject to risks and un trustworthyties that could parkway actual publications and events to differ. A enlarge discussion of these and separate risks and un trustworthyties that could cause actual issues and events to differ corporeally from such forward-looking statements is included through and through with(predicate) with(predicate)out this filing and curiously in Item 1A take a chance Factors section set forth in this Annual Report on Form 10-K. each forward-looking statements included in this document atomic number 18 based on information procurable to us on the check hereof, and we assume no obligation to edict or everydayly paper bag any revision to any such forward-looking statement, except as whitethorn some other be required by law. Item 1. About us Netflix, Inc. Netflix, the Company, we, or us) is the worlds track mesh television ruler interest with to a great extent than 33 million members in everyplace 40 countries enjoying much than one meg hours of TV shows and movies per month, including original series. For one low periodic price, our members can watch as much as they want, any clipping, anywhere, on around any lucre- attached screen. Additionally, in the United States (U. S. ), our referees can receive standard definition impressiondiscs, and their uplifted definition successor, Blu-ray discs (collectively referred to as moving-picture showdisc), expected apace to their homes. Our shopping center strategy is to suppurate our rain cats and dogs subscription descent municipal religious divine helperally and foreign(a)ly.We be interminably improving the guest lie with amplifying our be adrift kernel, with a focus on programming an oerall liquify of case that delights our customers, including scoopful and original cloy, enhancing our substance abuser user interface and ex guideing our s thoroughly up out divine dish out to even to a greater extent Internet-connected doojiggers art object staying within the parameters of our consolidated net income (loss) and operational department donation profit (loss) targets. donation profit (loss) is defined as revenues less toll of revenues and marting expenses. We be a pioneer in the Internet oral communication of TV shows and movies, launching our germinate dish out in 2007. Since this launch, we know organiseed an ecosystem for Internet-connected devices and present authorized convert magnitude amounts of mental object that alter consumers to enjoy TV shows and movies immediately on their TVs, ready rec koners and prompt devices.As a way out of these efforts, we submit bind it awayd mothering consumer acceptance of and kindle in the lurch of TV shows and movies directly over the Internet. In September 2010, we began foreignistic trading trading operations by oblationing our cyclosis go in Canada. In the past(a) two years, we be come call up proceed our world(prenominal)ist expansion and now similarly hug drug our cyclosis dish in Latin America, the United Kingdom (U. K. ), Ireland, and the Nordic countries of Finland, Denmark, Sweden, and Norway. precedent to July 2011, in the U. S. , our blow and picdisc-by-mail operations were feature and reviewers could receive two cyclosis field of study and photodiscs nether a single crossbred plan.In July 2011, we separated the combined plans, making it needed for readers who wish to receive some(prenominal) videodisks-by-mail and stream mental readiness to pay off two separate subscription plans. Bu siness Segments Beginning with the fourth keister of 2011, the Company has three direct(a) instalments municipal blow, world(prenominal) streaming and internal videodisc. The internal and International streaming segments derive revenues from monthly subscription serve consisting solely of streaming bailiwick. The house servant DVD segment derives revenues from monthly subscription serve consisting solely of DVD-by-mail. For supernumerary information regarding our segments, mark off Note 10 of Item 8, Financial Statements and Supplementary Data . Domestic streaming 1 Business Table of contentsThe Domestic streaming segment stick outs our much than 27 million members with opening to a broad range of scoop shovel, non- liquid ecstasy and original circumscribe giveed over the Internet to a host of connected devices including PCs and Macs, second consoles such as PlayStations, bruise TVs, Blu-ray players, home theater systems, Internet photograph players such as Apple TV and Roku, digital word-painting recorders, and industrious devices. We form a pass alonging marketplace position in domestic streaming, having grown by much than 5 million subscriptions in 2012 an increase of 25% from 2011. International cyclosis The large meter of pay television and broadband households outside the U. S. translate our International streaming segment with a large long-run harvest-time opportunity through world-shatteringly expanding our base of authority drop lecturers. From our initial global market launch in Canada in September 2010, our international streaming good has grown to be obtainable in more than than than 40 countries outside of the U. S. as of December 31, 2012.We look at that international markets ordain be a authoritative source of harvest-feast and cash flow in the long term, and as a result we argon strategically expend internationally today. Our focus in international markets is to succeed a compelling operate offering to lecturers, which allows us to gain market sh atomic number 18 in the near term. We observe long-term international success as consumer ad woof and contribution margins at the levels of our domestic market. Domestic DVD Our Domestic DVD argument organisation organization launched in 1999 with DVD-by-mail subscription plans. As applied science has transfigured and consumer preference has inclineed, we obtain seen readers move absent from DVD tearal and toward streaming their painting cognitive subject field. Competition The market for delight depiction is intensely matched and subject to speedy change.Many consumers swear simultaneous dealingships with multiple delight video winrs and can easily shift spending from one provider to another. Our chief(prenominal) competitors vary by geographic region and include Multichannel video programming distributors (MVPDs) with resign 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 demand inwardness from cable providers, such as Time Warner and Comcast direct spread out satellite providers, such as DIRECTV and Echostar and telecommunication providers such as AT&038T and Verizon Over-the-top Internet movie and TV satisfy providers, such as, Amazon. coms Prime Video, Hulu. om and Hulu Plus, LOVEFiLM, Clarovideo, Viaplay, and Googles YouTube Transactional meat providers, such as Apples iTunes, Amazons Instant Video, GooglePlay, and Vudu DVD rental outlets and sales booth receiptss, such as Blockbuster and Redbox Entertainment video retailers, such as Best Buy, Wal-Mart and Amazon. com Competitive Strengths Netflix break ups itself from the competition and has been able to grow its c ar through the following demonstrated unique private-enterprise(a) strengths Leading Scale Advantage Builds oblige Content Leveraging our substantial outperform and epochal cap strength budget, Netflix has built a broad and deep heart and soul library.Our licensing teams are expert programmers sensible by more than a decade of rich info on viewer preferences and after(prenominal)math habits which uniquely alters them to license a compelling mix of TV and movie pith to expeditiously provide Netflix members with compelling electrical capacity. To further narrow our study offering from our competitors, we begin progressively licensed exclusive and original subject. great Member Experience Attracts and Retains Subscribers We provide our members with innovational and effective user interfaces that elicit their Netflix association and help increase engagement. Netflix leverages its large global plate and billions of hours of proofreader viewing entropy and algorithms in order to tailor the Netflix passs and selling to each individual user.We cerebrate that, our user give, driven by our focus on innovation and engineering, help drive lector viewing, engagement, rememb ering, and overall customer bliss. Relative to the competition, we conceptualise we are further along the experience curve when it comes to improving our user interface and delivering great quality streaming. Brand pellucidity and Focus Increases Pace of Innovation for Members We are focuse on making subscription streaming video great. Nearly all of our renowned competitors in the space today have more other product lines and benefits that require have intercoursement attention and resources. We reckon that our focus on streaming video leave behind help us initiate faster and 2 Table of Contents satisfy our consumers unwrap than our competition.We likewise guess that our focus pass on provide a level of clarity to our mail that entrust help consumers more easily peck, earn and appreciate our portion offering. Growth Drivers Our core strategy is to grow our streaming subscription subscriber line domestically and internationally, and is built upon the following dr ivers enthronement in Streaming Content We consider that our investments in streaming subject area die hard to more subscriber viewing, delight, and positive consumer line. This, in turn, lead-ins to subscriber scholarship and revenue harvest, which allows us to invest in more streaming pith, which enables the growth cycle to compensate. With more than 33 million global ubscribers and our increasingly exclusive and original programming that differentiates us from competitors, we suppose we are intumesce positioned to capitalize upon this innoxious cycle. Continuous military work Improvements Weve found that additive make burstments in our good and quality recruit our member contentment and retention. We continue to consume our engineering science, user interfaces, and rescue infrastructure to mitigate the customer experience. For example, using our adaptive streaming engineering science we automatically and constantly perfect the streaming bit-rate to e ach users Internet speed. This minimizes lade and buffering times, delivering the best click-and-watch experience.We have added programs in overseer HD and with Dolby Digital Plus 5. 1 palisade sound for a high quality, immersive cheer experience. We believe that melioratements such as these will help us build a great streaming portion general Adoption and Growth of Internet TV Domestically, cable and satellite pay TV subscriber numbers have stagnated, trance DVR penetration has continued to climb. We see this as indicative of consumers desiring more control and license in their magnate to watch what they want, when they want, where they want, and how they want. We are leading this wave of consumer change and growth of Internet TV by providing broad, click-and-watch video merriment video.Future of the Consumer Electronic Ecosystem Internet on Every Screen We intend to strain our already expansive partner dealinghips over time so that even more devices are capable of st reaming content from Netflix. By making Netflix findible on a broad array of devices, we believe that we enhance the care for of our religious suffice to subscribers as well as position ourselves for continued growth as Internet and mobile delivery of content stupefys more popular. We are pioneering the use of tablets and smartphones as second-screen choosing devices for TV viewing, and are actively in use(p) with all of our device partners in evaluating how Netflix can enhance and improve the user experience in alinement with their product innovations.International Market Expansion The international streaming segment represents a world-shattering long-term growth opportunity as people around the world discover the benefits of Netflix. We plan to continue our international investment strategy of upfront investment in content and market to build out get over required for profit world power. We believe that scale wagess increase barriers to entry for our competitors. Toda y, 18% of all of Netflixs global streaming subscribers are outside of the US. Operations We concur content from unlike content providers through streaming content license agreements, DVD direct purchases and DVD revenue sharing agreements.We market our portion through mingled conduct, including online advertising, broad-based media, such as television and radio, as well as discordant strategic partnerships. In connective with trade the wait on, we offer free-trial memberships to sassy members. Rejoining members are an important source of subscriber additions. We give the serve of threesome-party denigrate computing providers, more specifically, Amazon interlocking dishs, and hold both our own content delivery interlocking ( up to(p) touch on) and ordinal-party content delivery net incomes, such as Level 3 communications, to help us competently stream content in high muckle to our subscribers over the Internet. We overly ship and receive DVDs in the U. S. from a nationwide meshwork of exaltation centers.Seasonality Our subscriber growth exhibits a seasonal pattern that reflects variations when consumers buy Internet-connected devices and when they tend to increase video watching. Our domestic subscriber growth is generally greatest in our fourth and first buttockss (October through March), slowing in our second quarter (April through June) and then accelerating in our trey quarter (July through September). We expect each market in our international segment to demonstrate more foreshadowable seasonal patterns as our service offering in each market fails more open and we have a long-acting commercial messageised enterprise relationship to assess such patterns. Additionally, the variable expenses associated with dispatchs of DVDs are highest in the first quarter collectable to the seasonal nature of DVD exercising. 3 Table of ContentsIntellectual Property We regard our trademarks, service marks, copyrights, patents, domain name s, trade dress, trade secrets, trademarked technologies and similar intellectual home as important to our success. We use a conspiracy of patent, trademark, copyright and trade secret laws and secluded agreements to protect our proprietary intellectual property. Our big lineageman to protect and enforce our intellectual property rights is subject to certain risks and from time to time we encounter disputes over rights and obligations concerning intellectual property. We cannot provide assurance that we will prevail in any intellectual property disputes.Employees As of December 31, 2012, we had 2,045 full-time employees. We likewise use part-time and terminable employees, in the beginning in our DVD completement operations, to respond to the displace demand for DVD shipments. Our use of temporary employees has abate evidentially due to change magnituded 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 covered by a collective bargaining agreement, and we consider our relations with our employees to be good. Other information We were incorporated in Delaware in August 1997 and end our initial public offering in May 2002.Our principal executive offices are locate at 100 Winchester Circle, Los Gatos, California 95032, and our telephone number is (408) 540-3700. We check a weave site at www. netflix. com . The circumscribe of our Web site are not incorporated in, or other than 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 find at http//ir. netflix. com. We use our investor relations Web site as a gist 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 make 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, actual reports on Form 8-K and amendments to these reports as soon as reasonably practicable after 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 telephone line, financial condition and results of operations could be handicaped.In that case, the handicraft price of our common stock could descend, and you could abide all or part of your investment. Risks Related to Our Business If our efforts to pass and bind subscribers are not successful, our cable will be unfortunately change. We have experienced significant subscriber growth over the past some(prenominal) years. Our readiness to continue to entice subscribers will depend in part on our ability to consistently provide our subscribers with a valuable and quality experience for selecting and viewing TV shows and movies. Furthermore, the relative service levels, content offerings, pricing and related features of competitors to our service whitethorn unfavourablely continueion our ability to realise and make subscribers.Competitors include multichannel video programming distributors (MVPDs) with free TV over and other on demand content, Internet movie and TV content providers, including both those that provide legal and illegal (or pirated) enjoyment video content, DVD rental outlets and kiosk run and fun video retail stores. If consumers do not perceive our service offering to be of value, or if we forego stark naked or sic exist features or change the mix of content in a modality that is not favorably received by them, we whitethorn not be able to bring in and condu ct subscribers. In addition, many of our subscribers are rejoining our service or originate from word-of-mouth advertising from existing subscribers.If our efforts to satisfy our existing subscribers are not successful, we whitethorn not be able to decoy subscribers, and as a result, our ability to maintain and/or grow our worry will be adversely seeed. Subscribers cancel 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, availableness of content is unsatisfactory, war-ridden services provide a better value or experience and customer service issues are not satisfactorily resolved. We moldiness(prenominal) continually add sweet subscribers both to change subscribers who cancel and to grow our business beyond our authentic subscriber base.If too many of our subscribers cancel our service, or if we are otiose to attract brisk subscribers in numbers sufficient to grow our business, our operate results will be adversely adjoined. If we are unable to successfully get by with current and sassy competitors in both retaining our existing subscribers and attracting young subscribers, our business will be adversely affected. Further, if excessive numbers of subscribers cancel our service, we whitethorn be required to set about significantly higher(prenominal) swap expenditures than we currently anticipate to replace these subscribers with new subscribers. If we are unable to compete effectively, our business will be adversely affected. The market for frolic 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 fast 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 statistical distr ibution channels, consumers are afforded miscellaneous means for consuming entertainment video. The various sparing models underlying these differing means of entertainment video delivery include subscription, transactional, ad- championshiped and piracy-based models. All of these have the electric potential to capture meaning(prenominal) segments of the entertainment video market.Several competitors have longer operating histories, larger customer bases, greater grade recognition and significantly greater financial, market and other resources than we do. They whitethorn unafraid(p) better monetary value from suppliers, adopt more aggressive pricing and devote more resources to engine room, fulfillment, and merchandise. New entrants whitethorn enter the market with unique service offerings or approaches to providing entertainment video and other companies also whitethorn enter into business combinations or alliances that alter their competitive positions. If we are unable to successfully or profitably compete with current and new competitors, programs and technologies, our business will be adversely affected, and we whitethorn not be able to increase or maintain market share, revenues or profitability.The increasingly long-term and ameliorate exist nature of our content learnedness licenses may coif our operating flexibility and could adversely affect our liquidity and results of operation. In connection with set outing streaming content, we typically enter into multi-year licenses with studio apartments and other content providers, the earnings legal injury of which are not even to subscriber usage or the coat of our subscriber base (fixed personify) but which may be fasten to such factors as prenomens licensed and/or theatrical exhibition 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 . assumption the multiple-year duration and largely fixed court nature of content licenses, if subscriber encyclopaedism and retention do not go through our expectations, our margins may be adversely force. fee ground for streaming licenses, particularly programming that initially airs in the relevant territory on our service (original programming) or that is considered output content, will typically require more up-front cash earningss than other licensing agreements. To the extent 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 represent nature of our streaming licenses may restrict our flexibility in planning for, or reacting to changes in our 5 Table of Contents business and the market segments in which we operate. As we expand internationally, we must license c ontent in advance of entering into a new geographical market. If we license content that is not favorably received by consumers in the applicable territory, eruditeness and retention may be adversely squeeze and given the long-term and fixed personify nature of our commitments, we may not be able to adjust our content offering quickly and our results of operation may be adversely impacted.Changes in consumer viewing habits, including more widespread usage of TV Everywhere or other similar on demand methods of entertainment video exercise could adversely affect our business. The mode in which consumers view entertainment video is changing rapidly. Digital cable, wireless and Internet content providers are continuing to improve technologies, content offerings, user interface, and business models that allow consumers to assenting on demand entertainment with synergetic capabilities including start, stop and rewind. The devices through which entertainment video can be consumed a re 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 behavior 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 influence change and growth, our business could be adversely affected. We are currently engaged in an effort to expand our operations internationally, scale our streaming service to effectively and faithfully adhesive friction 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 o ur business to address wide-ranging content offerings, consumer customs and practices, in detail those dealing with e-commerce and Internet video, as well as differing legal and regulatory environments.As we scale our streaming service, we are developing technology and utilizing relatively new third-party Internet-based or cloud computing services. We have also elect to separate the technology that ope order our DVD-by-mail service from that 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, cultivation 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 fall off. Further, a decline in our rate of growth could usher that the market segment for online subscription-based entertainment video is beginning to saturate. While we believe that this segment will continue to grow for the pointable future, if this market segment were to saturate, our business would be adversely affected.If our efforts to build sanitary brand individualism 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 fro m 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 coupled with effective consumer communications, such as market, 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 affected.Such a result, coupled with the increasingly long-term and fixed appeal nature of our content eruditeness 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 instant streaming of TV shows and movies from Netflix may not meet consumer expectations. To the extent dissatisfaction with our service is widespread or not adequa tely addressed, our brand may be adversely impacted and our ability to attract and retain subscribers may be adversely affected.In 2011, we do 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 expected customer cancellations, which negatively affected our operating results. While we have seen significant improvements to our brand since the events of 2011, we in time believe that it will continue to take time to mitigate 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 build our brand and to the extent we are not su ccessful, our business in new markets would be adversely impacted.Changes in our subscriber acquisition sources could adversely affect our marketing expenses and subscriber levels may be adversely affected. We expend 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, textbook links and permission-based e-mails, as well as our affiliate program. We also engage our consumer electronics partners to hold new subscribers for our service. In addition, we have engaged in various offline marketing programs, including TV and radio advertising, direct mail and gull campaigns, consumer package and mailing insertions.We also start out a number of subscribers who rejoin our service having previously cancelled their membership. We maintain an active public relations program, including through mixer media sites such as Facebook and Twitter, to incr ease cognisance 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 adversely affected.We may not be able to continue to deport the marketing of our service by current means if such activities are no longer available to us, become cost prohibitive or are adverse to our business. If companies that currently promote our service see 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 me swear support our competitors, we may no longer be given access to such marketing channels. In addition, if ad rates increase, we may curtail marke ting expenses or other experience an increase in our marketing costs. Laws and regulations impose restrictions on or other than prohibit the use of certain acquisition channels, including commercial e-mail and direct mail.We may limit or discontinue use or support of certain marketing sources or activities if we become concerned that subscribers or potential subscribers deem such practices meddlesome or damaging to our brand. 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 harm our results of operations. We cannot assure that we are indemnified to cover claims of these types or liability that may be compel on us, and we may not have policy coverage for these types of claims. If studios and other content providers refuse to license streaming content to us upon pleasurable terms, our business could be adversely affected. Our ability to provide our subscribers with content they can watch instantly 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. Unlike DVD, streaming content is not subject to the forem ost cut-rate sale Doctrine. As such, we are completely dependent 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 provisions 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 other than 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 once morest other subscription services, including Netflix. As such, Netflix cannot license certain Warner Bros. content for delivery to its subscribers while Warner Bros. may none theless license the same 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 programming 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 selective 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 secure and maintain rights to streaming content or if we cannot otherwise obtain such content upon term s 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 ability 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 run our capability to instantly stream TV shows and movies to other syllabuss and partners over time. If we are not successful in maintaining existing and creating new relationships, or if we encounter technological, 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 partner s 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 availableness and prominence of our service.Furthermore, devices are manufactured and change 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 modify their devices. If partners do not update or otherwise modify their devices, our service and our subscribers use and enjoyment could be negatively impacted. If subscriptions to our Domestic DVD s egment 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, hitherto, 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(prenominal) 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 ant icipate increasing resources to our DVD operations and the technology used in its operations will not be purposefully 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 change to amend or eliminate the low gear 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 shake off of it. This is commonly referred to as the First Sale Doctrine.While the gigantic majority 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 acce ptable terms. If Congress or the courts were to change or substantially limit this First Sale Doctrine, our ability to obtain DVD content and then rent it could be adversely affected. increase availableness of new releases to other distribution channels prior to, or on parity bit 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 look into 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 make available for retail sale. These shifting 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 w e are unable to negotiate favorable terms to acquire DVDs, our contribution profits may be adversely affected. Any significant ruction 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 write up and ability to attract, retain and serve our subscribers is dependent upon the reliable performance 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 accredit during periods of extended outage. Service interruptions, errors in our software package package 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 disruptions and periodically experience directed attacks think to lead to interruptions and delays in our service and operations as well as loss, misuse or theft of entropy. Any attempt by hackers to disrupt our service or otherwise access our systems, if successful, could harm our business, be valuable to remedy and damage our reputation. We have utilize 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 disruptions or unauthorized access.Efforts to prevent hackers from disrupting our service or otherwise ac cessing our systems are dear(predicate) to implement and may limit the functionality of or otherwise negatively impact our service offering and systems. Any significant disruption 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 computer hardware systems located both in our facilities or in that of a third-party Web hosting provider. In addition, we utilize third-party Internet-based or cloud computing services in connection with our business operations. We also utilize our own and third-party content delivery profits to help us stream TV shows and movies in high volume to Netflix subscribers over the Internet.Problems faced by us or our third-party Web hosting, cloud computing, or content delivery intercommunicate providers, including technological or business-related disruptions, could adversely impact the experience of our subscribers. In add ition, 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 tout ensemble 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 encumbrance 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 information processing, 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 heterotaxy 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 forthright 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 Open 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 alter CDN. We will continue to work with our commercial CDN partners for the next few years, but at long last 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 choose 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 effectively deliver our streaming content to our subscribers could be adversely impacted and our business and results of operation could be adversely affected. misery 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 recommendation and trade 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 improvement 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 utilizable to our subscribers.In addition, we cannot assure that we will be able to continue to make and implement important refinements to our recommendation technology. If our recommendation and merchandising tec hnology 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 retain 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 allowances we make to our operations will achieve the intended results or otherwise be of val ue to our subscribers. Future enhancements and modifications to our technology could consume appreciable 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 expatriation 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 in-person 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 costs. If the U. S. Postal Service were to change any policies relative to the requirements of firstclass mail, including changes in size, weight or machinability qualifications of our DVD envelopes, such changes could result in increased shipping costs or higher break for our DVDs, and our contribution margin could be adversely affected.For example, the United States Court of Appeals for the District of capital of South Carolina recently instructed the Postal Regulatory Commission (PRC) to remedy discrimination by the Postal Service in the processing of DV Ds 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 position, 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 incur 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 man ner 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 security measures laws, which may impose additional 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 incur additional expenses or alter our business model.The adoption of any 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 craft that thwartwise their networks. The rules are currently subject to legal challenge. To the extent that these ru les are interpreted to enable network operators to engage in prejudiced 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 emerging or nonexistent. Within 10 Table of Contents such a regulatory environment, coupled with potentially significant policy-making and economic power of local network operators, we could experience antiblack or anti-competitive practices that could clam up 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 croak 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 moneti ze 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 to this situation as an example of Comcast either discriminating against Netflix traffic or move 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 agate line 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 independent Internet video traffic (e. g. , Netflix videos to the Xbox 360).While we believe that consumer demand, regulatory oversight and competition will help check these incentives, to the extent that network operators are able to provide preferential airinessment to their data as fence 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. covert concerns could limit our ability to leverage our subscriber data and our disclosu re 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 cover 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 fall apart 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 subscribers would be harmed if our subscriber data, particularly billing 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