Losing Out Against Netflix? How About Some Network Discrimination?

Netflix (s NFLX) is harming Hollywood, and the studios have to team up with telcos to get priority treatment for the traffic of their own VOD offerings if they want to turn their fate around: That’s the gist of a new report published by the U.K.’s Telco 2.0 Initiative, which is spearheaded by telco consulting company STL partners. The report is titled “The Impact of Netflix: Can Telcos Help Hollywood?,” and it comes only days after Netflix posted record revenue and subscriber numbers in its first quarter earnings announcement, which the company attributed largely to its Watch Instantly VOD service.

Telco 2.0 isn’t alone in its critical view of the rental market. Studios have long worried that Netflix and low-end kiosk rental vendors like Redbox (s CSTR) could cannibalize their DVD sales. Netflix has been trying to calm those fears by agreeing to 28-day windows for newly released DVDs, and Redbox just yesterday agreed to a similar deal with Universal and 20th Century Fox. However, Telco 2.0 seems to believe that this is not enough, and instead wants to prioritize traffic of studio-owned VOD platforms at the ISP level.

Netflix reported this week that it added 1.7 million subscribers in the first quarter alone, which means that the company now has 14 million subscribers in total. It also said that 55 percent of its customers used its Watch Instantly streaming service, compared with 48 percent in the previous quarter. Telco 2.0 believes that this is bad news for Hollywood, because the revenue coming in from disc sales, licensing and revenue share agreements with Netflix can’t compete with DVD sales. From the report:

“The key here is that the revenue share is linked to the number of users not the amount of titles views. This is fundamentally different from the traditional DVD market and perhaps more akin to the supply of movies to TV which is less profitable for studios, if similar in revenues.”

So what can Hollwyood do? Exploit Netflix’s weaknesses, which are release windows, streaming quality and connectivity issues, if we believe Telco 2.0. That could be used to Holywood’s advantage if it partnered with telcos to run its own, competing VOD services offering consumers earlier access to movies. Again, from the report:

“(T)here is undoubtedly room to compete for studios that have the trump card in the content and a possible role for telcos to take the pain of developing and running effective and compelling online video services. This could be in form of Quality of Service (QoS) support for a superior delivery of similar services, or by enabling studios to deliver even more and greater value services….”

Quality of service has always been a hot button issue in the net neutrality debate. The term essentially describes the idea of prioritizing traffic for certain types of applications, like VoIP. Critics have argued that QoS can violate net neutrality if it leads to the discrimination of other applications, which seems to be exactly what Telco 2.0 has in mind. Its proposal would essentially prioritize traffic from studio-run VOD services, in turn leaving streaming services from Netflix and the rumored Redbox VOD offering in the slow lane.

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