Is Netflix at the Mercy of Big Cable?

Netflix (s NFLX) has grown tremendously over the last several years, due mainly to takeup of its online streaming service. But its reliance on others’ broadband networks for delivery of its streams, combined with its competition with the pay TV operators that run those networks, could put Netflix at the mercy of the very ISPs it needs to deliver its streams.

Netflix CEO Reed Hastings admits that the company competes with traditional pay TV providers. During yesterday’s investor call, when asked about how he saw Netflix stacking up against cable companies, he said there are three parts to cable service — three parts: voice, data and video.

“On the video side, we are mostly competitors except that we are at a very different price point with a very small fraction of their content. The analogy I use is ‘we’re a motorcycle and they’re a car.’ But on balance, we are competitive.”

On the other hand, Netflix can drive consumer demand for broadband services. “To data, we are a huge ally, drive a lot of data adoption, larger plans, and so we’re very aligned” [with cable providers],” Hastings said on the call.

But is that a good thing for cable companies? A report from deep packet inspection vendor Sandvine released today says that up to 20 percent of peak data traffic comes from Netflix. However, Sandvine says that traffic is heaviest in primetime, between 8:00 and 10:00 pm — you know, during the same hours when Netflix subscribers used to tune in to live broadcast TV.

Hastings was careful to say he believes Netflix is not seriously contributing to cord cutting, or leading consumers to ditch cable for its subscription video service. “We still see no evidence that our sub[scribers] cut cords at a greater rates than the general population,” Hasting said on the call. According to Netflix, not a lot of consumers are ready to turn their cars in for motorcycles — even if they are cheaper. (To learn more about cutting the cord, come to NewTeeVee Live on November 10 in San Francisco.)

Even so, the huge increase in data traffic that Netflix is driving, at the same time that it’s attracting eyeballs away from live TV, has to be troubling to cable companies. Broadband is not like video services, where pay TV providers can add-on value-added features like DVRs or boost rates through premium channel offerings; it’s mostly a commodity service with a flat rate and no real way for cable providers to differentiate. A dumb pipe is a dumb pipe is a dumb pipe, and until recently services like Netflix running over those pipes just meant that operators would have to upgrade their networks without getting any real benefit, whether it be from from higher subscription rates or increased customer loyalty.

But that’s starting to change, as some providers have begun offering tiered broadband plans to subscribers — and this is where the company’s streaming service is vulnerable to cable providers. Hastings even said so on the call, when asked if tiered broadband would hurt its business:

“We have some vulnerability depending on capped usage and what happens. Comcast (s CMCSA) has a cap, but it’s 250 gigabytes and so most users feel that they have an unlimited experience and it gives us plenty of room to deliver a high-def stream. On the other hand, AT&T (s T) Mobile data on an iPad is now capped at two gigabytes, so there’s not enough room to deliver hours and hours of high-def.”

Hastings said that there’s not a lot it can do from a compression standpoint, and that its only real recourse is to deliver a lower-quality stream — and a lower-quality experience — to users on constrained networks. But the more likely route is that it will continue to deliver the highest quality experience it can, and hope that tiered broadband doesn’t take hold. Or if it does, that broadband caps will be high enough that it can continue to stream what consumers will see as nearly unlimited amounts of video.

For more information on the future of streaming on connected devices, come see Samsung Director of Content Olivier Manuel at NewTeeVee Live on November 10 in San Francisco.

Image courtesy of Flickr user Scott Feldstein.

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