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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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13 Responses to “Is Netflix at the Mercy of Big Cable?”

  1. Bourgoise Pig

    As there are only 2-3 channels that I might like out of hundreds, I refuse to pay $100+ per month for cable/satellite tv. Therefore, I want a fast internet speed so that I can watch streaming Netflix movies and tv shows.

    What if I live in an area where I am stuck with Frontier as the only available dsl provider, and nothing more than 1.5 Mps max download speed is available. (Frontier also has crappy customer service).

    What if the satellite providers average 3 Mbs download speeds and have a “Daily Download Allowance” (google it) that make it impossible to watch movies online.

    What if Comcast is the only cable provider in my area. If I subscribe to the Comcast Internet-only package, I am subject to the 250 GB a month download limit. How many video podcasts and how many online movies will I be able to watch.

    Netflix told me today that a standard movie is 1 Gb/hour, while an HD movie is 2 Gb an hour. How much additional bandwidth is being used just by having my MacBook sitting on the coffee table and running a 2 hour podcast wirelessly? How much is being used while it is constantly “on” and connected to the wireless network?

    Therefore, capped broadband threatens freedom of speech. Where are the lawyers. Where is the ACLU when you need them?

    • PeteyNice

      AT&T’s iPad data plan was unlimited. They switched it to the almost useless 2GB plan back in June. If you already had an unlimited plan you can keep it but new subscribers are out of luck.

  2. Tony2Toes

    I switched to AT&T Uverse DSL about a month ago from regular old AT&T DSL. Now, Netflix on demand hardly works at all, I mean really, hardly worth watching, hangs constantly, bringing up my ‘On Demand’ list takes 30-40 seconds/page.

    With my old standard DSL, I had about 2.5Kb (according to dslreports – AT&T sold it as 3K).

    With AT&T Uverse, I bought 12K and get about 10K according to dslreports, consistently about 10K – even when I ran a speed test only a few minutes ago – and my Tivo has now been sitting with it’s version of the hourglass (Please Wait…:)

  3. Netflix is walking a tight-rope to be sure. I can’t help but feel that a war is brewing though. Something that could help is Netflix giving the customer the option of what quality of video they want to watch. I know it sort of flies in the face of their “highest quality experience” mantra but their has to be compromise here. I’m am on comcast and in my house Netflix takes the largest chunk of my bandwidth, being able to better manage that would help me, the customer.

  4. interprises

    At some point in the near future… five years or so. Netflix, or a company like Netflix (GoogleTV?) will partner with a “bandwidth only” provider. They’ll make major deals with the networks, and they’ll strengthen their partnerships with the movie houses. At that point they will cease to depend on companies like TW, Comcast, AT&T, etc. No throttling concerns. In fact, it would be like Netflix on steroids. True “Content On Demand.” Audio, Video, Whatever.

    • I agree, but add two points.

      First, eventually Cable operators will abandon conventional CATV service because the content providers keep demanding more money in terms of carriage fees. The operators will reason correctly that their ISP service does not have to bear that cost burden and can be much more profitable. IMO, Verizon FiOS ought to make this move now…but they’re not listening to me.

      Second, in many markets TV Band White Spaces can provide competitive ISP access at broadband speeds thereby creating a new ISP competitor for the Cable and Telco companies.

    • None of the Net Neutrality considerations would prevent tiered broadband (different levels of caps with different rates). The NN proposals would only prevent an ISP from favoring their own or partner traffic over others.