Is Netflix a Double-edged Sword?
Netflix is a U.S. based company that was founded in 1997, but you probably didn’t hear about it until at earliest 2000. Netflix began its DVD shipping service officially in 1999, and has been growing ever since. In the last 5 years, Netflix (NFLX) has increased an amazing 550%. The company marketed itself very appropriately, and was able to invade a market which Blockbuster had dominated for so many years. Now, Blockbuster seems like a thing of the past. Netflix has moved the world forward so fast that it’s hard to even remember a time when you had to go to the store to get a movie; but could the same thing that has made them so successful be their eventual downfall?
According to the article Will Netflix Destroy the Internet?, Netflix is in danger of growing too fast for its own good. Think about it this way, what would have happened if 5 years ago (when Netflix really began its amazing growth period) the U.S. Postal Service was overwhelmed by DVD mailings and moves didn’t arrive at your home until weeks or maybe even a month after you ordered them? What if they never arrived at all? Netflix stock would not just not be where it is today, but it may not even exist. This is exactly the same problem that the company faces today, except in digital form. The bandwidth demand of Netflix’s online streaming feature.
Netflix accounts for 20% of downstream Internet traffic during peak home Internet hours in North America (United States and Canada.) If you need something to clarify that number for you, that beat the shares of YouTube, iTunes, Hulu, and even the P2P network BitTorrent. BitTorrent accounts for 8% of the bandwidth during peak hours, but it wasn’t long ago that people thought that the movie industry would soon be suffering the same fate as the music industry. Who is going to spend the money to watch movies and TV shows instantly when they could watch pirated versions for free? Well it turns out the answer is a lot, since Netflix now dominates the share compared to BitTorrent. When you really think about it, the idea makes sense. The biggest excuse for global media pirates in the past was that there was no way to legally obtain their TV shows, movies and music that wasn’t expensive. Netflix has taken care of that problem and added the benefit of it being instant. Sure, not everything is available on the instant queue, but enough things are that make it worth it to spend the 8 dollars a month that Netflix chargers. The days of torrent’s and P2P networks may be dwindling, but they’re not gone yet.
I’m sure some of you don’t believe me, thinking how could P2P networks ever become obsolete? You use them for everything right? Sandvine is a networking equipment company that publishes annual reports on broadband usage since 2002. If you were to study the previous editions, you could see a pattern that develops beyond just Netflix’s dominance over BitTorrent, but shows a larger story about how our Internet use is changing. Slowly, the United States has shifted away from asynchronous (definition here) applications and more toward real time applications. To put it simply, we’ve shifted more to a download what we need right now and less stuff that we need later. Sandvine’s 2008 report which is a PDF file shows that every area of Internet traffic that saw an increase over the past year was dependant on real time access: online gaming, skype, Web Video, and things like this. P2P networks are asynchronous, so what that means is you spend a lot of time to get a movie or game that you’ll watch or play later. By 2009, P2P traffic had declined by 25%
I believe this will open a new market for someone to create, the next Sean Parker to create a new version of P2P sharing that could somehow include the instant feature that Netflix has? I don’t know if this is possible because even if they were able to implement this on a website, they wouldn’t’ be able to compete with the variety of electronics that Netflix currently works on.
These are just some of the more popular hardware that is Netflix ready: Apples iPad, iPhone, iPod Touch, Apple TV, Microsoft Xbox 360, Windows Phone 7, Nintendo Wii, Sony Blu-Ray, Tv’s, Google TV devices, and PS3. Of course the list of products is larger, if you’d like to see it you can click here.
Back to my point though, I don’t believe that there is any way that P2P will ever be able to re-grasp the popularity it once held on the internet.
Netflix isn’t concerned about P2P sites and their vitality. They care more about their own company and the direction that they’re heading in. It is estimated by 2014 that about 90% of the traffic on the Internet. This is where the title of my blog comes more into play. What could possibly go wrong with this business plan? How could Netflix fail with such a strong following and a great service? Well, there is one major problem that Netflix is facing: Will Netflix crash the Internet? It sounds crazy but it is possible. The biggest question is, will there be enough available bandwidth for Netflix to keep growing? In the time that Netflix hits around 20% of broadband use, it is only being used by UNDER 2% of its subscribers. If 2% of users account for 1/5 of the all traffic, what will happen when others decide to use their service during peak hours? There are really only a couple options of how everything could sort itself out.
Netfilx could be seen as maybe biting off more than they could chew. Not to say that everything they have done has been bad, because a company with that much success obviously knows what they’re doing. Netflix recently signed some good content deals to expand its content. Most recently they signed a five year, $1 billion deal between Netflix and the cable network Epix, which is a joint venture owned by Paramount Picture, Lions Gate Entertainment, and MGM. The fear of course though is that if Netflix were to grow too quickly, as I said earlier in the blog, and crash the Internet in Canada or the U.S., or even just regions of the U.S., customers may move away from the streaming video provider just as quickly as they jumped on board.
The second thing that could happen is a bit deeper of a topic, and something that I’m going to talk about in my next blog so I won’t talk about it too much here, only in the reference of Netflix. The idea is the concept of Net Neutrality. The issue boils down to whether providers of Internet access (fixed-line phone networks, cable networks, mobile phone networks) should have the right to prioritize – or even block – traffic for certain services on their network. Today I won’t talk about whether or not it’s right, just the implications for Netflix users.
I’ll try to make a simple point out of it. If you are someone who almost never uses your internet, don’t have any extra services that you run except your cable line, maybe you check your e-mail once a day and do a few searches when you have a question about something, you would benefit net neutrality not existing. If cable companies were able to throttle or control the internet usage and prices to certain users, you would certainly benefit and be charged less for your monthly bill.
However, if you’re someone who uses Netflix a lot, or plays online games on your computer, or gaming consol, or both, you’re in trouble. Basically, cable companies are hoping to be able to blatantly slow down the services that are taking away from their own bottom lines. So if you ordered that movie from Netflix, they may slow down your connection, so you get a lot of Buffering screens, which may incline you to use their service, which of course would be a lot faster. Not just that, but if you were using more bandwidth than the 90 year old woman next door, you’d be paying a lot more for it too instead of the standard monthly rate you pay now. This of course has two sides to it. The idea of cable companies being able to practice this is that they would be able to pay to keep up with the added bandwidth that may be needed with the more and more users of services like Netflix and whatever else may arise in the next few years.
I’ll end this blog with a quote from Bloomberg Businessweek’s article “Will Video Kill the Internet, Too,” : “Carriers such as AT&T and Comcast will see Internet revenues grow by 5 percent a year through 2020. Meanwhile, traffic will surge by 27 percent annually, and carriers will need to increase their investments by 20 percent a year to keep up with demand. By this math, the carrier’s business models break down in 2014, when the total investment needed exceeds revenue growth.”
