It’s Good to be Netflix

This isn’t really the best use of public relations I’ve seen lately, but it’s an interesting example of changing the subject. Netflix announced quarterly earnings yesterday, and the story is quite clear, Netflix is killing. After adding 7.7 million new subscribers on 2010, they’ve got more than 20 million customers and the pace of new subs is accelerating. Their distribution costs are falling rapidly, as more people switch from DVD rental that costs the company a dollar a shot to streaming, which costs a cent and a half per Dan Rayburn’s latest estimate. A number of entertainment devices will be sporting a “Netflix button” on their remotes, which makes Netflix viewing easier and more standard. Their sweetheart content deal with Starz has another year to run, so the sky is clear, the birds are chirping, and the NFLX share price rose 15% today:

Netflix shares today jumped more than 15 percent to hit $211.30 after closing at $183.03 yesterday following its quarterly earnings report. Wall Street is obviously thrilled with the 3 million new subscribers that Netflix reported adding in the quarter ending December 31. The total number of Netflix subscribers stands now at more than 20 million.

Netflix has been a Wall Street favorite for while now, trading at 80 times earnings and quadrupling in price in 2010.

This kind of performance doesn’t last forever, of course. Netflix is still a fairly small company with less than 10% penetration of the US TV market, and virtually no international presence so far. By most accounts, the dark clouds on the company’s horizon are competition and licensing. Netflix is a market pioneer, which makes them a candidate for arrows in the back as larger media companies – especially those who actually create content – decide to cut out the middleman and get into the game through Hulu Plus and similar systems. Netlix has players everywhere, but they use Microsoft’s Silverlight technology in a particularly unimaginative way, so they can be supplemented or displaced by other solutions. Unlike Apple, they don’t have a fan base of devices the control directly, nor do their own their distribution network. In essence, this is a company that distributes other people’s content to other people’s devices using other people’s technology, so they’re vulnerable now that they’ve established a market for streaming video on demand.

One way to keep people from worrying about what competition might do to the Netflix share price is to start a conversation on the side, to essentially change the subject. That’s what Netflix did today by publishing a ranking of ISP performance from their perspective:

As we use a number of CDNs, and our clients can adapt to changing network conditions by selecting the network path that’s currently giving them the best throughput, Netflix streaming performance ends up being an interesting way to measure sustained throughput available from a given ISP over time, and therefore the quality of Netflix streaming that ISP is providing to our subscribers. Obviously, this can vary by network technology (e.g. DSL, Cable), region, etc., but it’s a great high-level view of Netflix performance across a large number of individual streaming sessions.

This isn’t something you do if you’re trying to win friends and influence people; I’m also not sure how accurate it is. They’ve got Verizon ranked right in the middle, below most of the cable companies and ahead of Qwest and AT&T; that’s an unlikely ranking for the company that has more high-speed fiber to the home than anyone else. And oddly, their nemesis Comcast is in second place, only slightly behind Charter Cable and slightly above Time Warner Cable. The ranking indicates that nobody averages as high as the maximum quality Netflix format, which is 4.8 Mbps per their story. They fail to mention that very little of their content is available in that format, of course, which leads the reader to the mistaken conclusion that ISPs are throttling their content.

If these mixed messages (a surging share price and a shrill complaint about ISPs) make any sense, it’s to set up the next round of contract discussions in the context of Netflix as the innovation darling threatened by the dark lords of monopoly capitalism. There’s an audience out there that regards ISPs and Big Content as sharing common interests, so positioning itself as a victim of ISP misbehavior may just help Netflix get some regulator assistance with its real problem, the cost of content.

This is a nice game of misdirection if they get away with it, but it’s ethically dubious.

Netflix is objectively not a victim of the ISPs or anyone else, according to their own subscriber count increase, share price increase, and reduction in overhead cost of content delivery. They’re paying a penny and a half to deliver content all the way from servers in colo centers to Ethernet switches a few feet away, and are complaining that ISPs want compensation for moving it across 4 million miles of cable to their subscribers’ homes. Netflix says that it costs ISPs less than penny a gigabyte to take the Netflix content from the NFL citiies where the colo’s are to customer premises, but that’s a dubious calculation given the costs of maintenance on cable plant, let alone the cost of 20% more capacity across 4 million route miles of ISP networks.

Netflix will have to deal with challenges to keep their subscriber numbers growing, but ISP surcharges aren’t high on the list. Two years ago, Rayburn estimated Netflix’ costs of distribution at a nickel a show, and they’ve fallen 75% since then. The ISP whining is misdirection.

  • George Ou

    That nickel covers all of their IT costs. I ran some estimates for a 1 GB streaming movie today and found some huge problems with Netflix’s claims.

    I wrote:

    Hastings also seems to be confusing his bits or byte talking points or he’s trying to mislead us when he says:

    “Moreover, at $1 per gigabyte over wired networks, it would be grossly overpriced.”

    There’s no way broadband providers charge $1 per gigabyte for paid peering. Paid peering is always cheaper than generic Internet transit service and at the quantities that Netflix buys, it is probably around $1 per Mbps/month which works out to $1 per 324 GB. Each of Netflix’s movies is a little over 1 GB so it means that $1 will deliver ~300 movies over broadband and even the heaviest user will have a hard time reaching 300 movies a month on Netflix. By contrast, Netflix spends $1 on postage per DVD mailed.

    So even if we’re talking 3.24 GB per HD movie stream, the paid peering bandwidth only costs 1 cent per HD movie. That’s compared to 100 cents for DVD round trip postage. Netflix is complaining about a 1 cent charge.

  • Richard Bennett

    The nickel per movie is two years old, Rayburn says its more like a penny and a half today, as the story said. In any event, Netflix’ growth in profitability isn’t challenged by broadband costs, it’s about the content.

    When Hastings talks about a dollar a gig, he’s referring to ISP overage charges to their customers, not to peering charges.

  • George Ou

    1.5 cents per movie sounds about right given the typical large volume paid peering rates. It’s believable how peering might cost 1 cent per movie.

    No US wired provider, not even Time Warner has very small usage caps. Even their proposed rates were for tiers with very small upfront charges. The proposed fees GB over even had a maximum cap and a one-month freebie warning so they weren’t that outrageous. But even that was cancelled so we still have a system where most users subsidize the heavy users. The proposed rates with the smaller caps for Time Warner were very cheap compared to typical broadband rates. Most consumers would have saved a lot of money without changing their usage patterns, but that does make it less likely they’ll try services like Netflix.

  • […] This post was mentioned on Twitter by Stacey Coffey, High Tech Forum. High Tech Forum said: Richard Bennett on Netflix in High Tech Forum […]

  • Richard Bennett

    Yeah, this is most likely saber-rattling and misdirection by NFLX. No ISP wants to run off potential customers just because Netflix streaming is the flavor of the week. The weakness of their content library sinks in pretty fast once you try using the service, so they could be at the peak of their popularity right now.

  • George Ou

    There are customers who like it initially but they get bored after they’re exhausted the library. The big problem with video is that people tend to only watch something once, or a few times. It’s not like music where you listen to the same song over and over again.

  • Richard Bennett

    The value of the streaming service is that you can sample a number of movies faster to find one you’re going to like than you can ever do with mailed DVDs. The downside is that the content is so poor, you have to try several to find a good one.

Comments are closed.