Monday, September 19, 2011

Is Streaming Really The Future (Netflix)

A Netflix envelope picture taken by BlueMint.Image via WikipediaThe obvious answer to the question in the subject is yes, but I think it's overly simplistic and ignores some structural realities, at least in the US.

To briefly recap recent history Netflix has announced that they are splitting their DVD/Blue ray rental business from their newer streaming service and re-branding the older service as Qwikster while continuing to use the name Netflix for their newer streaming service. The decision to split the company in two isn't a bad one but  I question the prospects of the new company for the following reasons.

Two things are increasingly clear to me. First, US ISP's haven't made the investments they should have to handle growing bandwidth needs. This is particularly clear on the 3G/cell side of things were reliability has gotten much worse over the past year if my experience is any indicator. Dropped, slow and intermittent connections while tethering have become the norm and my ability to get work done while on the go has been reduced. I sometimes half jokingly blame the iPhone since I'm no Verizon and the iPhone is a relatively recent addition to their network but I suspect the real reason is the rapid rise of smart phones in general. At home we've also seen our peak bandwidth drop well below what is needed for 720p video frequently during peak usage times.

To be clear yes, I realize I'm basing this opinion on a very small number of data points measured in an unscientific way but I also have anecdotal evidence based on conversations with others and in combination those two source of data are more than rigorous enough for many major news outlets these days. (I debated putting a smiley emoticon here but I think I might be serious; it's too early in the morning for me to tell right now.)

The second thing that is clear to me is that low monthly data caps are pretty much a reality now. Comcast has a 250Gig limit, Verizon and AT&T have 2Gig caps with extra charges if you go above those numbers. HD video will blow through a 2Gig cap in the relative blink of an eye and 1080P will blow through even a 250Gig cap in much less than a month. Lower grades of HD are going to take up less bandwidth and be less problematic but the fact remains that for high quality video, 250Gig is not nearly enough for anything other than casual users of streaming today and if usage patterns continue to increase even casual users will be hitting those badwidth limitations regularly in the not too distant future.

All of which explains why I'm not convinced that Netflix streaming service has a rosy future, at least in the US. Blueray and DVD disks may seem a bit old school but they offer what is referred to by technical types as a "high latency high burst data rate". What this means is that while they don't offer instant gratification they do provide impressive bandwidth once they enter your home. This isn't a new concept. Old school computer geeks used to say that nothing beats the bandwidth of a station wagon full of high density backup tapes speeding down the freeway when you're trying to get a bunch of bits from one place to another.

As for why we find ourselves in this situation, I have two theories. In the case of cable companies that act as ISP's there is an obvious conflict of interest. They have their own streaming services and no desire to see the oft predicted death of cable TV take place as that is their core business and cash cow. Those 250Gig limits do not include cable services which are delivered by way of the same cable as their Internet service and thus in direct competition in the case of streaming video from companies like Netflix.

The second theory likely applies more to cell phone companies than Cable companies. The big cell phone companies in the US are all publicly traded and thus subject to the whims of large institutional investors who's primary interest is more often than not the short term. Investing in infrastructure is a long term play and  isn't a winner over the short term. Given that there is likely reluctance to invest in new technologies aggressively as it will have a negative impact on the immediate bottom line and calling it an investment doesn't help if the entity you're talking to doesn't plan on owning your stock for more than a quarter or two and/or has the option of moving their money elsewhere when you show any signs of ignoring their advice. Your drop may only be for a quarter or two but there is likely somebody else out there who is more willing to sacrifice their long term prospects for short term gain..

Getting back to Netflix, they are going to have a very difficult time growing their streaming service short of buying Cable companies or somehow partnering with them. On the mobile front the picture is even more grim as in addition to conflict of interest issues with the carriers there are the very real limitations of current infrastructure.

To be clear, Netflix isn't unique in these challenges. Any company hoping to build their business based on streaming video is going to run into this issue to an extent that will vary depending on how frequently they plan on providing content to their customers.

I'm predicting here that Net neutrality becomes and increasingly main stream cause over the next decade. There are a lot of complicated issues tied up in that topic that I may discuss at some future date. For now I need to get busy on other projects. I hope you all have a great week.
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