Behold Netflix. This really is a special company, one that was long adored by its customers for its DVD rental service by mail. Success made the company one of the largest if not the largest US Postal Service customer.
Then — and this is where the “really special” part comes in — Netflix managed to “pivot”, as Valley argot now demands we say. Netflix turned to the Internet and became the VOD (Video On Demand) leader, delivering movies directly to our homes through our laptops. Such a change of medium sounds obvious — retroactively. But ask Blockbuster. Once the retail king of VHS tapes and DVD rentals, it never managed to move its business to the Internet and went bankrupt, only to be picked up by Dish Network, another giant in trouble.
Netflix decided to change everything: business model, infrastructure, people. Such sweeping moves are risky, they often fail. As Netflix successfully managed the transition, Wall Street took notice of the Netflix exception:
As a result, Netflix is now the biggest consumer of Internet bandwidth:
Silicon Insider comes up with an even more interesting chart:
Netflix now has slightly more subscribers than Comcast (which now calls itself Xfinity) and keeps growing while the “cable guy” is bleeding.
I’m happy for Netflix, a well-run, customer-oriented company. And I’m happy Comcast is losing: They’re expensive, their customer service is terrible, they make you feel like you work for them and not the other way around. And their tricky channel bundle pricing ought to be illegal. Forget triple-play (TV + Internet Access + phone service) for a moment. Just for cable TV service, can a normal consumer easily figure out how much the Comcast bill will be?
Netflix, on the other hand, is easy on the mind and the wallet: $7.99/month, all you can watch, on all your devices (TV, PC, smartphone, tablet), cancel anytime. Furthermore, Netflix is making us honest consumers of Internet video. We all remember the lament of content owners: BitTorrent is killing us! Why bother with time-consuming downloads (and the malware they bring with them) when you can stream instantly for a mere eight bucks a month?
Of course, ISPs, Comcast among them, claim that Netflix makes money on their backs, that VOD “abuses” their infrastructure. This leads to bandwidth caps, a normal consequence of the Tragedy of the Commons: If a commodity is free, it’ll be overused and, in some cases, it might disappear. Metered Internet bandwidth isn’t evil in itself, but in the hands of a Comcast… Let’s remember this is the company that managed to convince Congress to let it buy NBC, the equivalent of movie studios buying theater chains. A lovely way to level the landscape.
The ascent of Netflix signals a broader shift in the way we consume television. For example, “news” programs aren’t really news in that they aren’t fresh, they’re already reheated when we watch them at 6 or 11. Many TV programs, from John Stewarts’s Daily Show to PBS Nightly News, can be watched on a PC when we — not they — are available. Tomorrow, we’ll get all of them (minus NBC, perhaps) on Netflix or one of its competitors.
But what about “really live” events: NBA finals, Wimbledon, the Superbowl, Indy 500 (or Formula 1 races for us degenerate Europeans)? Today, we have choices, we can use the DVR to time-shift and get rid of annoying ads, or we get the show in real time, with ads. This is changing rapidly: NBA (basketball) and MLB (baseball) games are available live on Apple TV through the Internet, not cable TV. For the time being, Netflix doesn’t offer such events, just movies and TV series.
This is Internet TV, but is it IPTV?
What we have today is a digitized video stream chopped up and stuffed into dumb IP packets. Here, dumb means little or no metadata, little or no upstream information or interactivity. IPTV means TV endowed with roughly the intelligence of a PC browser. More specifically, IPTV provides targeted ads, multiple windows, interactive commerce, games, Facebook and Twitter engagement, instant messaging to friends: ‘Quick, get on Channel 36!’
This will lead to unforeseen but retroactively obvious usage modes, giving us a truly new medium, not just a shovelware version of an old one.
So what about Apple TV and Google TV? It’s not clear yet when and how they’ll replace the set-top box. Today, the set-top box occupies the privileged “Input 1,” it’s an unavoidable gateway, all TV content flows through it. Apple TV and Google TV are accessories, they’re not the main device. And as long as they’re accessories, they won’t really soar because the set-top box, meaning the cable operator, remains in control.
That’s why Netflix’ ascendance is so encouraging: It bypasses and eliminates the set-top box. It isn’t difficult to see where this is heading. Just as wireless carriers are destined to become wireless ISPs, cable operators such as Comcast are bound to ISP land.
Once this shift happens, the move from TV on dumb IP packets to real IPTV can begin.
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19 Comments
True. It seems to me that they took a page from iTunes playbook: all the songs you want for 1$.
+764% since Jan 2009, no?
@Marc: You’re right, thanks. I stand corrected: it’s since Jan 200_9_ and not 20_10_. It’ll be corrected on the site. JLG
I find this juxtaposition especially interesting in that your typical cableTV customer has exactly one option available, the incumbent (say, Comcast). It used to be that monopolies were always regulated, yet if that’s true today, the regulation is even more light-handed than what let the banks blow themselves up.
And still, NetFlix is discovering how to compete with them, beating them not at their own game, but by being agile & clever about inventing a new future in which they are have the natural combination of features that customers want.
Eventually, we come to a tipping point: where enough people use the new model that programming originators (including MLB, Pixar) have more to lose from holding out from NetFlix because Comcast threatens them with inferior terms. This chart makes it look like that day is coming sooner than I thought, and from an unexpected source.
I, for one, welcome our new content-distribution overlord.
Very surprised to see Netflix’s bandwidth consumption already 3 times larger than that of Youtube.
With production costs going down dramatically (HD cameras, Final Cut Studio, …) I hope I will soon be able to subscribe to the Salzburg Festival and an Alsace Wine Channel that explores the terroirs and producers, attend an audience with the Dalai Lama or the Pope, go to the Theatre in London, attend a conference in SF or a public lecture at Cambridge University … you get the idea. New content and new distribution will, hopefully, change TV. I expect TV Shows, Films, and Sport to play a reduced role in my future TV diet.
Netflix somehow hammered out agreements with the studios that no one else appears to have been able to do. I don’t think that Apple considers them a threat but rather proof that digital distribution of video content can work and work well. I have a suspicion that Apple has largely given up on the incumbents seeing the light and is attempting to cultivate a new generation of content providers (I think similar to what happened with music). I harbor a fantasy that with their cash horde they’ll buy up all the Lte-Advanced equipment and chips and define a new world of ubiquitous high-bandwidth “too cheap to meter” Internet (similar to how I believe 10Mbps Ethernet changed computer networking). Disintermediating middle men will better connect content producers and consumers. Some will have to find new jobs, but all will benefit. Apple may be the root of a whole new world economy. (Not that the old economies will go away, but they will be dwarfed).
“Why bother with time-consuming downloads (and the malware they bring with them) when you can stream instantly for a mere eight bucks a month?”
I don’t illegally download movies, but I signed up for Netflix “Watch Instantly” for a free trial month and the selection of movies they have to play instantly is very limited. I wanted to watch the latest season of “Mad Men” — they didn’t have it available. I think I wanted to watch “The Godfather” and “Alien” and they didn’t have those popular movies as well.
Certainly an interesting argument with what I think is a bit of wishful thinking. Think about the developments that must happen for this future to take hold for Netflix:
1. An ISP would have to arise that is not interested in delivering media content but in providing price competitive bandwidth and customer service. Considering the CAPEX involved in a project of this magnitude, I find this development highly unlikely. Of course, a company could emerge that is interested in delivering internet to households that is already competitive in internet based media though this is highly unlikely. I don’t care how much cash Apple or Google has on hand.
2. Could you imagine the NFL amending their enormous contracts with television networks in the near future to distribute their games through the internet? Especially now with NBC owned by Comcast? Having ready access to a channel like ESPN or NFL football games is probably enough for most American households to hold on to cable networks.
3. Netflix would have to gain access to a much broader range of content, including newer movies and tv shows, that would probably signal an end to its low prices. Either that or their user base would have to grow so large that studios and other content providers will not be able to ignore Netflix’s pricing demands, which seems to be their current dream.
On the other hand, imagine the developments that must occur for ISPs like Comcast to crush Netflix.
1. Cable providers change their mentality and begin offering competitive content to Netflix. Customers realize that paying for Netflix is paying for the same service twice, so they stop subscribing. This would require developing a user base that is as wide as Netflix’s so that content providers would negotiate on the same terms, something that could emerge through collaboration or M&A. Considering the lack of competition between cable providers, I wouldn’t call this future far fetched.
2. Netflix becomes so successful that customers stop purchasing OnDemand packages from Comcast and other cable companies opting just for basic cable or just internet. These companies begin complaining that Netflix is free-riding on their networks and they start regulating bandwidth usage. Any sort of bandwidth regulation would be devastating for Netflix, because it would limit either the quality of their content, how quickly it can stream into people’s homes, or how much of it can be watched. Sure, the public outcry would be massive, but most people will have no other option but to accept it because of the lack of competition. I see this as the most likely outcome.
The outcome of this competition is certainly not written in stone. Perhaps mobile bandwith and speed will improve to the point where streaming movies can be delivered through a network that is not cable based. Or perhaps a way to deliver streaming movies without large bandwidth requirements will develop. But my bet would be that ISPs like Comcast win this battle, despite the wishes of most consumers. Reed Hastings is one of the best CEOs out there, but Netflix’s upside is limited because it counts on antagonizing the very companies it relies on to deliver its product, unless of course they can successfully execute another pivot.
Lastly, comparing Comcast and Netflix user numbers is not a completely fair comparison, considering that Comcast doesn’t service vast portions of the US population (like NYC). It would be interesting to see a comparison of market penetration rates between the two companies in areas that Comcast services. It would be even more interesting to see numbers comparing the total number of customers that access on demand content through cable boxes compared to Netflix. My guess is that Netflix still lags pretty far behind.
Some key points are missing in your comparison. As someone else pointed out, Comcast does not have national coverage, so they are not representative of the cable industry as a whole. A lot of tech pundits like to note that cable TV has lost subscribers. True. But, this has been an ongoing trend for the better part of a decade, as consumers made the lateral move to satellite and IPTV (e.g., UVerse and FiOS) services. When you combine together all of these pay TV services together, you wind up with more than 80% market penetration, which is about the same as cell phone service and still growing.
Netflix is nice. My wife and I use it to catch up on TV series that we missed the first time around, and watch the occasional movie. But, is it a replacement for the programming that we get on Directv? Not by a long shot.
For one thing, Netflix’s content is dominated by older movies and TV series. Anyone in the entertainment industry will tell you that the release window is the key marker of demand — a movie or TV show has its highest demand/viewership immediately upon release.
Netflix has indeed seen explosive growth for their streaming service, but as each content contract gets renewed, their programming costs are going through the roof, and far outpacing their subscriber and revenue growth. This is the underreported story that Wall Street is ignoring. At some point, this is going to force Netflix to either dial back on the recently released content (which they clearly are not doing), or restructure their service plans by either raising prices or going to tiered pricing plans. With Netflix now venturing into original programming and negotiating with the studios to shorten the time at which recent releases can go onto their streaming service, the current $8/month unlimited plan is simply not sustainable.
And it’s not like the cable providers and broadcasters are sitting still. Original programming is how broadcasters and premium channels retain subscribers and negotiate higher carriage fees. So long as there remains a demand by viewers to see something immediately when it comes out, these parties will retain significant leverage. The value of a program or movie progressively declines the further you get from the original release/broadcast date, and that’s how Netflix was able to populate its streaming service for so cheap. Now that they’re trying to move more towards recent and original programming, the costs will escalate accordingly.
Also, your example of NBA and MLB streaming for sports programming have one gaping hole — both of those services have local blackouts. In other words, if you live in the Bay Area and want to watch any of the local teams — Warriors, A’s, or Giants — you cannot stream on Apple TV. (And you’re wrong about the availability — many cable systems do offer up the same season package for the NBA and MLB, as do Directv, Dish, and FiOS).
Sports programming is the strongest foothold that the pay TV industry has, and they know it. That’s why ESPN and the regional sports networks that cover the local teams charge by far the highest carriage fees to cable/satellite/IPTV providers. And that’s why Comcast and Cox, which operate their own regional sports networks, have been exploiting loopholes in the telecommunications laws to keep their local sports programming off of satellite and IPTV competitors.
To illustrate the market impact that this has, consider that Comcast Sportsnet in Philadelphia carries all of the local pro teams (except the Eagles). Using the now expired “terrestrial loophole” CSN Philadelphia has only been available on cable, and as a result the Philly market’s satellite penetration is only half of the national average.
And the trend right now on local cable TV deals is moving towards multi-DECADE deals worth billions of dollars. With that kind of investment and the teams and leagues happily going along for the ride, there’s no way that internet streaming can get around the current restrictions without incurring huge costs in the process.
One of the key issues preventing a rapid diminunition of MSO power (vs. the OTO players like Netflix, Google, Amazon, etc.) is the affiliate fee each of the basic cable channels receive from the MSO’s.
Originally developed as a necessary tactic to help programmers (specifically, originally, HBO), to develop enough quality programming to help cable operators acquire subscribers, these fees are in many cases larger than the revenue these cable nets receive via advertising, (and in the case of ESPN, it’s likely $6-8 billion per year).
It’s going to be tremendously difficult for any major basic cable network to forego those fees and move to the OTO side, (though I suspect that some of the recent programmer skirmishes with Time Warner and Cablevision over whether these two MSO’s are entitled to air basic cable channels on their iPad apps is adding fuel to the fire).
As a consequence, the “revolution” may be driven by new entrants in the programming space, perhaps ones who are paid similar affilate fees by Netflix et. al. (?).
(BTW — in re: Daniel’s question above about Comcast’s penetration in each of their markets…I’m guessing that it averages approximately 75% or so, which is approximately equal to homes past by cable across the country…Netflix has a long way to go to achieve similar penetration across the country; still, its quickly established itself as one of the most impressive media companies of the past 25 years for all of the reasons stated above.
@Josh Grotstein
The points you bring up are very valid. The carriage fees right now provide critical revenue support for the more popular broadcast networks. ESPN collects about $4 per subscriber every month from the carriage fees alone (that roughs out to about $4 billion a year). No way they’re going to forego that in favor of internet streaming options, unless a comparable revenue stream is developed. And we know that web ads won’t come close to that.
Netflix can charge $8/month because their programming costs up to this point have been low. But, take a look at what they offer up — older movies and older TV series that have already been distributed and monetized thru other channels. As they venture further into original programming and more recent releases, their costs will escalate quickly. At some point, these higher costs will get passed onto subscribers.
The trend that I’ve seen with a lot of web streaming options is how they’ve begun tying into existing subscription platforms.
Cable providers have been launching mobile apps that allow subscribers to access their programming on the go (of course, the broadcasters are now trying to impose carriage fees on these mobile feeds).
HBO GO allows for on demand streaming from PCs and mobile devices, but you need to be a cable/satellite subscriber.
ESPN now does live streaming of their actual network feed (which their online ESPN3.com service does not do), but again, you need to be a subscriber with one of their partner cable providers.
Similarly, Hulu has been negotiating with cable providers to wall off certain portions of their content for cable/satellite subscribers.
The bottomline is that moving more programming towards internet video does not necessarily liberate consumers from cable/satellite providers, and it does not by definition result in lower costs.
Thanks to both @Josh and @Woochifer for their industry insights.
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Please let me know if it’s fair to take away this micro-summary: the cable networks, who have monopoly power over consumers, enhance that power by various payments to content providers. By creating prix fixe plans that bundle ridiculous number of channels in order to get a few premium ones, both parts of the industry get much higher revenues than otherwise. And none of this could work in an à la carte world, where you paid for what you wanted to see, when and how you wanted to see it, maybe watching the first part of a movie on your phone, then the remainder on your big screen. This necessarily means a network has to commit its own money, not its customer revenues, towards “developing an audience” for a new concept; the cable co can’t charge big access fees for the money-making channels in exchange for carrying the West Virginia Possum Recipe Network.
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Is that too simplified? If it’s halfway right, then both the producers and the cable networks could be in for a world of hurt. Pre-paying for a bundle of stuff you know you’ll never watch is so 1995. It’s already suffering defections to the ad-supported and pay-per-view models. (And, to “none of the above.” TV quality seems to be headed in the same direction as AM radio was a decade or two ago, and as I first started noticing FM going 5 years ago. Not that my tastes are so superior, but I can read the Arbitron and Nielsen numbers.)
@Woochifer — I fully agree…though I have heard that ESPN is getting $5-6 per sub when you include the NFL…(n.b., even at $4 per sub per month, that means that Comcast is writing a check to Disney (ESPN) of $100 million every month!)
@Walt — I think that you’ve got a lot of the end-state situation correct; however, I might quibble a bit with how things “emerged”. The cable operators (“MSO’s”) developed the two revenue stream model to support the cable programmers to allow these programmers to get started, so that the cable operators could get more distribution for their services. Remember that Cable started out as a way to get better television reception for smaller communities and only then began to differentiate via unique programming.
Further, I think it’s important to distinguish between the Basic and Paid cable programmers. The former (networks such as MTV, CNN, Discovery, CNBC, House & Garden, ESPN, etc.) are generally offered as part of the bundled package that comes with “access”. As such, they have lots of free rider benefits. In fact, some of these networks can have as little as a 4-5% cumulative rating some months, which essentially means that 95-96% of the cable subscribers are not watching that network but are supporting it via their cable bills.
The former (HBO, Showtime, and Starz…and their sister channels) largely support themselves and can be cancelled on any given month. It’s probably no coincidence that these networks (particularly HBO and Showtime) have developed some of the most unique and original programming on all of television.
Net, net — it’s not fair to lump all cable networks together from a business model (or future prospects) standpoint.
Further, unlike other media which have been “disintermediated” by the Internet rather quickly (I’m thinking Radio, Newspapers, Magazines), Cable has developed an approach to co-opt and slow the transition. As mentioned earlier in this thread, the MSO’s agreements with the networks require that IF they want to stream video over the web they can only do so IF the viewer of the video is already a Cable subscriber. It’s a smart approach, as it allows users to get their access wherever they choose as long as they remain a paying customer of the Cable MSO.
That said, I think that there is going to be a very interesting set of battles in the next few years. And one of the big fights will be over the a la carte issue: i.e., how many cable networks would be able to support themselves if the artificial subsidy afforded by bundling were to go away? There are very strong arguments for and against such a move.
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