Netflix USA – In pursuit of pricing models, network capacity

The "Neflix Effect" - it really could be called the "Profit Effect" or the "Profit Motive" because it's all about low variable costs for provisioning additional subscribers, and the flow of nice juicy profit margins that follow.

Fiber Optics - can you see the light?
Fiber Optics - can you see the light?
Fiber Optics - can you see the light?
Fiber Optics - can you see the light?

This morning I read about what some refer to as the “Netflix Effect,” which is to say since the service has become our modern day BlockBuster, it’s absorbing about a quarter of all U.S. Internet bandwidth. According to the report, released yesterday by research firm Sandvine, if other video services such as YouTube and iTunes are included that number jumps to almost 50%.

Like a lot of households we’ve ditched satellite (Dish Network) in favor of an online solution comprised of Netflix for movies and television series like Weeds, PlayOn which provides access to shows like The Office (a day or so later), and Vudu for on-demand releases that aren’t yet available on Netflix.

Total monthly cost?

$7.99.

We did also have to pay a one time $39 license fee to PlayOn and the Vudu charges are obviously pay-as-you-go, or about $3.99 for a 720p movie rental. But the decision wasn’t primarily motivated by savings. Although the total cost is significantly cheaper, convenience and access are the real reasons to make the switch. Schedules are a thing of the past. I’m amazed that television networks can still getaway with “primetime” mentality; that we need to organize our days and evenings around a certain time seems positively like 1987. Then again, shows like American Idol have proven there is life (lots of it apparently) in that model, and that America likes to cluster around the television for big events, just like we did for the moon landing, and the invasion of earth … well, the latter – that was by radio only, of course.

The shift of power away from telecom, satellite and cable companies is monumental, but not unforeseen. In the 1990s these were the guys that essentially controlled our lives, and raked in the profits, big time. Companies like NCR, McCaw ROLM, and all the regional bell operating companies (Pacific Bell, Ameritech, BellSouth, etc.) were what mattered, long before Apple’s iPad 2. Yes, it was a less pretty time. But money is money, and AT&T was an astonishing juggernaut. So much so, that the government had to regulate — via the Telecommunications Act of 1996 — to break apart the monopoly into “baby bells.”

Back then I worked first in the computer labs at Bell Northern Research (or as we liked to call it, the “Big Nerd Ranch”) and then later worked my way up the sales and marketing management chain at Nortel. In essence we supplied the digital pipelines. The routers, switches and hubs that were used to create the “information superhighway.” Fortunately I received a phone call from Cisco in Silicon Valley that changed my life in 1998.

But what I remember about those days, and why the “Netflix Effect” makes me smile wryly is the never-ending pronouncements that the world had an abundance of capacity, over-capacity even:

It’s fiber! Massive cables, buried in the sea, carrying light beams across the globe! It can carry the history of the world to Japan and back to North America, a hundred times before you can say (What’s the Story) Morning Glory?!

That plus a technology known as ATM (Asynchronous Transfer Mode) which could marry voice, video and data onto one transport device would change the world.

This was before beautiful 1080p HD video. Before Dolby Digital 5.1/7.1 surround, and certainly way before BlockBuster got waylaid by a small Los Gatos company with brightly colored DVD mailers. And although back then we did know that Voice over IP (VoIP) was a reality in small niche applications, and then for the enterprise, little did we know that it would hit the mainstream, thanks to something called Skype (just acquired by Microsoft for an astounding $8.5B).

And let’s not forget online gaming – more bits and bytes, thanks to an industry that has become the new Hollywood. Want a real summer blockbuster? Release a hit game across the PS3, Xbox360 and Wii.

So now you have voice, video and data flooding the Internet, creating congestion that may soon rival Highway 101 for too-many-things in too-small-spaces awards.

Back to the “Netflix Effect” then. It really could be called the “Profit Effect” or the “Profit Motive” because it’s all about low variable costs for provisioning additional subscribers, and the steady flow of juicy profit margins that result… so long as you don’t need to invest a few billion more into infrastructure, that is. Now carriers are talking about data caps and tiered plans. Don’t you just love overage charges? Back in the day, we could never have predicted this – there was just too much capacity. How on earth could we ever possibly use every little kilobyte? Moore’s Law would hold part of the answer, and so too would that basic human instinct: profit maximization.

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  • Anonymous

    Interesting to see what plays out here.