homeGeek CultureWebstoreeCards!Forums!Joy of Tech!AY2K!webcam

The Geek Culture Forums


Post New Topic  New Poll  Post A Reply
my profile | directory login | | search | faq | forum home
  next oldest topic   next newest topic
» The Geek Culture Forums   » News, Reviews, Views!   » Politics/Religion/Current Affairs   » Why Netflix is So, So Screwed

 - UBBFriend: Email this page to someone!    
Author Topic: Why Netflix is So, So Screwed
Erbo
Discontinued


Icon 1 posted January 19, 2011 21:52            Edit/Delete Post   Reply With Quote 
I thought I'd post about business news for once, since that ought to be less controversial. And, just as a disclaimer, I have no position in Netflix, nor am I their customer, since I do not do business with spammers.

First, some of the most recent news:
quote:
Netflix (NFLX) this week said it would stop allowing subscribers to use videostreaming consoles and mobile devices to order DVDs by mail.

On its blog Monday, the largest mail-order-DVD-rental company said it would remove the "Add to DVD Queue" option from streaming devices because the function "ties up resources that are better used to improve the overall streaming functionality."

Okay, they're encouraging people to use their streaming services. And why not? It's good for them:
quote:
Netflix currently pays up to $1 per DVD mailed round trip, and the company mails about 2 million DVDs per day. By comparison, the company pays 5 cents to stream the same movie. In other words, the company pays 20 times more in postage per movie than it does in bandwidth, according to The Hollywood Reporter.
Wow! Lower costs by a factor of 20! Awesome!

But, as Karl Denninger has pointed out, "there ain't no such thing as a free lunch."

The problem is that Netflix is getting those cost savings by passing the cost of sending those movies onto the ISPs that serve their subscribers' homes...many of whom (such as Comcast, Time Warner Cable, and Rogers Cable for Canadians) also happen to be Netflix's direct competitors! And those that aren't (Qwest, Verizon, AT&T, and so on) probably would like to be.

But that's mainly a side issue. The real issue is that Netflix is laying off their bandwidth costs on other companies, which, to meet the rise of demand, will have to engage in expensive buildouts of their own networks, with little to no chance of recouping those costs on their existing subscriber revenue.

Read the first of the Denninger links, in particular. He outlines the whole problem with doing this, such as that "unlimited" consumer Internet really isn't (and in point of fact truly isn't anymore; Comcast has instituted hard caps, and I imagine most other providers have followed suit by now), and if you really did hammer your home Internet link at its full bandwidth, it would cost $200 a month as opposed to the $50 or so you pay now.
quote:
Unless [Netflix] starts installing data centers near the nexus of all the population centers in America to provide the streams and interchange with "last mile" providers at or near those provider's hubs they are going to eventually run into one of two problems - either they will be forced to pay for their interchange or, if they (and others) manage to get the "net neutrality" folks to scream loud enough (and they may) the "all you can eat buffet" from the last-mile providers will disappear, instantaneously destroying their business model.

The cable company and other last-mile providers have an advantage here that Netflix never will - a near-zero cost of last-mile transport on an incremental basis. Disks these days are basically free, and in addition most of the last-mile providers have existing deals with the content owners for distribution. As such I expect a collateral attack to show up soon with cable providers installing disk farms and using their digital delivery systems to provide what amounts to Netflix's service at the same or lower price, undercutting their business. At the same time the company will be forced to either duplicate infrastructure that their competitors already own or pay for long-haul transport (either directly or via a "Hot Potato" charge to them), which will wind up impacting their margins as well. They can tattoo Netflix on COGS (Cost of Goods Sold) and once that realization sinks into the heads of the CableCo executives they will, I predict, do exactly that.

And such appears to be happening, as Comcast, to use one example (since I subscribe to their service), expands its "Xfinity" video-on-demand services and introduces things like iPhone/iPad streaming.

What's that? Yeah, you in the back. You said something about how "net neutrality will save us all"? Sorry, that turns out not to be the case. Denninger again:
quote:
But for those who are strong net-neutrality supporters, realize that if you win you will lose. That is, if the carriers are forced to allow Netflix to saturate your line the response will simply be to raise the price on your Internet service. That is, if they can't "tax" the outsized impack [sic] back to Netflix, they'll bill you for it whether you use it or not. Be careful what you wish for as you just might get it.
This was also the reason behind the Comcast-Level3 dustup two months ago. Again, it's that Level3 (that handles content caching for Netflix) was passing Comcast a lot of traffic that Comcast had to handle--more so than a simple "peering" relationship would ordinarily support. More Denninger commentary:
quote:
It's not about content, it's about volume and flows, and who pays for the infrastructure build necessary to handle them.

What amounts to poaching other people's resources works well right up until you drive that other party into the wall and force them to spend a crapload of money for which they receive nothing in return. That is, they don't receive any renumeration for the additional expense - but you do!

This is the base problem with all overcommitted services where the business model is predicated on fractional use of maximum possible resource consumption. When that model is violated costs go up dramatically. This is ok provided the person who has the cost also gets the revenue that is occasioned by the violation of the original model.

But in the case at hand, Netflix and similar get the revenue, but Comcast gets the cost.

I saw this one coming a mile away. If L3 manages to get the FCC involved and Comcast is prohibited from doing this they will be forced instead to either cap-and-charge customers or dramatically raise their prices, which will also blow back on the content folks like Netflix.

Suddenly that $8 "video any time" subscription becomes not $8, but $28 as Comcast adds another $20 to your monthly cable internet bill.

And there goes the pricing model that everyone loves so much about Netflix!

So what can Netflix do? They can eat the extra costs that the ISPs will want to impose on them for all the extra traffic. Or they can (partly) mitigate those costs by expending a crapton of capital building data centers close enough to most of their subscribers to make long-haul data costs less of a factor. Or they can watch helplessly as the ISPs make their service less attractive to the consumer, by either jacking everybody's rates, Netflix subscriber or not, or by imposing data caps onerous enough to make a Netflix subscription impractical. (And meantime, many of those ISPs will have their own video content delivery services all set to reap the benefits.)

Lesson learned? If your business model is based on "poaching" someone else's service to lay off your costs, you have a BIG problem...because, as soon as you actually have to absorb those costs yourself, you can't make money anymore. And you're fucked.

Truth be told, Netflix could probably make a decent amount of money just sticking with the physical DVD-based business model that made them famous. Trouble is, they're a public company, and that's not going to provide the kind of growth that investors want to see. (Then, too, companies like Redbox are starting to eat their lunch on that end...but this post has gotten too long already. [Big Grin] )

IP: Logged
Snaggy

Sir Snaggalot!
Member # 123

Member Rated:
5
Icon 3 posted January 19, 2011 22:38      Profile for Snaggy   Author's Homepage     Send New Private Message       Edit/Delete Post   Reply With Quote 
There's a mini revolt going on in Canada over the ISPs charging more for bandwidth. One of the culprits for that extra bandwidth use is Netflix, it's been a HUGE success here in Canada. My Mom loves her Netflix/Apple TV.
Posts: 8111 | From: Canada | Registered: Jan 2000  |  IP: Logged
quantumfluff
BlabberMouth, a Blabber Odyssey
Member # 450

Member Rated:
5
Icon 1 posted January 19, 2011 22:43      Profile for quantumfluff     Send New Private Message       Edit/Delete Post   Reply With Quote 
quote:
Originally posted by Erbo:
.....

So what can Netflix do? They can eat the extra costs that the ISPs will want to impose on them for all the extra traffic. Or they can (partly) mitigate those costs by expending a crapton of capital building data centers close enough to most of their subscribers to make long-haul data costs less of a factor. Or they can watch helplessly as the ISPs make their service less attractive to the consumer, by either jacking everybody's rates, Netflix subscriber or not, or by imposing data caps onerous enough to make a Netflix subscription impractical. (And meantime, many of those ISPs will have their own video content delivery services all set to reap the benefits.)

Lesson learned? If your business model is based on "poaching" someone else's service to lay off your costs, you have a BIG problem...because, as soon as you actually have to absorb those costs yourself, you can't make money anymore. And you're fucked.

Truth be told, Netflix could probably make a decent amount of money just sticking with the physical DVD-based business model that made them famous. Trouble is, they're a public company, and that's not going to provide the kind of growth that investors want to see. (Then, too, companies like Redbox are starting to eat their lunch on that end...but this post has gotten too long already. [Big Grin] )

Wrong conclusions....

ISPs have no business imposing extra fees on Netflix for the traffic. That puts ISPs in the business of deciding what the value of any particular bit should be.

The performance of Netflix streaming to your home should be based on 3 main factors. 1. How much downstream bandwidth your ISP provides you from backbone to your home. 2. How much upstream bandwidth Netflix pays for from their site to the backbone. 3. Aggregate bandwidth over the backbone.

The bandwidth the ISP sells you should be regardless of content. When ISPs can favor one over the other, the fallout is a monopoly gets to censor the net for you. Netflix can put a few servers in a data center somewhere and will deliver crappy service. If they want high performance, they have to locate streaming servers in low-latency relationships to ISP peering points. This is a cost of doing business for Netflix - but it is NOT a negotiation between Netflix and your ISP.

Posts: 2902 | From: 5 to 15 meters above sea level | Registered: Jun 2000  |  IP: Logged
The Famous Druid

Gold Hearted SuperFan!
Member # 1769

Member Rated:
4
Icon 1 posted January 20, 2011 05:12      Profile for The Famous Druid     Send New Private Message       Edit/Delete Post   Reply With Quote 
quote:
Erbo: (or was he quoting Chairman Denninger?):
If your business model is based on "poaching" someone else's service to lay off your costs, you have a BIG problem...because, as soon as you actually have to absorb those costs yourself, you can't make money anymore.

 
quote:
TFD:
If your business model is based on offering an 'unlimited' service you have neither the capacity or intention to deliver you have a BIG problem...because, as soon as your customers actually start using the service they've paid for, you can't make money anymore.

FTFY.

quote:
Erbo again:
Sorry, that turns out not to be the case. Denninger again:

Erbo, your ideological love-affair with Chairman Denninger is quite touching, but can you please stop quoting his opinions as if they were undisputed facts.

Denningers "they'll bill you for it whether you use it or not" is One Possible Pricing Model, there are others.

--------------------
If you watch 'The History Of NASA' backwards, it's about a space agency that has no manned spaceflight capability, then does low-orbit flights, then lands on the Moon.

Posts: 10680 | From: Melbourne, Australia | Registered: Oct 2002  |  IP: Logged
GrumpySteen

Solid Nitrozanium SuperFan
Member # 170

Icon 1 posted January 20, 2011 06:03      Profile for GrumpySteen     Send New Private Message       Edit/Delete Post   Reply With Quote 
God forbid we should blame Comcast for overselling their capability and lying to customers about what they're getting.

The real problem is obviously those evil content providers who force Comcast's users to use up Comcast's precious bandwidth. If those Netflix people would just take down their content, Comcast's users would go back to watching physical DVDs and use less bandwidth. Comcast could then oversell that bandwidth by a few hundred more percent and their profit margins would soar like an eagle in the sky (and nothing is more American than eagles soaring in the sky, so stop trying to force your socialist ideas of getting what you pay for down our throats).

Hey, I have an idea. We can make this so much more efficient!

First, pass a law that states that everyone in the USA is required to pay Comcast for monthly service without actually using any bandwidth. Comcast can save money by not installing any equipment and that will ensure that nobody cheats and uses the bandwidth they're paying for. It's absolutely perfect! Everyone in the US can have gigabit Ethernet accounts and we'll once again be the leader in internet access! Nobody will ever need dial-up again!

The future is truly so bright that I gotta wear shades.

--------------------
Worst. Celibate. Ever.

Posts: 6364 | From: Tennessee | Registered: Jan 2000  |  IP: Logged
TheMoMan
BlabberMouth, a Blabber Odyssey
Member # 1659

Member Rated:
4
Icon 1 posted January 20, 2011 06:20      Profile for TheMoMan         Edit/Delete Post   Reply With Quote 
____ Well Virgin Mobile has now put on a cap, Five Gigs so how many movies is that? Guess I will watch movies from the dish!!!

--------------------
Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.


Benjamin Franklin,

Posts: 5848 | From: Just South of the Huron National Forest, in the water shed of the Rifle River | Registered: Sep 2002  |  IP: Logged
Ashitaka

SuperFan!
Member # 4924

Member Rated:
4
Icon 1 posted January 20, 2011 06:31      Profile for Ashitaka     Send New Private Message       Edit/Delete Post   Reply With Quote 
I wish I could download/watch Hulu and Netflix content legally. I cannot, I have to download it from localtions that do not have the right to distribute sadi content.

I cannot imagine that you can blame the legal downloading of movies for the overloaded internet pipelines.

I am a little consoled that my ordering of DVDs through the mail is done by comanies that are run much much better than Netflix. ( they are cheap (compared to going out and renting from a store), usually instock, and if you order by 5p.m. you have them before noon the next day, except on sat-->sun.)

--------------------
"If they're not gonna make a distinction between Muslims and violent extremists, then why should I take the time to distinguish between decent, fearful white people and racists?"

-Assif Mandvi

Posts: 3089 | From: Switzerland | Registered: Feb 2006  |  IP: Logged
dragonman97

SuperFan!
Member # 780

Member Rated:
4
Icon 1 posted January 20, 2011 17:16      Profile for dragonman97   Author's Homepage     Send New Private Message       Edit/Delete Post   Reply With Quote 
Hahaha...it's been a busy day today, and when I saw this thread's title before going to work, I was remotely worried. Now that I see the rambling nonsense, I see it's just anti-Net Neutrality bunk.

As has been rightly said, it's incumbent upon the ISP to provide the bandwidth to their customers AS ADVERTISED. If the ISPs choose to advertise UNLIMITED access, at a given speed, that's what they need to provide - regardless of the cost to them. If an ISP oversubscribes, that's not the customer's fault. In the case of Netflix and Hulu, both of which I use regularly, they're completely legit services, and cannot be subject to bandwidth caps. (Speaking with my networking hat on, I can fully appreciate restricting/throttling abusive usage [read: torrent traffic for stuff that results in C&D letters])

I'd like to point out that many large video sites _do_ put servers near the edge. Netflix, for instance, uses Limelight Networks. According to their site, they actually sit on many large networks, essentially bypassing the need to touch the public Internet for many of their clients' resources. Obviously this means that Netflix is paying a pretty penny to guarantee good access for their clients, and is basically lightening their load on public networks.

However, nothing compels them to do this. The open nature of the Internet is the very thing that has caused so many things we enjoy online to take off. Any clever geek in a garage can build something new and incredible and put it online without paying exorbitant licensing or carriage feeds.

BTW...guess what? All the cable ISPs out there reaping in ~$45+/mo. from their customers for 'high speed' access wouldn't have nearly the number of customers they do if a need didn't exist for that bandwidth. Dialup wasn't fantastic, but for simple HTML pages and e-mail (POP3), it was 'acceptable.' Many ISPs actively advertised being able to 'download faster,' even if they didn't endorse the kind of 'downloading' their customers ultimately did. They promised fast access...and now their customers want that access. Cry me a river.

--------------------
There are three things you can be sure of in life: Death, taxes, and reading about fake illnesses online...

Posts: 9332 | From: Westchester County, New York | Registered: May 2001  |  IP: Logged
Xanthine

Solid Nitrozanium SuperFan!
Member # 736

Member Rated:
5
Icon 1 posted January 20, 2011 20:03      Profile for Xanthine     Send New Private Message       Edit/Delete Post   Reply With Quote 
So I'm completely lost...

The ISPs are supposed to be providing a service that customers pay for. NetFlix sends tremendous amounts of data to its subscribers via those services. And now the ISPs are getting mad at NetFlix because the NetFlix subscribers are using what they've paid for...and it's NetFlix's fault?? Um, WTF? A company is bound by law to sell what they advertise. If Comcast et al just can't handle selling what they advertise they need to either a) overhaul their system so they can or b) admit to their customers that they're lying bastards and start selling what they really have to sell.

--------------------
And it's one, two, three / On the wrong side of the lee / What were you meant for? / What were you meant for?
- The Decemberists

Posts: 7670 | From: the lab | Registered: Mar 2001  |  IP: Logged
TheMoMan
BlabberMouth, a Blabber Odyssey
Member # 1659

Member Rated:
4
Icon 1 posted January 21, 2011 03:02      Profile for TheMoMan         Edit/Delete Post   Reply With Quote 
____ Well ladies and gents, back when Sojourner went to Mars. Most ISPs only had 28k modems, Users were advised to check on the "Customer to phone lines" ratio of the ISP. Ever called with your modem and got a busy signal?

____ Then things kept getting faster, some ISPs raised prices, some did not. I was with the same ISP from 1998 until Thanksgiving 2010. I was actually paying less, I had started at $14.95/Mon. and that went down to $9.95/Mon.

____ I can not say that they ever over charged me, they provided what they claimed they would. So some ISPs do throttle at high usage levels, check the customer agreement at any of the Dish companies. By the way their agreements does not allow negotiation by the customer, some contract. So if a company is claiming to be hurt by a usage problem then it is up to them to put caps on their subscribers accounts. Don't go crying foul or unfair.

--------------------
Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.


Benjamin Franklin,

Posts: 5848 | From: Just South of the Huron National Forest, in the water shed of the Rifle River | Registered: Sep 2002  |  IP: Logged


All times are Eastern Time  
Post New Topic  New Poll  Post A Reply Close Topic    Move Topic    Delete Topic next oldest topic   next newest topic
 - Printer-friendly view of this topic
Hop To:

Contact Us | Geek Culture Home Page

© 2015 Geek Culture

Powered by Infopop Corporation
UBB.classicTM 6.4.0


homeGeek CultureWebstoreeCards!Forums!Joy of Tech!AY2K!webcam