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Netflix Streaming Puts the Squeeze on ISPs

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Not surprisingly, Netflix continues to climb all of the Nielsen charts for viewing time per subscriber and total streams viewed, with Nielsen saying the company streamed more than 200 million videos in March. With all of that traffic, it’s no wonder that U.S.-based ISPs continue to worry about the impact Netflix is having on their networks and work very hard on solutions. While none of them have yet to announce it, many are already deploying solutions to help cache Netflix content inside their networks.

Multiple last-mile operators have shared anecdotes with me on the impact of Netflix’s traffic on their networks. One ISP planned for a 40 to 50 percent growth in bandwidth per subscriber for 2011; it already hit that growth number in the first quarter. Essentially, it blew the bandwidth budget for the year in 3 months and is now scrambling to make budget adjustments that won’t dramatically impact its service and plans for 2011.

Last October, Sandvine, Inc. reported that Netflix represents “more than 20 percent of downstream traffic during peak times,” but ISP representatives I have spoken with say the percentage is higher and growing. Almost 1 in 3 bits during peak are feeding Netflix, and as more videos become available and more subscribers join the service, the bandwidth consumption is only getting worse.

During a Q&A session at the IPTV World Forum earlier this year, Netflix VP of business development Bill Holmes claimed that the numbers reported by Sandvine were not a problem and that Netflix is advocating settlement-free peering. “Netflix pays to bring the bits to the last mile,” he said. “Then that last mile relationship is one between the consumer and the operator. We feel it’s being monetized in that way, and we are looking to see how we can foster that type of business model across the board.” He also went on to say that Netflix traffic does not go “over the backbone” and is not “saturating the pipes” and that the internet is not “in jeopardy.” While I agree that the internet is not in jeopardy, ISPs completely disagree with Netflix when it comes to the costs associated with the traffic.

While Netflix CEO Reed Hastings claims that the cost of bandwidth to an ISP is about a penny per gigabyte, every ISP representative I have spoken with says that Netflix does not know the real cost since it doesn’t operate a network and is only quoting raw bandwidth pricing, which does not include any of the other expenses associated in upgrading the network, including hardware. The “last mile” in this context is really to the boundary of an ISP’s network and the internet, and there are significant costs to deliver those bits from that edge to the subscriber. Continually adding bandwidth and infrastructure is not a free endeavor, even in the U.S. where the cost of bandwidth is low.

More than a year ago, Netflix also claimed that bandwidth caps by ISPs would not impact its business. But in March, it started to reduce the quality of videos that are being served across Canada to fit into data caps. Subscribers are demanding higher quality, not lower, and the ISP is caught in the middle of the value chain with few options as traffic grows.

This article was originally published under the title "Learning to Live with Netflix" in the August/Septermber issue of Streaming Media magazine. 

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