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Will Bandwidth Caps Strangle Netflix? Not Likely

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In 2009, I wrote a post detailing what Netflix’s direct costs were for streaming movies and TV shows over the internet.

Since then, Netflix’s cost to stream 2 hours of video has dropped by about half, and I estimate the company will spend about $50 million this year with third-party CDNs for video delivery.

Two years ago, Netflix paid about 5 cents to stream a movie, and today it pays about 2.5 cents. While most video contracts with third- party CDNs are typically priced on a per- gigabyte-delivered model, Netflix and other large content distributors usually pay the CDNs on a per-megabit-per-second-sustained model. They pay not for the total number of bits they transfer each month but rather the total amount of bandwidth they peak at each month, a pricing model also referred to in the industry as 95/5. This means that customers can burst above their committed rate of megabits per second less than 5% of the time with no penalty, but once they go over that, they pay for overages.

Like most videos viewed on the web, Netflix’s movies and TV shows are encoded at multiple bitrates to allow for the different broadband connection speeds and performance of today’s ISPs. Netflix has given out some details that show the average user streams Netflix at just more than 2Mbps (2,000Kbps) even though it encoded video for twice that speed. Most Netflix users watch content in 480p or 720p quality, but Netflix does offer a limited amount of content in 1080p, only available via playback on the PS3.

What’s really interesting about the bitrate data that Netflix provides is that it shows just how bad most consumers’ ISPs really are at delivering video. In 2009, most users were getting about a 1.5–2Mbps stream from Netflix. Two years later, Netflix’s data shows most users are getting about 2Mbps. That’s almost no video bitrate quality improvement in 2 years’ time. That’s not to say that Netflix isn’t improving its video quality, because it is working to make its encoding more efficient as well as working with its partner CDNs to deliver the bits more efficiently. But even with those efforts, Netflix has no control over the last-mile providers, who still treat Netflix traffic as if it’s a burden on their network.

While there has been a lot of talk lately about new bandwidth caps by AT&T, that really has no impact on Netflix because as we can see from Netflix’s own data, bitrates and video quality aren’t exactly growing very quickly, if at all. AT&T said that 2% of its users account for 20% of the traffic, and the caps are a way for it to manage performance on its network. I think rather than going after the 98% of its customers with caps, it should really go after the 2% causing the problem. That aside, caps from Comcast or AT&T won’t have any material impact on Netflix now or anytime in the near future. Years from now they could, if the ISPs don’t raise their cap levels, but right now caps are not a big deal to Netflix.

Some might suggest that the Netflix pricing data shows that bandwidth pricing is falling fast. While it is for a company such as Netflix, most content owners aren’t seeing this big of a decline in CDN pricing because they don’t grow traffic as fast as Netflix. Overall, I expect the average CDN customer, which Netflix isn’t, to see a pricing decline of about 20% this year. Of course the good news for Netflix in all of this is that its pricing to stream video continues to decline, and it’s cheaper to stream than to send DVDs through the mail. And with video bitrates not growing very fast, Netflix’s cost to deliver video remains very stable and overall is a very small percentage of its cost to run its streaming service.

This was originally published in the June/July 2011 issue of Streaming Media under the title "Netflix's $50 Million Plan."

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