Netflix as a Streaming Service is the Bandwidth King

by Ben Bajarin   |   July 14th, 2011

News broke yesterday that Netflix was raising the price of its streaming plus DVD-in-the-mail plans. It was interesting to see all the backlash from some media and from consumers on Twitter. As much as this may be shocking in the short term what it really signals is the bigger picture story that Netflix is really a streaming video service not a DVD-by-mail service.

In fact I think this piece in the Wall St Journal got it right: Reed Hastings Doesn’t Want You To Pay More For Netflix. He Wants You To Stop Using DVDs.

If you noticed, the cost of their streaming only service did not go up at all. Only the packages that included an option for DVD-by-mail went up in cost. The age of Internet video is undoubtedly upon us. This reality is cemented in stone if we do a quick case study of Netflix.

I’ve recently analyzed a Q2 2011 report on Netflix from Sandvine Networks. Here are the key points from that report as I see it.

  1. Netflix now accounts for 29.70% of all downstream traffic during peak period (evening traffic)
  2. Netflix has 23.6 Million Total Subscibers
  3. The average Netflix consumer consumes more than 40gb of data per billing period
  4. Playstation 3, XBOX 360, PC, and Wii (in that order) account for 85% of Netflix traffic
  5. Average consumer using Netflix on an XBOX 360 consumes over 80gb of data per billing period

To quote a statement from their report:

“It is difficult to understate how truly staggering the growth has been. Lest the reader think that this phenomenon
is limited to peak period, even when measured over 24 hours, and when measuring all traffic (upstream and
downstream), Netflix is #1.”

Netflix is now the undisputed bandwidth king of the Internet in North America. What’s more is that they have caught Comcast in total US subscribers both with just over 22 million.

What I find most interesting about the Netflix streaming service is how the non-techie community has embraced it. We are hearing more and more frequently in our interviews with mainstream consumers (non-early adopters) how they are turning to Netflix as a part of their prime time evening experience. The reality is for this to happen Netflix time is taking away from their service providers time. In fact we are beginning to hear frequently in these interviews how many are cutting the chord to cable and using Netflix streaming only.

These are telling signs about the value these types of services offer into the main part of the market. As more online streaming services from companies like Apple, Amazon and perhaps even Google continue to grow and become attractive, traditional MSO’s will have no choice but to adapt and adapt fast.

The Bandwidth Story
The real point I want to make is around bandwidth demand. The bandwidth Netflix is demanding from North American service providers is simply stunning. Keep in mind this is just one service. I expect many entrants into the streaming media sector from major players over the next 5 years. The impact on broadband will be overwhelmingly significant.

Not only are the bandwidth demand numbers I pointed out above only from one service; they are also only from one device and one concurrent stream. What happens when you have multiple people in homes consuming Netflix on a tablet, PC and TV all at the same time? The answer is the 29% of downstream traffic could double or triple.

The multi-connected-device reality that is coming is one i’m not sure the network and broadband providers are ready for.

Are Service Providers Prepared?
The Wall St Journal Heard on The Street section published a commentary on this subject titled: “The Time Bomb in Netflix’s Streaming Strategy.”

If we do see a continued explosion in streaming services how will the broadband service providers meet the demands of their consumers? Are the networks themselves capable and ready to handle this explosion of streaming media?

These are all questions we will have to wait to see how they are solved. I do however hope that whatever costs that get passed to consumers do not hinder the success of these services as the WSJ article suggests. What could very well happen is that the costs of traditional TV packages go down and data packages go up – just a thought.

It is in the best interest of the network and service providers to add more value to their broadband networks. Right now they believe their broadcast services are the most valuable but very shortly that value will transition into their broadband services. And that transition will happen on the back of services like Netflix.

Ben Bajarin

Ben Bajarin is a Principal Analyst at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research. He is a husband, father, gadget enthusiast, trend spotter, early adopter and hobby farmer. Full Bio
  • Jared Homrich

    Until Hulu and/or Amazon work with Playstation 3, XBOX 360, PC, and Wii…Amazon will continue to dominate.