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Netflix moves beyond DVD, tangles with ISPs on net neutrality

Netflix, the Blockbuster-buster and mail-order DVD titan, is now calling itself a full-fledged Internet company and says it may begin to offer online-only video-streaming subscriptions this year.

And with its remarks, made Wednesday as part of its third-quarter earnings announcement, the Silicon Valley-based firm is wading deeper into a debate over proposed federal net neutrality rules.

How does Netflix get tangled in the businesses of the likes of AT&T and Comcast (and Comcast's proposed merger with NBC Universal)? Online video is seen as a major threat to traditional cable and satellite television firms, many of which want the FCC to allow companies to pay extra for higher-speed "channels" in the broadband Internet pipe.

In the third quarter, Netflix saw a 52 percent gain in subscribers to 16.9 million. Revenue increased 31 percent to $553 million. But most interesting: 66 percent of subscribers watched more than 15 minutes of streaming video compared with 41 percent during the same period last year. The company predicted Wednesday that in the fourth quarter, a majority of Netflix subscribers would watch more content streamed from the Web on Netflix than on DVD.

"This growth is clearly driven by the strength of our streaming offering. In fact, by every measure, we are now primarily a streaming company that also offers DVD-by-mail,” Reed Hastings (above), Netflix co-founder and chief executive, said in a release.

The company has already begun to wade into the debate over net neutrality at the FCC. Netflix lobbyists have visited the media bureau and other officials at the FCC at least three times in the last year and said in written comments that the FCC should not allow paid prioritization, or specialized services, that allow an Internet service provider to favor its own content or block out new competitors. Here's an excerpt from the those comments, which were submitted to the FCC on Oct. 12:

"The Commission must assure that specialized services do not, in effect, transform the public Internet into a private network in which access is not open but is controlled by the network operator, and innovative Internet-based enterprises are permitted effective access to their consumers only if the enterprises pay network operators unreasonable fees or are otherwise seen by such network operators as not threatening a competitive venture."

Netflix's earnings show how quickly the online video market is changing. Its success in Canada with a streaming-only service has encouraged the company to test a similar service in the United States.

"If our results are as strong as we think they will be, then we will look to start this offering later in this Q4," Netflix said.

Analysts tout Netflix's strides in forging partnerships with content companies and device makers, making it one of the most significant applications in Internet television. It has deals to distribute on Apple TV and Google TV. Netflix is already on the Wii game console and Blue-ray players.

So far content companies have been slow to distribute their shows and movies through online platforms like Netflix and many television shows are delayed by at least one day for online viewers.

But in the third quarter, Netflix renewed its partnership with NBC Universal and signed a five-year contract for $1 billion with EPIX, which gives Netflix viewers access to 1,000 titles of new movies from Paramount, MGM and Lionsgate.

Those efforts appear to be paying off for Netflix, according to recent industry data. Analytics firm Sandvine said Wednesday that its broadband trends survey showed that Netflix accounted for 20 percent of download traffic in the United States during peak traffic times.

Photo: Netflix CEO Reed Hastings
Credit: Reuters

By Cecilia Kang  | October 21, 2010; 6:00 AM ET
Categories:  Comcast, FCC, Google, Media, Net Neutrality, Online Video  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: FCC to set stage for more broadcast airwaves for mobile devices
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I think one of the problems Netflix has with streaming is the picture quality. If you have a DVD in an upscaling DVD player, you receive a much better picture on flat screen than you do from streaming. You are also denied the extras which appear on the DVD.

Posted by: mortified469 | October 21, 2010 9:29 AM | Report abuse

Last year, I tried streaming video with Netflix using my laptop at home. It was very slow and cumbersome. I tried again this summer - and it is awesome. There are occasional times when the response to start a movie or show is slow, but overall I am very happy. I have small kids, and can get most childrens tv shows, without commercials, and many seasons. With Verizon FIOS, on-demand only has a limited number of titles availble (like only 4 of Diego's shows), and using the DVR means I need to fast forward through commercials or the extra minutes it records. So using Netflix is awesome and $ and time saving.
That said, if my ISP started to interfere with my ability to get streaming video from Netflix, I would be upset (first) and then I would cancel my subscription to Netflix. It's unfair to Netflix, but why pay for something that I cannot get consistently? Third, when my contract is up with Verizon, I would cancel it and go with an ISP that does not prioritize and block.
I pay for high speed internet, and the ISP should not "prioritize" what it thinks I should access.

Posted by: Mom2Kids1 | October 21, 2010 10:13 AM | Report abuse

Paid prioritization is double-dip greed and nothing more. Netflix already pays a tremendous amount of money for the bandwidth it needs to stream the video to its many users (as do all websites, streaming video services, music services, and everyone else distributing stuff over the internet). And users already pay to receive that data. Everyone is already getting paid. This is just an attempt to extract more money for the exact same services.

Posted by: madmacrae | October 21, 2010 10:19 AM | Report abuse


Streaming is nice when you don't have the DVD. As for the extras on the DVD -- you can keep 'em. We waited through 15 minutes of promos before getting to "Clash of the Titans" last night. The only extra that I've really been missing with streamed movies is subtitles, and the latest Netflix streaming upgrade includes this function, although it appears the content itself has not yet been upgraded to include subtitles.

As for picture quality, here's my take: First of all, the picture quality is, for most movies and for virtually all other content (tv shows, documentaries, etc.), quite sufficient. That leads to point #2: watching streaming movies on Netflix has reminded us just how little picture quality has to do with our enjoyment of most movies.

Posted by: pyellman | October 21, 2010 10:55 AM | Report abuse

We ditched cable tv almost 2 years ago, in favor of streaming content from Netflix & slinging streaming via Play-On from Hulu and other sources to an Xbox 360. I fail to see why I should pay for cable that hardly supplies me with what I want & overcharges me considering what I actually use. This way we pay a nominal fee for programing we actually want to see, when we want to see it with no or very limited commercials. I would gladly pay for access to premium content from providers I want content from, if that option where available.

I believe that this is the future of tv. We are early adapters, and have made some sacrifices, but they are small and worth it to me. Picture quality is generally outstanding, HD when available, no lag. We are VERY happy with what we have.

As far as service providers trying to double dip, they are just being greedy. They see that this is the future and are trying to get their hands in the pot before anybody knows what is going on. The fight for net neutrality is real and very important to the future of the medium. Verizon gets their cut already, we do pay for FIOS, and the second tier at that. They need to set up their own service, make their own deals for content if they want in on the future, instead of trying to middle man their way into undeserved profits. Provide a service on par or better than what is available, and get in on the action, or just get out of the way.

Posted by: pete1013 | October 21, 2010 12:16 PM | Report abuse

does Netflix stream the 5.1 audio mix as well? I haven't streamed anything that had that, yet.
The question I thought of when reading this, is if I start watching Netflix via streaming, primarily, instead of DVD's, will Comcast be willing to up their Bandwidth Cap, since I'm a Comcast & Netflix cutomer, & Netflix has the NBC/Comcast agreement?

Posted by: Hattrik | October 21, 2010 12:35 PM | Report abuse

Currently with no ability to receive 5.1 sound or HD-It is disingenuous for Netfix to promote itself as "a streaming service that also does movies by mail"
The compromise in sound and picture quality is unacceptable and keeps me locked into snail-mail.
One would think that with their $$$ they would get a manufacturer (e.g., Roku) to produce a suitable box.
I expect will be at least another year.

Posted by: your-ma-sews-socks | October 21, 2010 1:01 PM | Report abuse

@socks- There are many suitable devices available, and HD content is available. But it is totally reliant on your available download speeds and bandwidth. Cable internet most likely cannot give you the speed you need, as it is a shared line that's speeds are subject to the number of users and their demand. I am not a shill for Verizon, but since switching to FIOS, I get all content that is available in HD in HD. Before the switch, not so much. With a fast enough connection, streaming is a totally viable alternative to pay tv, couple it with HD broadcast tv, and you aren't missing out on anything. Granted I pay for FIOS, XBOX Live and Netflix services, but I was already paying for them anyway. Now I utilize them to their fullest extent, so I feel that I am really getting my money's worth.

Posted by: pete1013 | October 21, 2010 1:58 PM | Report abuse

The people saying that Netflix does HD are correct. I use Netflix on an Xbox 360 and it streams HD just fine - as long as my connection speed can handle it. It adjusts the picture quality as my speed changes, ranging from pretty low quality to crisp HD.

There's even a little "HD" icon that appears in the corner of the screen to let me know when the quality has been adjusted to proper HD.

Posted by: madmacrae | October 21, 2010 2:11 PM | Report abuse

Netflix is not doing much to reach out to those user with linux installed in their computers. Their silverlight player wont work with ubuntu or other linux OS distros. They could fix this by allowing moonlight (Linux player) to work with their videos.

Posted by: TroN-0074 | October 21, 2010 2:58 PM | Report abuse

The $64,000 dollar question is how the heck did the Obama administration rack up $3 TRILLION in debt, and not wire the whole freaking country with fiber optic cable???? Then bandwidth limits would be a thing of the past.

Posted by: moonwatcher2001 | October 21, 2010 3:08 PM | Report abuse

If this isn't proof of the illegal monopolistic business practices of the cable companies that needs to be reigned in, I'm not sure would it take!

They compete with Netflix with their grossly overpriced video on demand, and to avoid competition, they want to throttle the Internet for their own benefit. They want to keep Netflix and Hulu and iTunes and the rest from being able to compete on a level field.

I'm thinking Netflix is going to be slinging DVDs and Blu-rays to us for a long time to come. Not to mention the pathetic nature of broadband in the US compared to Asia and Europe to begin with.

Make the pipe owners drop their competing business plans and net neutrality wouldn't be so desperately needed.

Posted by: leicaman | October 21, 2010 6:40 PM | Report abuse

I have a fast internet connection and my Netflix streams movies to me in HD quality. Netflix enabled me to cancel my outrageously priced Dish Network premium channels, and soon I'll be dropping them entirely. Whatever it takes to keep them running smoothly is fine with me. Mess with them and I'll vote you out.

Posted by: realneil | October 21, 2010 7:02 PM | Report abuse

I stream Netflix over a Roku HD box and the quality has been if not great, then at least it's acceptable to me. I use streaming almost every day and watch a DVD only when it's not available on streaming.
I'm on the lowest tier plan which allows me 1 DVD at a time, but as many as I want in a month and unlimited streaming. I would gladly pay Netflix an extra $5 or $10 or even $20 per month if I were allowed to stream all its movies
Please Netflix, make this happen and in ALL of North America, not just Canada and the USA, but Mexico too

Posted by: Phoghat | October 22, 2010 9:26 AM | Report abuse

These Network execs are like kids in a sandbox. Here in Canada all we get when we go to the various network sites is "this video is not available in your geographic area". Could not be more frustrating!

I signed on to Netflix in Canada and was very impressed with the quality of the service. Movies started instantly and ran without a hitch. I am watching on my laptop and it could only be better on an HDTV.

Like most people, I pay a small fortune for my cable and the service is pathetic. Their "On Demand" is completely dysfunctional, doesn't work half the time and the movies are either old or expensive ($5.99 for a single title). Half the regular TV programming isn't available and the episodes are often two weeks or more old.

What I want is a completely open access, subscription based service. I want a menu similar to what you see on TV Guide. I want to click on a program for more info and then be able to select it for streaming, when I want to watch it, and not dictated by when it aired. I am more than willing to cancel my cable and instead pay a subscription to watch the programs I want to watch, when I want to watch them.

The cable companies are all afraid of losing their cash cow cable subscribers, so they are increasing bandwidth charges to grab some of the money. Why not just cooperate in giving people what they want, in exchange for a piece of the pie? The average cable subscriber is paying a hundred bucks a month, plus charges for PPV and movies. It's outrageous! If everyone paid a subscription for the service they wanted, everyone would win.

Stop all the infighting and get together to provide the service people want, and are willing to pay for.

It's also technically possible to make it a two-way system, so advertisers could put those short 15 or 30 second spots at the start of programs, like the network sites do, and get instant feedback on whose watching. That's a lot better than eight or nine blah-blah ads that people just want to fast forward through on recorded TV. Popular programs would quickly command premium ad rates to raise production money. Lousy programs would disappear quickly with no ad revenue.

Posted by: panamacanuck | October 22, 2010 10:57 AM | Report abuse

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