Wednesday, May 21, 2008

Finally, the "Net" in Netflix; plus, the bandwidth question

Netflix has released a set-top box that users can use to receive movies directly over their broadband Internet connections. The box, developed by the silicon valley company Roku, has received good reviews on CNET and PC Magazine for its nice interface and more-or-less good performance over most home-broadband connections.

Advantages for users
  • No propagation delay from snail-mail shipping DVDs - no more waiting for 2 days.
  • No need to mail back DVDs.
  • Ability to switch to another movie or show - you are not stuck with that wrong movie you placed in your Netflix queue.
  • No extra cost except the broadband connection and the $99 cost of the box.
Advantages for Netflix
  • Savings in storage, handling, and shipping costs (to-and-fro) of the DVDs. Theoretically, if all Netflix subscribers switch to this technology then Netflix can close its nation-wide distribution centers and also save on postage costs: assuming that Netflix pays the standard first-class mail rate of $0.42 to USPS, thats a $0.84 saving per mailed DVD. I think that the present overall cost of circulating a DVD to a user may be well above a dollar for Netflix.
  • Centralized content control and the ability to speedily deploy new movies, shows etc.
  • Ability to expand beyond the US in a relatively painless way - no distribution centers to set up, no additional staffing costs (analogous to how iTunes operates in Europe).
And the Bandwidth cost?

The Netflix system delivers video streams at 2.2 Mbps, 1Mbps, and an even lower bit-rate depending on the connection between the server and the receiving box. The quality naturally degrades according to the lessening bitrate, but let us assume that a user has a great Internet connection and that no bandwidth bottleneck exists between the serving CDN and this user and so s/he can watch the best 2.2Mbps quality for the entire 120 minutes of a movie.

Size of the movie:
2.2 Mbps x 7200 seconds (i.e. 120 minutes) = 15840 Mb = 15840/8 MB = 1980MB = 1980/1000 GB

= 1.98 GB.

So downloading a movie at the best quality means the CDN serves about 2GB of data to the end-user's Netflix- Roku box.

To arrive on the bandwidth costs, lets go with the figures presented in this PBS article about CDN pricing. Disclaimer: This article is more than a year old, and I have been reading about CDN price wars all along. So the current cost of bandwidth may actually be lower than stated.

From the PBS article the costs for streaming a 2GB stream to a user (assuming volume wholesale pricing):

Single server: $0.26
Akamai : $0.32
P2P: $0.0024

Ok first off, I like the P2P number the most but lets ignore that because P2P may not be able to compete in quality with CDNs (See my paper on this). Even if Netflix uses the most expensive Akamai CDN, they are getting away with just $32 cents per movie instead of the dollar-plus cost in the DVD-mailing model. Even if we assume a few more cents of overhead per movie due to the technology costs, I think Netflix is well in the green with this.

The beauty of Netflix's strategy is that they will be able to gradually wean people from the DVD mailing model to the this online content delivery model because of the convenience of the latter. And this without jeopardizing the DVD mailing model because there is no cannibalization here - its perfect migration with one less DVD mailing customer corresponding to one more streaming customer. Every DVD streamed will add up and lead to a drastic reduction in Netflix's operating costs.

Meanwhile, Roku will probably make some money out of their $99 box.

Last question: And the ISP?
Thats for later. Enjoy your movies.

Update: Netflix bandwidth costs come to about $5cents as of June 2009, according to this article.

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