Tuesday, April 26, 2011

Netflix: "Cord cutting became cord mending .. data caps are actually a very poor way to manage demand"

Netflix tries to avoid conflicts with the major content distributors in the US (background - here). Now it tries to show that its customers are using the OTT service in addition to legacy video services, and not instead - "Our subscribers overwhelmingly enjoy both their Netflix and the variety of sports, current season TV shows, news and entertainment available through MVPDs [multichannel video programming distributor: cable, satellite and IPTV]".

In a letter to shareholders [here], following the release of Q1 results, Netflix' CEO, Reed Hastings (picture), and CFO, David Wells, explain that although the company added 3.6M subscribers globally (i.e. US and Canada), it did not intensified the "cord cutting effect". Netflix now has 23.5M subscribers (see table below).

"Since last year, online video use has more than doubled and the recession has receded somewhat. So, if online video use was driving cord cutting, the behavior would have intensified. On the other hand, if it was the recession that was driving people to drop MVPD subscriptions, cord cutting would have moderated. In fact, not only did cord cutting slow, it became cord mending with total U.S. MVPD households growing in the latest estimates.

Simply put, the data shows that Netflix is a supplemental channel to MVPD. While Netflix is likely to show huge growth again this year, we think MVPD cord cutting will be minimal to non-existent. We hear some stories from customers who have Netflix and no MVPD service, but these are generally people who rely on free broadcast TV (which is now in HD) and supplement with Netflix, rather than switching from MVPD to online".

Nevertheless, Netflix does not hesitate to go against usage-based billing or data caps.

They remind that "In response to these excessive $1+ per gigabyte fees, we’ve recently changed the default setting for Canadian Netflix members" (see "Netflix to the Rescue"- here).

Netflix states that "As a side note, data caps are actually a very poor way to manage demand and limit Internet congestion. All of the costs of supplying residential broadband are for supporting the peak loads, typically Sunday nights for residential customers. Bandwidth consumed off-peak is completely free; it literally has no marginal costs. If ISPs really wanted to limit their costs and congestion, they would limit speeds at peak times. But if their goal is instead to increase revenue, then making consumers pay $1 or more per gigabyte is an excellent strategy. When we state the marginal costs of residential wired gigabyte are below one penny, but are not zero, that is because we are making the appropriate costing assumption that some of an average gigabyte is transferred at costly peak times".

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