Will Netflix Kill the Internet?
NetFlix Inc. (NASDAQ:NFLX) now accounts for 20% of all Internet traffic during the typical American evening, who is going to pay for it in the long run and who will help build a faster internet?
The crushing demands of video delivery and mobile devices are changing the economics of the Internet | By Peter Burrows
(BusinessWeek.com) By any measure, Netflix (NFLX) is having a really good year. Its subscriber base jumped by 52 percent in the third quarter, and its stock price has doubled since July 1. Analysts and customers are bullish about the Los Gatos (Calif.) company as it moves from a DVD-delivery service to an on-demand entertainment provider and de facto rival to cable TV. Netflix's 16 million subscribers are so eager to stream Sandra Bullock movies—Crash and The Blind Side are currently the No. 1 and No. 5 most-streamed movies—that the company now accounts for 20 percent of all Internet traffic during the typical American evening, according to Sandvine, which makes network monitoring equipment. At the Web 2.0 conference in mid-November, an onstage interviewer asked Netflix Chief Executive Officer Reed Hastings whether the Internet's infrastructure can withstand the strain as his streaming business grows. "If there's anything you'd want to bet on," said Hastings, "it's that technology will make bandwidth faster and cheaper."
That bet may not be as safe as it seems. It's true that history is reassuring, and the steady progression from the dial-up modem to fiber-optic cable has led to bandwidth that easily meets demand. Yet there has been nothing like the double whammy of video and mobile that's under way, say industry executives and analysts. A high-definition movie is magnitudes larger than an e-mail or a Web page, the kinds of content the Net was built to transmit. And there are now more than 50 million smartphone owners in the U.S., many of whom want to catch up on Glee while in line at the supermarket.
The most widely cited estimate of Internet traffic, from networking giant Cisco Systems (CSCO), suggests it will triple by 2014, to 64 exabytes a month. (Monthly traffic in 2006 was 5 exabytes, enough to store every word ever spoken.) By then, more than 90 percent of the traffic will be video. "This is the most dramatic change in the network that has ever occurred," says Michael Hatfield, a serial entrepreneur whose latest venture, Cyan Optics, makes gear to manage the data flood. Michael Howard, co-founder of market researcher Infonetics, says Cisco's numbers may be conservative. "It's only a matter of time before the train wreck happens," he warns. His worst-case scenario: Carriers halt upgrades, leaving consumers with slow connections and hindering Internet innovation.
The issue is as much about economics as technology. For the same $40 monthly broadband fee, consumers can send 1-kilobyte e-mails—or watch the 30-gigabyte director's cut of a Hollywood thriller on their large-screen PC. Unlike with power or water bills, there's no meter to keep gorgers in check. A study from Juniper Networks (JNPR) highlights this "revenue-per-bit" problem.