Reed Hastings, CEO of Netflix, shows off the company's growing reliance on broadband streaming, moving away from its original DVD-by-mail rental business.

Last week, Netflix CEO Reed Hastings was showered with questions from Wall Street during the company’s third quarter-results conference call.  At the top of the agenda — the company’s shifting business model away from DVD rentals-by-mail gradually towards instant on-demand streaming over broadband networks.

At issue is how Netflix can survive a broadband industry that controls the pipeline Netflix increasingly depends on for its continued existence.

Hastings tried to assuage his cable competitors by telling investors the company is hardly a threat to cable-owned movie channels and basic cable.  But he admits ultimately the company will be in a real mess if Internet Overcharging schemes like usage caps and speed throttles limit the amount of content customers can affordably access:

“We have some vulnerability depending on capped usage and what happens. Comcast has a cap, but it’s 250 gigabytes and so most users feel that they have an unlimited experience, and it gives us plenty of room to deliver a high-def stream. On the other hand, AT&T Mobile data on an iPad is now capped at two gigabytes, [and that’s] not enough room to deliver hours and hours of high-def.  We are definitely sensitive [to the issue] in the long term [whether] the industry ends up at 250 gigabytes or two at the other extreme.”

There is some limited evidence Netflix’s success in Canada is already being tempered by usage limits near-universally imposed in the country.  Rogers, a major cable company in eastern Canada, even reduced usage caps for certain tiers of service around the same time Netflix announced its imminent arrival north of the border.

Barry McCarthy, Chief Financial Officer notes fewer Canadians are converting their free trials of Netflix’s streaming service into paid subscriptions.

“We anticipate we are seeing slightly lower conversion rates in Canada than we see in the U.S.,” McCarthy told investors.

As Netflix moves towards higher quality video streams, the amount of data consumed increases as well.  In Canada, that eats into broadband usage allowances, and fast. As soon as customers start receiving warnings they are nearing their monthly usage limit, or receive a broadband bill with overlimit fees, Netflix is likely to lose that customer.

Cable and phone companies in Canada are already warning customers that online video is a major culprit of exhausted usage allowances.  Both are also happy to remind their customers they are happy to sell them access to unlimited video — through cable or telco TV subscriptions.  Rogers owns a major chain of video rental stores as well.

What can Netflix do about usage capped broadband?  Not much, admits Hastings.

“There is a not a lot of improvement in compression techniques. But what we can do is just deliver a lower bit stream, a lower quality video experience. So, for example, not too high-def. So, that’s one possible way to partially mitigate that impact,” Hastings said.

Netflix will soon face increasing competition, especially from the cable industry’s TV Everywhere projects, and they won’t deliver a lower quality video experience.

Time Warner Cable and Comcast this month both formally introduced their respective video on demand services.

Comcast’s Xfinity online service arrives after months of beta testing.   Comcast customers can watch video selections from nearly 90 movie and television partners, including programming from HBO, Viacom, and Paramount.  Ultimately, the online video service is expected to deliver access to dozens of cable channels and individual programs from studios and networks at no charge to those who subscribe to a cable television package.

Time Warner Cable took a more modest approach last week by introducing ESPN Networks to its cable subscribers who register with the cable company’s MyServices website.  The new customer portal allows subscribers to review and pay their cable bill, add new services (but not cancel existing ones), remotely program DVR boxes, and also verifies subscriber status for future cable subscriber-only online video programming.

Netflix may soon find itself at the mercy of the cable and telephone companies which deliver broadband access to the majority of Americans.  Not only is it difficult to convince customers to pay a monthly fee for programming the cable industry may eventually give away for free, it may be downright impossible for Netflix to survive if those providers decide to squeeze the customer’s pipeline to unlimited Netflix content.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Comcast Xfinity Ad Spot 10-2010.flv[/flv]

Comcast Ad Introducing Xfinity Online.  (1 minute)

"DVD's are so five years ago!"

Netflix, which has seen its Canadian streaming-only video service welcomed with usage cap reductions by Rogers Cable, has finally started to wake up to the threat its online video business model is one speed throttle or usage cap away from oblivion.

As the video rental company now contemplates launching a streaming-only version of its service in the United States, it has now firmly waded into the Net Neutrality debate.  In a filing earlier this month, Netflix impressed upon the Federal Communications Commission the importance of prohibiting providers from establishing blockades to keep its competing video service from threatening cable-TV revenue:

“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 online video packs a real wallop, as Americans embraces the service as a suitable and cheaper replacement for premium cable movie channels.

Sandvine, which pitches “network management” products to the broadband industry, reported Netflix now represents more than 20 percent of all downstream broadband traffic in the United States during peak usage times between 8-10pm.

The company’s financial results seem to affirm its growing impact as an online video entertainment player.  The Washington Post reports 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.

That prompted CEO Reed Hastings to say Netflix should now be considered a streaming company that also offers DVD-by-mail service.

If providers launch Internet Overcharging schemes that limit broadband usage or throttle their competitors to barely usable speeds, that growth could come to an end quicker than the introduction of the next “unfair usage policy.”

Sandvine’s research confirmed something else.  As broadband speeds increase, so does usage.  In Asia where broadband speeds are dramatically higher than in the United States, Sandvine found median monthly data consumption is close to 12 gigabytes per household compared to 4 gigabytes in North America.  And Asians stay very close to their broadband connections, using them on average for almost 5.5 hours per day, compared to just three hours for North Americans.

When one considers the majority of broadband users are only starting to discover online video, those numbers are headed upwards… fast.

Get used to seeing this screen because we saw it for minutes on end when testing Time Warner's new Remote DVR service.

Time Warner Cable has launched its free Remote DVR programming service throughout the country, allowing customers to remotely manage their DVRs from the cable company’s website or through a smartphone application.

Stop the Cap! gave the service a test run this morning to see how well it works.

Here are some of our early impressions using the online, web-based interface (we did not test the smartphone application):

1.  The service is in beta and it showed.  Our first attempt to use the system this morning was laboriously slow, taking 30 seconds or more to change pages.  Things worked better as the morning progressed, but it still suffers from sluggish responsiveness.  Several features failed for us occasionally, such as deleting some scheduled recordings remotely.  After two minutes or more of waiting, we gave up.

2.  The application was generally intuitive and we did not need a lot of hand-holding to get started. But at the same time, the usefulness of the application itself was limited.  Scrolling through the online program grid was as tedious as the using the television version.  It’s fine if you know exactly what you want to watch and what channels to check, but terrible for browsing through hundreds of channels.

3.  The search and browse functions are far too limited to be useful.  It is impossible, for instance, to search just for movies.  Categories are too broad to be of much use, and many are missing.  “Drama” and “Action” included everything from a documentary to a series to a movie.  Netflix succeeds where Time Warner fails.  Their search categories are much better — documentaries, TV series, horror, foreign and classic films, and many more make it far easier to drill down to the type of show you want to see.  Netflix even offers sub-categories, helping people find similar programs to watch they never realized were available.

4.  Changing the name of the DVR from its hexadecimal default did not work consistently.  When we tried to rename ours to “Living Room,” sometimes it appeared that way, other times it defaulted back to the cryptic “DVR 00:xx:92.E9.xx.xx” (we replaced some numbers and letters with “x”).

5.  The more scheduled recordings you have, the more ponderous the application seemed to work.  We tried deleting some series (which did not always work either) and it helped responsiveness.  If you use your DVR a lot, you may find using Remote DVR a patience-testing experience.

6.  There did not seem to be an indicator as to how much recording space you have remaining or what is already stored on your DVR.

Time Warner customers who use smartphones and other Web-enabled mobile devices can access “Remote DVR Manager” at mdvr.timewarnercable.com.

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/TWC Introducing Remote DVR.flv[/flv]

Time Warner Cable produced this video to help introduce customers to its Remote DVR service, explaining how to register and get started with the free service.  (1 minute)

Blockbuster, Inc. announced this morning it was filing for Chapter 11 bankruptcy protection under a plan that cuts nearly $1 billion in debt and delivers a financial rescue package to help reorganize its operations.

The company, based in Dallas, faced insurmountable challenges from online video, piracy, pay-per-view, Netflix, and most recently Redbox — video kiosks strategically placed in supermarkets and drug stores.

But despite the bankruptcy filing, which wipes out the company’s shareholders, Blockbuster said it would keep its 3,400 company-operated and franchise stores, its DVD by-mail business, and online operations open for business.  Those holding Blockbuster coupons and gift cards need not worry — the company will continue to honor both.  Some unprofitable store locations may be closed later.

Netflix and Redbox are among the biggest contributors to Blockbuster’s financial demise.  Netflix’s 15 million customers dwarf Blockbuster’s 2.6 million customer rent-by-mail operation.  Redbox has more than a 13,000 store kiosk advantage over Blockbuster.

Shareholders blamed Blockbuster CEO Jim Keyes for the company’s financial position.

“Jim Keyes is the main reason Blockbuster is in this position today due to his denial of being in a business model that did not work anymore,” said Niko Celentano. “If Jim Keyes would have seen the changes that were evolving in this industry in the past few years, Blockbuster would not have been in the courts today filing Chapter 11 bankruptcy.”

Epix, the pay-TV channel from Viacom, Lions Gate and MGM, will -not- be coming to Time Warner Cable lineups anytime soon.

Why? Because the network ‘cheapened themselves’ when they agreed to get in bed with Netflix, which will offer online video streaming of the three studios’ movies just 90 days after appearing on the channel.

Time Warner Cable Chief Financial Officer Rob Marcus said the network did itself no favors with that deal.  He told attendees at the Bank of America/Merrill Lynch Media, Communications & Entertainment Conference that Epix’s online video deal “devalued the channel.”

Epix may have irritated the cable company for another reason — it streams much of its content online for its subscribers to watch anytime they like, outside of the industry’s TV Everywhere project.

Indeed, the majority of cable operators seem to share Time Warner’s sentiment, as the new HD pay channel faces a virtual embargo from the industry’s big players, including Comcast and DirecTV.  In fact, Epix’s four million subscribers come primarily from just three companies — Verizon FiOS, DISH Network, and Cox Cable.

[flv width=”480″ height=”292″]http://www.phillipdampier.com/video/Introduction to Epix.flv[/flv]

A short introduction to Epix.  (1 minute)