The Rise of Netflix and the Future of Home Entertainment

I can haz any moovy I want?

Our entertainment habits and the nature of our online life are shifting beneath our feet. According to Sandvine, a network analytics firm, Netflix is now the reigning champion of Internet traffic. Its video streaming service commands a whopping 29.7% of peak-hour activity among North Americans, dethroning the infamous BitTorrent. While this may seem like a sudden bombshell for some, the rise of Netflix has been brewing for quite some time. Spurred by an ever-expanding “Watch Instantly” library and the breakneck expansion of broadband infrastructure, Americans have emphatically responded to the on-demand-video-of-almost-anything entertainment model. But we ain’t seen nothin’ yet. Singularity Hub has kept an unblinking eye on the looming home entertainment revolution (check out Aaron Saenz’s declaration: TV is a Dinosaur and the Internet is a Meteor), and Netflix is just another space rock in the cosmic avalanche of improved entertainment options.

It all started on January 14th, 2008, when the Watch Instantly feature made its stunning debut. With the flick of a switch, 6,000 films and TV shows were released from their industry-imposed cages to roam freely on the computer screens of Netflix subscribers everywhere. However, amid the fanfare, questions arose on the sustainability of the video-streaming model. Could a steady influx of new subscribers outpace hefty content licensing costs? There were also grumblings on limited catalogue. Despite the risks, the subscription-based, video-streaming experiment had begun.

When outdated TVs roamed the earth . . .

And so far, the model looks promising – very promising. Netflix has significantly expanded its Watch Instantly library, collecting content licenses like beanie babies. You can watch everything from Jersey Shore, to Blue Velvet, to Barney’s Great Adventure. While it has cost them a pretty penny, new subscribers have been coming out in droves. According to the Wall Street Journal, Netflix posted an 86% surge in profits for Q1 2011, fueled by a 69% boost in users since last year. The latest Sandvine report is a direct outcome of the surge in subscribers, gobbling up traffic like data-hungry Pac-Men of the Internet.

Neflix’s recent success comes with a new set of challenges. Broadband providers have begun targeting Internet users who eat up too much of the data-pie with metered plans. Analogous to those mean, old energy conglomerates monitoring electricity usage, your data consumption will be under corporate eyes, too. According to the Washington Post, AT&T capped data usage at 150GB in May, tacking on an additional $10 per month if users surpass the limit. While 150GB is quite a chunk of data (about 32 two-hour DVD-quality movies), usage-based pricing will directly impact a subset of Netflix’s data-gorging customer base, and some subscribers might feel deterred from signing up. I can hear the choir of parents right now: “Turn off that Netflix! If I get an Internet bill like last month’s, it’s coming out of your allowance!”

There’s also the issue of acquiring and keeping new content licenses, the lifeblood of this semi-tested enterprise. Even while profits have been growing, Netflix will continue shelling out epic dough for the rights to video-stream, with one market analyst expecting costs to jump from $700 million to $1.6-2.2 billion this year (WSJ). Netflix is betting that its booming customer base will continue to outpace these mounting costs.

Another concern is content provider relations. Criterion Collection bailed on Netflix last February, taking their 150 titles with them. While this is only a drop in bucket of Netflix’s massive library, it might be an omen of an even larger media company jumping ship. Also, if relations turn too sour, lawsuits could be on the horizon. It’s not a perfect comparison, but Grooveshark (a music streaming service) knows how frightening those big-media-company lawsuits can be. If enough titles are withdrawn, the reliable stream of Netflix memberships could slow to a trickle, accompanied by a wave of unsubscribers.

Even with these hurdles and risks, there are plenty of reasons for both Netflix and consumers to keep the hope for home entertainment freedom alive. Rapidly developing high-speed Internet infrastructure, the force that made widespread video-streaming possible, isn’t going away. Network penetration has been spreading over the past decade, and President Obama recently detailed plans to extend wireless broadband to 98% of Americans over the next five years. However, given that one-third of Americans still don’t have high-speed Internet access, the U.S. still has a ways to go.

What about those pesky usage caps? Given Google’s planned Gigabit network in Kansas City (100 times faster than current broadband) and the potential of 10-Gigabit networks, I think metered broadband is a problem with an expiration date. Internet services are always getting faster and more cost-effective, and those benefits almost always find their way to the consumer. Remember the Dark Ages of the Internet (1990s), when AOL had per-minute billing for dial-up (shudders)? This trend works in Netflix’s favor, and I’m confident that Internet gluttons of the future will be able to eat up video-streaming data without worrying about additional fees.

So what does this all mean for the average-American-TV-addict? We can see the changes all around us. Friends are knocking out entire seasons of Dexter on their computers over the weekend and it appears that TV-set ownership, that old mainstay of the American living room, is on the decline (the Independent). Also, according to Nielsen data, DVRs have seeped into 39.7% of U.S. households, up from 13.5% just four years ago. While this reflects entertainment liberation, DVR users are still limited to aired content, whereas Netflix subscribers can peruse vast digital repositories. Furthermore, the digital media receivers from Apple and Google are finding their way into homes and serve as platforms for Netflix and Hulu. This allows users to enjoy libraries of movies and shows on a familiar format, their own TVs, providing a possible check against falling TV-set purchases. While the adoption of these Smart TVs has been moving at a snail’s pace, they could dissolve the needless membrane that separates TV and Internet entertainment.

Together, these trends signify an ongoing shift in home recreation. Gradually, we are untethering ourselves from rigid TV schedules and are moving toward a more viewer-centered home entertainment milieu. All the pieces are out there: subscription-based content providers (Netflix, Hulu), Smart TVs (Google, Apple), and the accelerating speed and availability of broadband Internet. These three factors are coalescing, giving birth to a new home entertainment paradigm. Imagine having all the world’s music, TV, and film at your fingertips for one flat rate a month. Over the course of a lazy Sunday, you could tap dance along to old Fred Astaire flicks, veg out to a few classic Simpsons episodes, and end with the day with a re-listening of Abbey Road.

Netflix’s considerable upswing in Internet traffic is a sign that we are getting ever nearer to the couch potato’s Promised Land.  Nonetheless, even while we move toward more individualized entertainment, we’ll still want to watch those live watershed moments in unison, such as the first human on Mars, the Kansas City GoogleBots playing in Robo-Bowl XIII, 3D Holograms vocally sparring on Android Idol, and the inauguration of the first AI president (just kidding?).  One thing is for certain:  TV as-we-know-it is marked for extinction. I hope the meteor shower brought on by ultra-high-speed Internet crashes into living rooms soon rather than later. Let it rain, let it rain.

I’ll leave you with one of the many possible benefits of the home entertainment revolution. Save your family from an unspeakable tragedy!

[Image 1:  Wikimedia Commons (modified), Netflix]

[Image 2:  Wikimedia Commons (modified), Netflix, Microsoft Clip Art]

[Sources: SandvineSF Gate, Wall Street Journal, Washington Post, CNN]