Will Netflix kill the internet?

[Sonic Youth]

Will Netflix kill the Internet?
Peter Burrows,
Bloomberg Businessweek


By any measure, Netflix 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 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 a typical evening, according to Sandvine, which makes network-monitoring equipment.

At San Francisco's 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," Hastings said, "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 smart-phone owners in the United States, many of whom want to catch up on "Glee" while in line at the supermarket.

Triple the traffic

The most widely cited estimate of Internet traffic, from networking giant Cisco Systems, 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.

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 said. His worst-case scenario: Carriers halt upgrades, leaving customers with slow connections and hindering Internet innovation.

The issue is as much about economics as technology. For the same $40 monthly broadband fee, people 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 highlights this "revenue-per-bit" problem. The report predicts that carriers such as AT&T and Comcast will see Internet revenue grow by 5 percent a year through 2020.

Meanwhile, traffic will grow by 27 percent annually, and carriers will need to increase their investment by 20 percent a year to keep up with demand. By this math, the carriers' business models break down in 2014, when the total investment needed exceeds revenue growth.

Juniper CEO Kevin Johnson presented these findings at a company event attended by 227 carrier executives. Few of them flinched.

"At least half of them said it wouldn't happen in 2014 - because it was already happening," he said.

Crunch is coming

Juniper stands to gain by selling the networking equipment that eases the carriers' pain, so take the company's analysis with a grain of salt. While few experts expect carriers to stop investing in new capacity, there's widespread agreement that a financial crunch is coming.

Sanford C. Bernstein analyst Craig Moffett has studied the issue from the perspective of the wireless carriers. As traffic soars, he expects the revenue per megabit to fall from 43 cents today to just 2 cents in 2014. That means a far lower return on investment, a key measure for telecom companies.

"The carriers are faced with an incredible deflationary spiral," Moffett said.

The tussle between Comcast and Level 3 Communications shows how the issue can become electric.

Level 3, which operates backbone networks that quickly ship bits between cities, recently struck a deal with Netflix to help speed delivery of its streaming videos. The result was a sudden surge in Level 3's traffic, which eventually goes through Comcast's cables to reach subscribers.

On Monday, Level 3 accused Comcast of charging exorbitant rates to carry the additional traffic. Comcast shot back that it had no obligation to bear the load for free.

The exchange is a sign of the times: Even if the technology is up to the task of shipping huge data packets, no one is sure how to pay for it.

Ultimately, most experts expect that people who are the heaviest data users will have to start paying more, most likely in the form of tiered pricing plans. These are already common in Europe and Asia, but Americans are used to no limits.

The wireless networks have already moved in this direction: In June, AT&T discontinued its $30-a-month unlimited data plan, forcing mobile consumers to choose between an 0.2-GB-per-month plan or a 2-GB-per-month plan. On Wednesday, Federal Communications Commission Chairman Julius Genachowski approved limits for fixed-line networks that carry data to home or businesses, and said carriers should have "meaningful flexibility ... to address the effects of congestion."

Such changes are new enough that the big data senders like Netflix haven't yet adapted to them. But on an otherwise triumphant earnings call on Oct. 20, Hastings did concede that AT&T's data plans might limit demand for watching movies on mobiles devices.

To Bernstein's Moffett, it was a striking admission.

"That was the first time I've heard one of those tech CEOs admit what should be obvious: that you can't simply bet on continued bandwidth availability."