This is our 'blog. This is the home of longer pieces about television and how it's changing.

We also have a much more active tumblr blog where we share links, quotes, pictures and other miscellaneous digital detritus about the tech industry in general, the emerging TV space, and Synchronize.TV the company.


The New Reality of Netflix

There have been a ton of comments online about the Netflix price changes. Many of these comments are along the lines of “the postage costs are hurting Netflix”. I’m going to take a different view and point more at the streaming business. We’ll break this into two sections, delivery costs and content acquisition costs.

Netflix DVD by Mail Business Delivery Costs

Netflix runs a profitable business renting DVDs by mail, largely because they know their maximum exposure is metered by the speed of the postal service and their own turnaround time (which they will adjust if you’re getting too many discs). Netflix is totally in control of this maximum exposure.

If you’re on the one-disc-at-a-time plan you pretty much max out at 8 discs a month, and you really need to work at it to get that many. Furthermore, whenever I get near 8/month going, “the post office” always manages to take a few extra days to make a return so I end up with 7 that month. I imagine Netflix breaks even or loses a little money with one-at-a-time customers who turn 8 discs a month. I also imagine fewer than 5% of Netflix one-disc-at-a-time customers come anywhere near 8 discs a month.

Netflix Streaming Business Delivery Costs

First of all, we need to understand that Netflix does not stream anything itself. It hires 3rd party companies called content delivery networks (CDNs) to do the streaming. Akamai and Level 3 are example of some of the CDNs Netflix works with. CDNs don’t charge a flat rate per user, they charge for traffic through their network. There are some price breaks as the volume increases, but basically the graph is linear. CDNs have huge capital infrastructure and bandwidth expenses and are not cheap at scale.

With unlimited streaming, Netflix’s maximum exposure is not in its control. Netflix modeled its streaming business based on a volume of usage it experienced in the DVD rental business. For a long time, that model worked well. Streaming usage was light, expenses were under control. But streaming has taken off. People are streaming much more than Netflix expected, and unlike in the DVD rental business, there’s no way for Netflix to meter the usage on its side to control its maximum exposure. If I want to stream Netflix 24/7, I can, and I’m going to eat up the portion of my subscription fee allocated to content delivery in CDN costs pretty fast if I do.

But content delivery is not the only expense.

Content Acquisition

Netflix is one of the largest buyers of DVDs in the world. This gives it enormous leverage in negotiating prices for content. The content owners it is negotiating with to buy massive quantities of DVDs at really high margins are the same people who own the streaming rights to the content.

One of the reasons you see so much crap on Netflix Streaming is that the studios throw in the shitty movies and failed TV shows for cheap (or maybe even free) because Netflix is such a good customer buying DVDs (which are quite profitable). This is also why you see the SAME shitty movies and failed TV shows on Amazon VOD; Amazon also buys a boatload of DVDs.

So streaming is taking off and people are loving the convenience, but they think the programming sucks. Now Netflix is discovering that the good TV shows and recent movies are not just free add-ons that the studios are willing to throw in to sweeten an order of 1,500,000 Dark Knight DVDs. What happens when Netflix wants to buy fewer DVDs because more of its customers are streaming? It LOSES leverage in streaming negotiations. WB is not going to throw in as many old movies and TV shows for free if Netflix only wants to order 250,000 Dark Knight DVDs.

Netflix is also competing against a different set of players -- it is suddenly bidding against companies like HBO. HBO is owned by Time Warner. Time Warner also owns New Line Cinema and Warner Brothers. So when the negotiations for the Harry Potter 1-7 streaming rights happens, who wins? Netflix or HBO (and their HBO Go streaming service)?

Finally, the structure of streaming rights is very different than physical rentals. The laws regarding rentals of physical media are well defined and quite mature. That all got hashed out in the VCR revolution in the 1980s. Once Netflix owns a disc, it can rent it out for as long as the DVD physically lasts without paying the content owner any more money. With streaming rights, the studio wants to get paid every time the movie is streamed.

So what is going to happen here?

There are a lot of possibilities. The CDNs are going to make a fortune. As the content gets better, unlimited streaming is not going to last at a reasonable price. Netflix is going to work hard to be able to control its maximum exposure.  Until it does, look for prices to keep on rising.


Synchronize.TV on NewTeeVee

Last week I spent an hour or so chatting with Janko Roettgers with GigiOm's NewTeeVee blog. He wrote a nice piece on what synchronize.TV is working on and out vision for the future of television.

Here's a link, check it out.


The Death of Cable TV? "Cord Cutters" are Not the Threat.

We might be further from mainstream cord cutting than some people would like.

With Apple TV, Google TV, Boxee and a host of other streaming video services launching, there’s a ton of talk in the connected TV space about “cord cutting,” or dropping your TV subscription and getting all your TV programming over an IP data connection.

According to a report in Engadget over 20% of peak internet downstream bandwidth is Netflix streaming. Let me start out by saying I am somewhat skeptical of this data and they don’t publish the research methodology. But for the sake of discussion let’s take it at face value and extrapolate a bit.

Netflix recently published their Q3 numbers. They have 16 million total subscribers. 11 million of them use streaming for at least 15 minutes a month. Now 15 minutes a month is a pretty low threshold. For the sake of argument, assume 6 million of these people are getting most of their video programming though Netflix On Demand and using most of that bandwidth. I consider myself a pretty heavy Netflix On Demand user and I use it maybe 20 hours a month, and that is well under half of our TV viewing. In the average American household, the TV is on for ~250 hours/month. So 6 million people getting most of their programming via streaming is almost certainly an overestimate.

There are 300 million people in the US, and the market penetration of TV is effectively 100%. Therefore using the 6 million number, roughly 2% of Americans are getting their programming via Netflix on demand. The 115 million TV household number is not really that relevant as most houses have multiple TVs. When little Sally turns on the TV in her bedroom while mom watches in the living room, the household bandwidth doubles.

These 2% are using up 20% of the available downstream bandwidth.

Netflix streaming grew 145% in the last year. If it does that again in the next 12 months Netflix will use 50% of the available downstream bandwidth.

What happens when video streaming goes really mainstream and 50% of Americans start becoming heavy streamers via Netflix? Assuming there is no other growth in bandwidth demand (very unlikely) it will be necessary to have a nearly sixfold (580% increase) increase in downstream bandwidth to keep the same level of service we have now (500% of current bandwidth to support video streaming and 80% of current bandwidth for everything else).

So what does this all mean?

It means that the mainstream adoption of streaming will require massive capital expenditures in infrastructure to support, and it’s not Netflix’s infrastructure that will need most of the upgrades. It’s the local MSO, the one who is getting less revenue from cable TV subscriptions. How will this get paid for? Higher fees for data. Unlimited data will go away. Metered data will become the norm.

At the end of the day, there’s no free lunch.


Web Innovation 29

Synchronize.TV has been invited to demo at WebInno next week. This will be the first time that the technology will be demonstrated in public.

We'll be showing an iPad app developed with our API (we might be showing an android version too if I have time to port it over).

Sign up here (it's free).


What Does "Watch TV" Mean?

The average American household consumed 8 hours and 21 minutes of TV per day in 2009.

There are three different usage paradigms for television: active interaction, passive consumption, and background consumption.

Active Interaction
People have been working on cracking this nut for a long time with little consumer success. I was working for an interactive TV start up in 1990; we did classified ads, sports scores, photo albums, and weather. Recently TV widgets have become a hot new meme -- they're just another take on the same interactive TV ideas that consumers have already rejected. Television watching is in its essence a passive medium. All the wishing in the world is not going to change that. The only real success in active interaction with the TV has been the console-based video game business. From a real world perspective, this consumption paradigm is de minimis and I expect it to remain so.

Passive Consumption
Passive consumption has some brief interaction at the beginning of the session to start or select a video, followed by a long period of passivity. Over the years, this interaction has changed from choosing a channel, to putting a tape in the VCR, to starting a DVD, now it's becoming manipulating the VOD interface (either a local DVR or a streaming service). This brief interaction is followed by a long period of passive, albeit engaged, consumption. If the capability exists in the delivery channel, users often skip commercials. This is what is generally considered "watching TV," but it does not constitute the majority of the TV consumption in the US. This is the consumption paradigm that most "TV start-ups" are focused on. This business has been disrupted many times since 1975, when Sony introduced the Betamax. Each time, the programming selection method changed, and each of these changes was a disruption that was predicted to bring down TV. None of them did. TV consumption continues to grow. It will be disrupted further but this disruption, like the previous ones, will not change the majority of television consumption.

Background Consumption
The vast majority of television consumption in the US (better than 75%) is background consumption. Background consumption is what drove the average daily household television viewership in 2009 to 8 hours 21 minutes. Since 1997, despite a fracturing media landscape, despite dozens of new consumption channels, the average American household consumes ~20% more TV now then it did before the internet revolution. Americans are NOT watching less TV because of the internet and online video: they are watching more. Many Americans leave the TV on in the background at home during all their waking hours. They briefly engage with it and go back to other tasks. It's companionship. It's serialized, interrupt-driven content snacking. They leave the TV on while the cook, or eat, or clean the house, or surf the internet, or tweet and play on Facebook, or play World of Warcraft, or have sex. Commercials are not skipped in this use case. Attention is shifted away, attention is shifted back. The influence is subliminal but very real.

Finally, the expected default behavior of television is not to wait for user input. You turn it on. It makes noise and shows you pictures. It does not start an interrogative. If you like what it's showing you, you leave it alone. If you don't, you change the channel.