Can Netflix survive as an independent, or will Verizon sink it like Napster?

Verizon, Redbox announce partnership even as Netflix content thins

There are a lot of ways to judge how popular an Internet service is.

One is to measure how much traffic it generates across open Internet links, especially during peak hours that conform roughly with prime-time TV viewing hours in the U.S.

By that metric, Netflix is the most popular thing on the Internet.

According to Sandvine, Inc., which makes network-management products for carriers and publishes reports on Internet usage, video traffic from Netflix makes up 32.7 percent of all the traffic flowing across the 'net during prime time.

That number, from the most recent Sandvine report, in late October, is 37 percent higher than the previous October, when Netflix made up only 20.6 percent of all the traffic online during peak hours.

Netflix' popularity, and relatively low price even after its big price split last fall, shows how eager consumers are to watch what they want to watch when they want to watch it – rather than engaging Video on Demand at absurdly high prices, awkward interfaces and limited content menus, which is what they get from most carriers.

Netflix is vulnerable right now. Ever since Netflix lost Starz as a primary content provider its listings have been thin and the number of exciting new movies and TV shows has been disappointing.

Since then Netflix has had to deal with the still-undetermined regulation of the ISP business by the FCC -- regulations lobbying by Verizon, Comcast and other carriers skewed so the rules give them a loophole to continue throttling traffic, speeding every kind of content except that from and all the other technical tricks that can be used as anti-competitive weapons.

Now it has to deal with yet another major competitor, this time from Verizon itself, which just formed a joint venture with Coinstar, Inc., which replaced BlockBuster as the physical-movie-medium rental source of choice by putting its Redbox vending machines in retail stores in 34,000 locations nationwide.

Forming a partnership with Redbox could be considered a way to reduce competition for Verizon's movie services through teamwork with a vendor that specializes in retail locations and physical media, rather than Internet connections and streaming media, as Verizon does.

Wall Street sees it clearly and overtly as a way to compete against Netflix.

“The service will have a Netflix look and feel, which means it will likely offer more generic library content, and not the latest shows and movies, in terms of digital rights,” according to a BusinessWeek story quoting Christopher Watts, an analyst at Atlantic Equities LLP in London. “That’s the model Verizon is aiming for.”

Verizon which, along with Comcast and most other big cable TV/ISP businesses, already offers its own services for sale, but can always use a hipper interface and more content, according to telco analysts.

Apple, Google, Amazon and Dish Network are also working on or have already launched content networks to compete with Netflix.

So what's going to happen to everyone's favorite TV-series-on-demand Internet content provider? The one whose service eats up one third of all the available Internet bandwidth in the U.S. during peak hours?

Financial analysts give Netflix an edge due to its installed base of almost 22 million homes.

Considering that one or more of its competitors are already in most of those homes, that advantage isn't as great as you'd think.

Netflix might continue to be the carrier-independent leader in online content, but in the long run it faces tremendous competition from both the content services and the unfriendly network presence of Comcast, Verizon and others.

Can Netflix survive when it has to rely on competitors to deliver its content without slowing it down and reducing its quality, while also trying to make up for a thinning menu of shows and movies?

It can't do that and keep the kind of market share that lets it eat up a third of the available bandwidth during peak hours in the U.S.

It may not be able to survive at all.

Within the next couple of years it might turn out that Netflix is this generation of the Internet's Napster.

Yes, Netflix has a better business model, longer track record, more professional management and far better menu of content than the amateur-hour performance of the file-sharing startups that defined the streaming-media market in its salad days – which ended March 5, 2001, when a federal court ordered Napster's first incarnation shut down permanently.

It also has a list of enemies just as long and just as powerful as Napster did, and no inherent base service as Comcast, Verizon and other providers do.

Can a service-only content provider compete with content providers that also own the wire, the router and the Internet account of the customers both companies want to capture? Especially when the FCC seems to be doing all it can to help Goliath slay David?

It's one of those questions on which I hope I’m wrong, but my instinct is to say the answer is 'No.'

Read more of Kevin Fogarty's CoreIT blog and follow the latest IT news at ITworld. Follow Kevin on Twitter at @KevinFogarty. For the latest IT news, analysis and how-tos, follow ITworld on Twitter and Facebook.

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