Oleg Zabluda's blog
Monday, October 31, 2011
 
Netfix stock is down 73% from its high.
Netfix stock is down 73% from its high.

Netflix DVD/Blu-ray shipping business is great and is the best. We've been customers for 10 years and loving it. Streaming - not so much. Blu-ray is 54 Mbps. Streaming is 6 Mbps max, 1Mbps being more typical, depending on the network conditions. There is no option to download at night, when we are asleep, or during the day, when we are at work, so that we can watch it in the evening. Neflix has about 100K DVDs, and about 1K streams, mostly TV series, they count each episode individually, so that it looks like they have 10K, but nobody is fooled.

Netflix has defensible competitive advantage in physical DVDs - most customers, huge shipping centers, economy of scale, order history driving recommendation engine, etc... With streaming - not so much. They buy content from owners, just like everybody else, then they pay so-called CDNs, like Akamai or L3 for the delivery to the viewers. They also pay Amazon for using their EC2 computers. Amazon is also in the video streaming business, and actually owes CDN called CloudFront.

Other competitors are Google/YouTube, which doesn't pay internet transit at all. Then there are cable/phone ISP companies like Comcast or AT&T, which also don't pay. Anybody, at any time, can pay a CDN to deliver content, including content owners themselves. Then there is Apple.

I don't see any way how Netflix can compete with any of those companies in streaming, especially after Netflix started doing things which are just crazy, like the aborted splitting the only advantage they have - DVD customers, into a separate website.

If Netflix was so smart, maybe they should have tried to build or buy a CDN when maybe they could. Or if they couldn't, just live with it. Not everyone should be in the video streaming business. It only seemed to them that it's a natural business for them to expand to, but it never seemed like that to me.

http://www.google.com/finance?q=netflix
http://www.google.com/finance?q=netflix

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