Why no one is buying Netflix: ISP bandwidth caps

Yesterday, Forbes practically screamed for someone to buy Netflix. Here’s why that isn’t happening:

ISP bandwidth caps have severely limited the potential of 3rd party streaming video services.

Simple math proves this. To properly compete with Blu-ray, cable and satellite options, streaming video has to offer HD resolution and surround sound audio. Currently, Netflix’s HD streams top out at 4800 kilobits per second. The standard ISP bandwidth cap is 250 GB/month. This cap disincentivizes Netflix usage as much as it does getting a faster connection. Using Wolfram Alpha again as I did then, I can compute that assuming you don’t use your internet connection for anything else, you can watch only 115.7 hours of Netlfix HD video per month before you exceed your ISP’s bandwith cap.

Assuming there are 30 days in each month, 115.7 hours/month allows 3.86 hours/day of Netflix HD streaming per internet connection. That’s regardless of how many people or Netflix accounts use that connection.

That’s disastrous for Netflix for several reasons:

  1. It puts them at a signifcant disadvantage against cable/satellite/Blu-ray, all of which are effectively unlimited
  2. It places a hard limit on the amount of content Netflix can deliver to a given household. Netflix’s streaming service tiers are priced based on how many multiple streams are allowed per account. Since the time limit applies regardless of how many streams are allowed, upgrading to a higher Netflix tier simply means you have less time per stream and does NOT allow you to view more content in total. This effectively limits Netflix’s revenue per household as it eliminates the biggest incentive to upgrading to a higher service tier or opening a new account which uses the same internet connection as a pre-existing one.
  3. It creates complications for cases in which one internet connection is used by multiple people. For example, households of 4 occupants can separately view less than an hour a day of Netflix HD video

While most Netflix users have yet to encounter bandwidth caps, more of them are likely to – whether via use of Netflix or other services – as video consumptions shifts increasingly to the internet.

Netflix isn’t the only company to be adversely affected by the above. Hulu hasn’t been bought despite being available for sale for a while now, and deal prospects are waning. Ironically, the best suitor for either of these companies would be – gasp – a large incumbent ISP. However, even an ISP buyer which relaxed caps for Netflix on its own network would still face limits when delivering content to customers on other ISPs. Such a buyer could limit Netflix to its own subscribers, but that would undo nearly all the growth the service has ever seen.

Thanks to bandwidth caps, 3rd party streaming video is neither the end run around traditional subscriber video that cord cutters have been hoping for nor the cash cow that investors were once enamored with.

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