If you were building a startup, would you go head-to-head with Apple? And if you did butt heads with Apple, would you also challenge Amazon, Comcast, the rest of the cable industry, and every studio in Hollywood?
No, you wouldn't. But that's the roster of enemies that now face one startup. It's called Netflix.
When Netflix launched back in 1997, its list of enemies was much shorter. It pretty much stopped at one company -- Blockbuster -- and the startup made pretty quick work of Blockbuster and the rest of the brick-and-mortar video rental industry, fighting alongside other services such as iTunes and Redbox. But in the process, this one-time DVD delivery outfit backed into becoming one of the most popular tech companies on the internet. As a result, Netflix has become the accidental enemy of the biggest tech, cable, and entertainment companies in the world.
Under such weight, many companies would be crushed. But Netflix is able to resist because it dominates one of the most valuable commodities on the internet: your eyeballs. With its online streaming service, Netflix is serving up the future of television and movies. That's undeniable. The question is whether it can hang on to that future as the pressure increases. Here's what it's facing.
Amazon Reborn
At first, the streaming video that Amazon offered as part of its unlimited two-day shipping Prime subscription seemed like an odd perk. What did video have to do with online shopping? But as Prime's popularity has surged, Amazon Instant Video has become a viable Netflix competitor.
In findings touted by Amazon, online video tracking company Qwilt reports that Amazon Instant Video has leapt past Apple and Hulu over the past year to become the third-biggest streamer of video in the U.S. by traffic volume. Qwilt takes an interesting approach in that rather than individual views it measures total bandwidth consumed, a category famously monopolized by Netflix, which is said to account for nearly one-third of all downstream internet traffic. Only YouTube stands between Netflix and Amazon's aggressive push into video content, which now also includes the Fire TV, a dedicated set-top box to serve up Amazon video on your TV.
On top of all that, Netflix runs its streaming service on Amazon's cloud platform. But, ironically, this means that even as its rivalry with Netflix heats up, Amazon can't afford to alienate a foe that also happens to be one of its most important clients. Netflix's popularity equals visibility, which is also why the Fire TV includes a Netflix app alongside Amazon Instant Video. Today, a set-top box without Netflix, which still far outstrips Amazon in overall video traffic, simply won't sell. That's why the startup can still win.
The Bandwidth Problem
On a different front in the battle for video, Netflix has started streaming select shows in 4K, the latest in ultra-high definition. With the first 4K televisions just hitting stores, the demand for the format will start small, and plenty of skeptics doubt it will take off at all. But if Netflix hopes to compete with traditional television networks, it has to prep itself for the possibility that 4K is another venue in which it will have to compete.
The big snag for Netflix is that traditional networks and cable companies go way back -- so far back that their shows are delivered on a completely different set of pipes. If Comcast and others make 4K widely available, TV networks can flip that switch. For Netflix, on the other hand, 4K becomes a major bandwidth issue. The recent melee around net neutrality and peering has led, among other things, to Netflix agreeing to pay a fee for more direct access to Comcast's network. For the bandwidth 4K demands, cable companies might try to exact an even higher toll from Netflix.
Once again, however, Netflix has more leverage than might be expected of a company so dependent on others to deliver its product. Along with the possibility of a technological end-run around cable ISPs -- not happening soon, but not out of the question -- Netflix's sheer popularity means cable companies can't simply cut it off. Yes, cable companies have monopolies in many markets. But they're rarely the only option for broadband access. A cable company that consistently fails to deliver Netflix well is opening itself up to complaints from tens of millions of dissatisfied customers. If Netflix can hold off streaming competitors like Amazon, it can also force the cable companies to keep cooperating.
The Skeptics Are Selling
Wall Street's relationship with Netflix has always been bipolar. Netflix has good news: its stock price surges. Netflix has bad news: its shares fall off a cliff. Back in Netflix's darkest period -- call it the Qwikster days -- the company clumsily tried to break off its DVD service and regroup as a streaming-focused company. In the year or so after that famous failure, Netflix shares spent much of their time in the mid-double digits before shooting up in early 2013 to become one of last year's highest-flying stocks.
That same volatility has now hit Netflix again. During the widespread downturn in tech stocks that started in early March, Netflix has shed nearly six months of gains. That still has Netflix trading far above its doldrums, closing at nearly $349 a share yesterday. But the company's rocky past should be enough to make any shareholder nervous. "People with equity in Netflix are in a difficult place," Felix Salmon wrote during a similar plunge a few years ago. "Their company is locked into a model where it pays billions of dollars for streaming rights, while keeping the price to subscribers dirt-cheap. That’s a model which on its face looks much more attractive to the content creators than it does to Netflix."
But if those creators -- aka Hollywood -- can squeeze Netflix on licensing fees, Netflix also has gained the leverage to squeeze back. Streaming video has become a key way for networks to drive interest in their shows, especially around serial dramas, allowing new fans to binge-watch their way into catching up (Breaking Bad is the textbook example). Every movie streamed on Netflix is a potential DVD that goes unsold, but Hollywood knows the days of physical media are done. Streaming is the future and, despite all its flaws, streaming is the medium Netflix rules. As long as Netflix can keep its grip on our attention, everyone else is forced to play along until they can figure out how to beat it. If Netflix loses that grip, on the other hand, it doesn't have much to fall back on, aside from a few dusty DVDs. It could go either way.
