Netflix Takes Aim at the Cable Guys, With a Promise to Start Firing Tomorrow

Interesting PR campaign from Netflix, which is fighting with the cable guys and telcos over the cost of delivering all that streaming video to your living room: The company is going to publish a list of broadband Internet providers, ranked by performance.

Netflix CEO Reed Hastings’s letter to shareholders goes on about his company’s position vs. the ISPs at great length, and I’ll reproduce it at the bottom of the post.

But you can summarize it in a sentence: If the broadband guys insist on gouging us to get video to our customers, we’re going to make a very public stink.

So tomorrow’s list is a warning shot, meant to give the ISPs a sense of where Netflix is willing to go on this one.

Hastings says the list will detail “which ISPs provide the best, most consistent high-speed Internet for streaming Netflix,” and offers a preview: Charter is tops, right now.

But if you invert Hastings’s description, you get what he really means: We’re going to tell some broadband customers that they’re getting screwed and should switch to a new provider. Heads up, Time Warner Cable, Comcast, etc.

In other news, Netflix casually tossed off another very good quarter: The company added three million subscribers in the last three months of 2010, and says that a third of its new customers are choosing its new streaming-only plan. International expansion is still on the table for 2011 and is a major focus for Netflix going forward, Hastings said.

Here’s his warning/threat to the broadband business:

Recently the FCC adopted a version of net neutrality for wired networks in the U.S., and it’s a step in the right direction. The focus is on fair-play within an ISP’s network, but does not explicitly address entry into the ISP’s network.

Delivering Internet video in scale creates costs for both Netflix and for ISPs. We think the cost sharing between Internet video suppliers and ISPs should be that we have to haul the bits to the various regional front-doors that the ISPs operate, and that they then carry the bits the last mile to the consumer who has requested them, with each side paying its own costs. This open, regional, nocharges, interchange model is something for which we are advocating. Today, some ISPs charge us, or our CDN partners, to let in the bits their customers have requested from us, and we think this is inappropriate. As long as we pay for getting the bits to the regional interchanges of the ISP’s choosing, we don’t think they should be able to use their exclusive control of their residential customers to force us to pay them to let in the data their customers’ desire. Their customers already pay them to deliver the bits on their network, and requiring us to pay even though we deliver the bits to their network is an inappropriate reflection of their last mile exclusive control of their residential customers.

Conversely, this open, regional, no-charges model should disallow content providers like Netflix and ESPN3 from shutting off certain ISPs unless those ISPs pay the content provider. Hopefully, we can get broad voluntary agreement on this open, regional, no-charges, interchange model. Some ISPs already operate by this open, regional, no-charges, interchange model, but without any commitment to maintain it going forward.

Tomorrow, we’ll publish on our blog ongoing performance statistics about ISPs collected from our 20 million subscribers detailing which ISPs provide the best, most-consistent high speed internet for streaming Netflix. We can tell you now, though, that for our subscribers streaming Netflix, Charter is the highest-performance ISP in the United States.

Recently, there was a report that at peak times Netflix subscribers in the U.S. were driving about 20% of peak downstream last-mile Internet traffic. This may or may not be accurate, but it should be noted that because we pay for the data to be delivered to regional ISP front doors, little of this traffic goes over the Internet or ISP backbone networks, thereby minimizing ISP costs, avoiding congestion, and improving performance for end-using consumers.

An independent negative issue for Netflix and other Internet video providers would be a move by wired ISPs to shift consumers to pay-per-gigabyte models instead of the current unlimited-up-to-a-large-cap approach. We hope this doesn’t happen, and will do what we can to promote the unlimited-up-to-alarge-cap model. Wired ISPs have large fixed costs of building and maintaining their last mile network of residential cable and fiber.

The ISPs’ costs, however, to deliver a marginal gigabyte, which is about an hour of viewing, from one of our regional interchange points over their last mile wired network to the consumer is less than a penny, and falling, so there is no reason that pay-per-gigabyte is economically necessary. Moreover, at $1 per gigabyte over wired networks, it would be grossly overpriced.