The Real Reason Netflix Invests in Network Tech

This summer, Netflix  (NASDAQ: NFLX  )  introduced a content delivery platform all its own. It was always a thing of beauty. This week, the "Open Connect" platform became even prettier.

Rather than relying on traffic management partners Akamai Systems  (NASDAQ: AKAM  ) , Level 3 Communications  (NYSE: LVLT  ) , and Limelight Networks  (NASDAQ: LLNW  ) to do the heavy digital video lifting, your service provider can simply give Netflix a call. The company will be happy to install specialized hardware boxes in convenient data centers, free of charge. The vast majority of Netflix's streaming content will then be delivered from these boxes, which are updated with fresh content in off-peak hours.

So everybody wins. Network service providers don't have to clog their Internet pipes with untold terabytes of Netflix movies every night, saving both customer headaches and operator bandwidth bills. End users get a guaranteed high-speed, high-quality connection to digital entertainment even at peak viewing hours. Netflix gets a firmer hold of its own operations, and says sayonara to content hosting costs flowing into Akamai and friends (though this is just gravy on top of the real benefits -- read on for more!).

Oh, and don't cry for Akamai -- Netflix always kept margins razor-thin on these accounts thanks to the negotiating leverage of extremely high volume. The content delivery guys can now resell that capacity to smaller customers at higher prices. It's all good.

But wait, there's more!
On Tuesday, Netflix announced that Open Connect now delivers "the vast majority" of Netflix video in Canada, Europe, and Latin America. The last straggler is, ironically, the domestic market, where Cablevision  (NYSE: CVC  ) was presented as the "most recent major provider" to join the party. You'd think Netflix would brag a bit if larger network operators such as Comcast  (NASDAQ: CMCSA  ) or Verizon  (NYSE: VZ  ) had signed on the dotted line, but the press release had to settle for the 3.2 million subscribers of America's ninth-largest cable system. So there's plenty of work to be done.

Which brings us to the "even prettier" part of the program. Netflix also unveiled a couple of brand-new and compelling reasons for installing Open Connect in your local network hub.

Say hello to Netflix Super HD.

What's so super about this? 
The average Netflix stream today pumps out about 2 megabits per second (or Mbps in techie terms) of digital video data. At the highest available quality setting, a high-definition film maxes out at 5.2 Mbps. More bits means more pixels, or the same number of display pixels but with more clarity and fewer compression artifacts.

But with Open Connect managing the data stream, you can now get a plain high-def stream at 7 Mbps. That should deliver a significantly clearer picture to your big-screen TV. And there's still more: Super HD connections can also deliver 3-D movies if you have 12 Mbps of bandwidth to spare. No other digital video service comes close to these high-quality data pipes.

You need something like Open Connect to take the load off local network service providers, or they'd all start asking for huge bandwidth payments. That's why Hulu can't do this. Neither can Amazon.com  (NASDAQ: AMZN  ) , despite all of its online muscle. Redbox Instant could do it for customers connected to co-owner Verizon 's (NYSE: VZ  ) networks, but could hardly install delivery boxes in the data centers of rivaling network operators.

So far, I understand that only Cablevision and the Google  (NASDAQ: GOOGL  ) Fiber project in Kansas City have installed Open Connect hardware on American soil. To see if your service provider has enabled Netflix Super HD yet, check your status right here. Please share your results in the comments box below.

What Netflix is doing here goes beyond just taking a load off the public Internet. These Open Connect hubs give Netflix the power to deliver unique services like these high-traffic data streams, and I bet we ain't seen nothin' yet.

The next step might include even sharper images as 4K TV screens trickle down into the mainstream, or maybe a whole new breed of interactive services. Too soon, you say? Think again -- it's already work in progress. Netflix showed off 4K super-high definition screens at this week's CES show, filling up an 85-inch TV by Samsung.

So Netflix is running a few steps ahead of the competition here, and I don't see anybody else catching up anytime soon. By the time they do, Netflix will have mastered the content delivery game and moved on to the next greenfield selling point. These are the perks of dominating a market while it's still taking shape.


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