Netflix Drops the Stick, Grabs a Carrot

Netflix (NASDAQ: NFLX  ) used to tie its highest-quality video streams exclusively to the in-house content delivery system it developed. The combo of Super HD video and Open Connect delivery is popular in overseas markets, but hasn't caught on in America.

Okay, so the big stick didn't work. Let's drop it and pick up a carrot instead.

Starting this week, Netflix customers everywhere can enjoy high-quality Super HD and 3D streams even without an Open Connect box installed at your service provider.

This anonymous-looking chunk of server hardware is no longer mandatory for Netflix Super HD streams -- but it can save your service provider some costs. Will the carrot do what the stick never could? Image source: Netflix.

What's the big deal? Well, everybody likes a smooth video without compression defects. Regular high-def streams from Netflix consume about 3 megabits per second, but the Super HD version doubles this to roughly 6 mbps. It's still the same 1080p resolution, but with better sound and fewer compression artifacts. You know, those ugly moments where a part of the picture turns blocky like the pixelated faces in police videos.

This higher-quality experience is a potential selling point for Netflix. It sets the service apart from competitors like Amazon.com and Hulu, both of which max out at 720p resolutions and roughly 3 mbps of bandwidth slurping. Having Open Connect hardware in the ISP's data center is another moat builder for Netflix, because it guarantees quicker delivery and fewer downloading hiccups than reaching out to external servers for every chunk of video data.

Tying these two features together was an attempt to force the service provider's hand. "Use Open Connect, or you won't be able to promise top Netflix quality to your customers!"

But the Bad Cop approach has failed in the U.S., so here comes the Good Cop.

"Based on the performance data we've seen, and in response to member requests, we are now expanding availability to give all our members the ability to enjoy Netflix in the best possible quality," said Joris Evers, director of Netflix communications.

So now these high-bandwidth streams can start sucking down double the peak data rates everywhere. The incentive to install Open Connect just became a direct cost savings: Without this trick to keep Netflix traffic mostly internal, your Netflix-related backbone traffic will increase dramatically. This costs money. Now will you order a few Open Connect installations?

I would not be surprised to see Verizon (NYSE: VZ  ) and Comcast (NASDAQ: CMCSA  ) suddenly changing their minds about Netflix Open Connect. Maybe it's not such a bad idea to let some foreign hardware into the data center if it slashes peering costs. Remember that Netflix videos account for one-third of all Internet traffic in peak viewing hours. Reducing the external traffic load would be a big deal for Verizon, Comcast, and friends; a sudden spike would be very unwelcome.

Netflix publishes speed reports every month, consistently showing that Open Connect partners deliver higher data rates. This move comes too late to change the next report very much, but the early November rundown will be veeeery interesting. Will Open Connect users still enjoy higher data rates on average, or will bandwidth surge across the board? The answer to that question will make a huge difference to how Comcast and Verizon think about their Open Connect policies.

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