Netflix Is Winning, but Who Is Losing?

This is Netflix's (NASDAQ: NFLX  ) world and every other content distributor is simply streaming in it. Internet traffic tracker Sandvine is out with its semiannual report on streaming trends, and the leading service continues to pad its lead.

Netflix accounted for 34.2% of the Internet's peak downstream traffic during the first half of the year in North America, up from a still healthy 31.6% during the latter half of last year. Amazon.com's gaining ground with Prime Instant, but it still accounts for a meager 1.9% of downstream traffic. We'll see if the addition next month of several iconic HBO shows helps boost Amazon's fortunes.

Think about that for a moment. Netflix streaming is taking up more than a third of the country's downstream traffic during peak usage periods. Sandvine also points out that the top 15% of video users -- categorized as exhibiting "cord cutting" behavior for their dependency on streaming -- took in an average of 100 hours of Internet video a month. Let that marinate, too. We're talking about folks spending an average of more than three hours a day streaming video. 

If Netflix and streaming video are gaining so much ground, who is losing? We know it's not Netflix. Despite accounting for less than 2% of peak downstream traffic it is actually gaining market share. Despite the 15% of the country consuming 54% of the total monthly network traffic, it's not as if those cord-cutters are leaving much of a mark. After a few years of declines we're seeing stability and even growth at some of the country's leading cable television providers.

It's not as if cable customers think that they're getting a good value. In another round of mind-blowing data last week, TV ratings tracker Nielsen revealed that the average U.S. home receives 189.1 channels but only watches 17.5 of those channels on average. We're watching just 9% of the channels that we're paying for, or -- put a more dramatic way -- we're paying for 91% of channels that we never watch. 

But we can't introduce logic when data tells us otherwise. Comcast is coming off back-to-back sequential increases in video customers, and Time Warner Cable posted its smallest sequential decrease in five years. 

So where are all of these hours that we're spending on Netflix coming from? Real-time viewing of broadcast TV is an easy target, but we can't ignore that video game sales have been slumping through most of the streaming video revolution. Even mobile gaming has come under fire lately with back-to-back quarters of sliding sequential bookings for niche juggernaut Candy Crush Saga.

In the end, Netflix's growth isn't coming at the lone expense of the pay-TV industry. The hours spent streaming today were the hours we spent playing games, reading books, or perhaps even surfing the Web in previous years. Netflix is throwing a bigger net than you think.

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  • Report this Comment On May 14, 2014, at 10:55 PM, PrivInvest wrote:

    Very interesting observations Rick. They could come from study time, exercise time or even working time. I can´t help but wonder if the late silly box (as the TV was referenced in it's beginnings) has come back to haunt us.

  • Report this Comment On May 15, 2014, at 9:23 AM, 24penny wrote:

    Over one third of internet traffic and they complain about paying for peering. Geeze.

  • Report this Comment On May 15, 2014, at 2:44 PM, thesmartestfool wrote:

    Rick - your logic is flawed. You're conflating "usage" with "growth." If NFLX content was offered a la carte, then there might be some correlation.

    For example, if lots of food was being eaten at a buffet, that doesn't necessarily mean the restaurant has more customers.

    Look at how many customers walk through the door to determine growth, not how much food is being eaten.

    In that same vein, don't bother looking at Sandvine's traffic numbers, rather look at Quantcasts numbers on how many people visited the site. You'll notice a drop in overall visits.

    The number of visits of course also doesn't have a direct correlation with subscriptions, but I'd argue that if there are fewer visitors, there are probably fewer new subscribers and thus growth is not accelerating. I'd also argue that the information from Sandvine shows that the existing user base is just streaming more content - especially now that NFLX paid for faster access speeds.

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