Digital video frontrunner Netflix
But there is one real problem that could trip Netflix up, depending on how consumers, governments, and service providers the world over (but particularly in America) allow the scenario to play out. You guessed it -- I'm talking about bandwidth caps and metered broadband services.
There are already precedents for these attempts to clamp down on -- or flat-out profit from -- data-hungry online services like Netflix video streams. Several Canadian service providers have capping programs already, prompting Netflix to slim down its Canadian customers' bandwidth-hogging needs. In the U.S., the issue is mostly mobile at this point, as Verizon
This is the real deal and a real threat. Where is the bandwidth issue going, and how will it affect Netflix? Let's jump into our DeLorean, fire up the flux capacitor, and explore two possible futures.
Netflix is dead in 2015
In this future, the service providers will get everything they want and also make some smart, ruthless strategy decisions, while customers fail to revolt. It's a scary future for Netflix.
- Numerous bills on network neutrality and open Internet policies will be shot down before becoming laws or regulations.
- From obvious player Comcast
to wired-and-wireless latecomer Verizon and prepaid cell specialist Leap Wireless (Nasdaq: CMCSA) and everywhere in between, every high-speed Internet service provider will offers its own expansive and affordable slate of video services. Their video products will add value to the network subscription, and they'll be allowed to prioritize in-house video traffic over Netflix streams, or homegrown music services over Pandora (Nasdaq: LEAP) , and so on. (NYSE: P)
The only digital media services that look and sound good without triggering exorbitant surcharges will be from the service providers themselves. It will be impossible to run or start-up an innovative media business such as Netflix because there will be no way to stay competitive while also making a profit.
If you like the media landscape in 2015, that's just great -- because it'll be the same in 2020 and 2025 as well. Telecom and cable companies prosper will like there's no tomorrow, and Netflix will be diminished to a shrinking niche player, the marginalized Blockbuster of its generation. Elsewhere, Sirius XM Radio
Netflix wins in 2015
In this alternate reality, Netflix wins the lottery: Service providers will fail to bend Congress to their will and leave digital video well enough alone. The few exceptions, mostly cable providers cast from the Comcast mold, will find themselves forced to compete with Netflix, Hulu, and a revamped YouTube on a level battlefield. That's a losing proposition if you're used to enjoying unfair advantages.
Data caps will still exist, but typically as a low-cost alternative next to reasonably-priced all you-can-eat options. Running into these glass ceilings will be rare and easily fixed with a fairly painless service upgrade. In 2015, fair competition will be alive and well.
So the new broadcast media landscape will turn upside-down. Netflix will not own the entire market, but instead dominate its clearly defined niche, which is a value-priced subscription service with a very small side order of latest-and-greatest hits alongside a nearly complete library of older material. Here, Netflix will be able to afford streaming licenses for pretty much everything in the old DVD catalog, so that service is now obsolete. (Perhaps it will be spun off as DVDflix in 2014 and slowly wither on the vine.)
In the neighboring music industry, the same environment changes will lead to a slightly different outcome because songs are inherently less data-intensive than videos. Sirius will occupy one large corner of that universe, while Spotify and Pandora will carve out their own profitable niches.
The middle road
These thought experiments are fun and instructive, but the real future won't go to either of these extremes. Netflix and its fellow new-media mavens will win some battles and lose others. Where lawmakers and regulators fail to take action, the free market will do its job instead.
So we'll end up with a relatively healthy mix of outcomes. Overtly cash-grabbing Internet service providers are parried by smaller vendors happily pandering to consumer needs, and media services must navigate uncharted waters at every turn -- but at least they stand a chance.
Under these circumstances, Netflix should be able to stand tall in the new media landscape and keep up its torrential growth for years to come. The content library won't be quite as plump as the DVD catalog, but good enough for all but the biggest film buffs. Don't forget that fatter earnings and cash flows will come once the market has been saturated, as Netflix loses incentive to keep buying more expensive content licenses. And that's easily good enough to justify today's seemingly overbought valuation -- and then some.
Whether you believe in an all-out win for the digital media industry, a rout on the other side, or anything in between, it's obvious that massive bandwidth needs are driving tomorrow's media market. One way to win under any circumstances is to invest in the nuts and bolts of big data feeds, as described in a free report titled "The Motley Fool's Top Stock for 2011." It's free, fun, and informative, and likely to shake your portfolio to the core. Grab your copy right now and get ready for every possible future.
Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. Motley Fool newsletter services have recommended buying shares of Netflix and AT&T as well as buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.
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