Netflix moves beyond DVD, tangles with ISPs on net neutrality

Netflix, the Blockbuster-buster and mail-order DVD titan, is now calling itself a full-fledged Internet company and says it may begin to offer online-only video-streaming subscriptions this year.

And with its remarks, made Wednesday as part of its third-quarter earnings announcement, the Silicon Valley-based firm is wading deeper into a debate over proposed federal net neutrality rules.

How does Netflix get tangled in the businesses of the likes of AT&T and Comcast (and Comcast's proposed merger with NBC Universal)? Online video is seen as a major threat to traditional cable and satellite television firms, many of which want the FCC to allow companies to pay extra for higher-speed "channels" in the broadband Internet pipe.

In the third quarter, Netflix saw a 52 percent gain in subscribers to 16.9 million. Revenue increased 31 percent to $553 million. But most interesting: 66 percent of subscribers watched more than 15 minutes of streaming video compared with 41 percent during the same period last year. The company predicted Wednesday that in the fourth quarter, a majority of Netflix subscribers would watch more content streamed from the Web on Netflix than on DVD.

"This growth is clearly driven by the strength of our streaming offering. In fact, by every measure, we are now primarily a streaming company that also offers DVD-by-mail,” Reed Hastings (above), Netflix co-founder and chief executive, said in a release.

The company has already begun to wade into the debate over net neutrality at the FCC. Netflix lobbyists have visited the media bureau and other officials at the FCC at least three times in the last year and said in written comments that the FCC should not allow paid prioritization, or specialized services, that allow an Internet service provider to favor its own content or block out new competitors. Here's an excerpt from the those comments, which were submitted to the FCC on Oct. 12:



"The Commission must assure that specialized services do not, in effect, transform the public Internet into a private network in which access is not open but is controlled by the network operator, and innovative Internet-based enterprises are permitted effective access to their consumers only if the enterprises pay network operators unreasonable fees or are otherwise seen by such network operators as not threatening a competitive venture."

Netflix's earnings show how quickly the online video market is changing. Its success in Canada with a streaming-only service has encouraged the company to test a similar service in the United States.

"If our results are as strong as we think they will be, then we will look to start this offering later in this Q4," Netflix said.

Analysts tout Netflix's strides in forging partnerships with content companies and device makers, making it one of the most significant applications in Internet television. It has deals to distribute on Apple TV and Google TV. Netflix is already on the Wii game console and Blue-ray players.

So far content companies have been slow to distribute their shows and movies through online platforms like Netflix and many television shows are delayed by at least one day for online viewers.

But in the third quarter, Netflix renewed its partnership with NBC Universal and signed a five-year contract for $1 billion with EPIX, which gives Netflix viewers access to 1,000 titles of new movies from Paramount, MGM and Lionsgate.

Those efforts appear to be paying off for Netflix, according to recent industry data. Analytics firm Sandvine said Wednesday that its broadband trends survey showed that Netflix accounted for 20 percent of download traffic in the United States during peak traffic times.

Photo: Netflix CEO Reed Hastings

Credit: Reuters

