Can Netflix’s Bandwidth Saving Plan Attract More Subscribers?
A report by Variety suggests that Netflix (NASDAQ:NFLX) is bringing about a huge change to its streaming technology which will help consumers get better looking streams and save up to 20% in terms of internet data bandwidth. [1] Netflix believes that different types of videos need a different bitrate for streaming, depending on their type to be displayed effectively. Over the years the company has been developing a video algorithm capable of encoding content at different bitrate, depending on the granularity of the image. Simple animations can be streamed at slower bitrates and motion pictures at higher bitrates. Even with the highest quality streams, the basic ratrate is 20% lower, which is a significant advance. This enables users with slow connections to view high quality data with a 20% reduction in data usage. We believe this technology should increase Netflix’s video consumption on mobile phones – where users have fixed data plans and should develop traction in developing nations where users have slower internet connections.
See our complete analysis for Netflix
Better Video Quality At Slower Internet Speed Can Help International Expansion
- Up 27% Year To Date, Will Q1 Results Drive Netflix Stock Higher?
- Netflix On A Roll As It Benefits From Paid Sharing And Ads. Is The Stock Undervalued At $610?
- Up 50% Over Last Year, Will Q4 Earnings Drive Netflix Stock Higher?
- Will Netflix Stock Rally 40% To Return To Pre-Inflation Shock Highs?
- How Will The Password Sharing Crackdown Help Netflix Q3 Results?
- Will Netflix Stock Return To Pre-Inflation Shock Highs Of Over $650?
Netflix plans to become a global company by the end of 2016. It is targeting Asia in a big way and while it launched in Japan in September 2015 the company plans to enter South Korea, Singapore, Hong Kong and Taiwan by early 2016. The company is also exploring options of entry into China and India. We believe that as Netflix enters developing economies, streaming quality of its videos over slow internet speeds will be critical for its success in these regions. Broadband speeds in several Asian countries are much lower than the global average, which was 5.1Mbps as of Q3 2015. [2] India’s average broadband speed is one of the lowest in the Asia-Pacific region and stands at 2.5 Mbps while this figure for China is 3.7Mbps. Indonesia and Philippines are at 3.0 Mbps and 2.8 Mbps respectively. In the U.S., which is Netflix’s biggest market, average internet speed for the third quarter of 2015 was 12.6Mbps. [2] A technological improvement which will enable users in regions with slower internet connections to watch Netflix videos without compromising the quality should enable the company to attract more subscribers in this region. We expect Netflix’s international subscribers to increase from around 29.5 million in 2015 to more than 70 million by the end of our forecast period.
Increase In Mobile Consumption, Cost Savings
Video consumption on mobile devices is forecast to grow by nearly 35% in 2016, while the average time people spend on consuming online videos each day will increase by nearly 20% in 2016. [3] Netflix already consumes the biggest chunk of downstream bandwidth in North America, accounting for more than 37% of all downstream Internet bandwidth during peak periods according to broadband network solutions company Sandvine. [4] Zenith Optimedia expects mobile to become the main platform for viewing online video in 2016. [3] Given this trend, Netflix’s technology to reduce data usage and optimize videos should encourage users to watch its content on mobile phones, given the data savings. Increased video consumption should have a positive impact on Netflix’s margins. Further, the company can save on the fees it pays to internet service providers to carry its streaming data to customers, improving margins.
Netflix plans to fully implement this change by the end of Q1 2016. While we do not expect a significant impact on the company’s financials immediately after the roll out, it should save costs and drive revenues in the long run.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
Notes:- Inside Netflix’s Plan to Boost Streaming Quality and Unclog the Internet (Exclusive), Variety.com, December 14, 2015 [↩]
- Akamai’s state of the Internet Q3 2015, Akamai [↩] [↩]
- Mobile to drive 19.8% increase in online video consumption in 2016, ZenithOptimedia, July 2015 [↩] [↩]
- Sandvine: Over 70% Of North American Traffic Is Now Streaming Video And Audio, Sandvine, December 7, 2015 [↩]