Netflix (NASDAQ:NFLX) recently started adding some 3-D and high resolution HD content to its service and has stated that its subscribers can view this content only if their Internet service providers (ISPs) are using Netflix’s Open Connect CDN.  Netflix expects its subscribers to push their ISPs towards the adoption of Netflix’s own CDN. Why is the company doing so?
Netflix launched its own content delivery network (CDN) named Open Connect last year, which is a dedicated CDN for video delivery. Over time, the company expects to deliver a majority of its data using Open Connect and, in the process, reduce reliance on third-party CDN providers. Netflix has traditionally used services from CDN providers such as Lime Light Networks, Level 3 and Akamai (NASDAQ:AKAM). As the company moves towards higher video quality, which requires higher bandwidth, it can potentially save costs with its own CDN and make ISPs such as Comcast (NASDAQ:CMCSA) a little happier.
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Besides potentially saving costs, Netflix can enhance the quality of its delivery by building a dedicated network and leveraging economies of scale. Furthermore, it is likely that given the dedicated nature of Open Connect, the number of servers will be optimally distributed so as to provide best delivery to Netflix’s customers based on geographical location. ISPs have the option to either deploy Netflix’s Open Connect device or get their data from common Internet exchanges.
The flexibility and potential of less network congestion might be something that ISPs will like. Overall, Netflix is trying to please ISPs and not be a competing service that clogs their pipes. The other motivation is to reduce costs in the face of profit crunch and improve data delivery to enhance customer experience. This reconciles with the broader effort to re-build the company image following the 2011 fiasco.
Our price estimate for Netflix stands at $81, implying a discount of about 20% to the market price.Notes:
- Netflix adds 3-D, Super HD movies to push ISPs towards its own CDN, GigaOm, Jan 8 2012 [↩]