Is Netflix's place in the slow lane?

The recent interest in Net Neutrality has been spurred on by Netflix’s fight with Comcast for a fast lane. The issue of whether a lack of access to a fast lane might stifle innovation is a big one (see here for an impassioned plea) but what I wanted to consider today was the more basic premise: should Netflix itself have a fast lane?

In order to couch this in the right terms, let’s suppose that it was not the Comcasts of the world choosing whether to give Netflix a fast lane but consumers. Imagine that consumers paid some form of peak-load pricing for Internet services (they don’t now and data caps aren’t that). That is, if networks became congested and hence, started to slow down, the price paid by consumers would rise so that external effects of usage were internalised.

Now suppose that you wanted to watch Netflix (or any other streaming video) at the peak time; that is, time for watching video is highly correlated across individual households. In this scenario, if Netflix is streamed, you have no choice but to consume it when you want to and pay the price.

But there is an alternative. What if you could, say, earlier in the day or even before, click and form your Netflix queue for the evening. In that situation, suppose that Netflix then optimised when to download the video content and store it on your machine or device. Then when you came to watch the video when you wanted to, you could avoid paying the peak pricing. What’s more, you wouldn’t have to worry about buffering etc. So quality would be high. In other words, local storage is a substitute for streaming.

To be sure, in both scenarios, you need to download the same volume of content. However, in the storage scenario, this can be managed and so network congestion is minimised. Put simply, you can download the video at a much slower rate than its consumption. The same cannot be said for streaming.

My guess is that faced with congestion pricing, many consumers would choose the storage option. Indeed, I suspect they might choose it without congestion pricing and just purchase a slower speed broadband plan. I base this prediction on the fact that DVRs are successful; they are basically a local storage option. In other words, I am just suggesting that time shifting is possible for ‘on-demand’ video as it is for broadcast video.

Now this isn’t a new thing. Andrew Odlyzko wrote about it a decade or so ago (here and here) and predicted that Netflix wouldn’t exist in the form we know it today. He was wrong about the prediction but the economics sure does make sense.

So why does Netflix exist in this form and why is it shelling out money for what seems to be an inefficient solution? If I had to guess it is because (a) consumers don’t have the alternative option and (b) storage rights cannot be easily negotiated with video copyright holders because they fear that storage leads to piracy while streaming is somehow safer. That last one has worked out so well since users don’t know how to share passwords! But I think that streaming video is a puzzle.

And Net Neutrality advocates should be concerned about this. If network congestion is a real thing — and I suspect it is — then streaming video (in all its forms) is currently the culprit. The concern is that congestion is itself causing a barrier to start-ups who may have a legitimate reason for real-time bandwidth. We need to think creatively about empowering consumers to put Netflix and others in their right place in the queue. At the moment, that market force does not seem to be present.