NEW YORK – Netflix had a chance of breaking the Internet over the weekend in America.
The hugely popular movie streaming company released the second season of the award-winning drama “House of Cards” on Friday, just as winter storms turned large swaths of America into a nation of stay-at-homes — a combination that was bound to test America’s creaky broadband infrastructure to its limits.
Even Tom Wheeler, chairman of the Federal Communications Commission, was worried about the strain on the system. Last month he told an interviewer his wife berates him over the sometimes choppy connection to Netflix.
“I don’t think this is TMI (too much information), but my wife and I like to lie in bed and watch Netflix,” he said. When their Internet connection slows down, Wheeler’s wife is incredulous: “You’re chairman of the FCC,” she says to him. “Why is this happening?”
In part, Netflix is a victim of its own success. Its video-streaming service makes up about a third of America’s web traffic on any given evening.
Started as an online DVD rental business in 1997, it has pulled off the shift to digital in spectacular fashion. A business that started as a library of old movies has been transformed into a major media player.
The first season of its “House of Cards” remake won the first Emmy for a web-only TV show and four Golden Globes. Relaunched comedy “Arrested Development” went on to scoop up more awards.
This year, Netflix received its first Oscar nomination for “The Square,” a documentary about the Egyptian revolution. The company is now planning to spend $3 billion on new programs in 2014 — 60 percent of the revenue that Morgan Stanley analysts have projected it will rake in this year.
It is a pricey gamble, but so far it has paid off. The combination of new programs and old movies has won Netflix 44 million subscribers in 41 countries, who watch more than 1 billion hours of TV shows and movies every month.
Three-quarters of them are in the U.S., but Netflix is an increasingly international business. It now has an estimated 2 million subscribers in the U.K. and has been growing rapidly in Nordic countries.
“The strategy of providing something new is a good one. It makes the service more about today rather than being an archive,” said Toby Syfret of Enders Analysis.
Even in the U.K., where Netflix faces stiff competition from Sky and LoveFilm, shows like “House of Cards” and the prison black comedy “Orange is the New Black,” are attracting subscribers.
But behind the new shows lies Netflix’s real innovation: its recommendation technology.
Using a customer’s history, Netflix tailors its library into an estimated 79,000 “microgenres” — Oscar-winning romantic movies about marriage, gritty suspenseful revenge Westerns, evil kid horror movies — you watch it, they categorize it.
“The whole service acts as a filter,” said Syfret. In a world where there are too many choices, Netflix offers a solution.
Netflix is a tech company first and a media company second. Founder Reed Hastings studied math and later artificial intelligence at Bowdoin College in Maine. The company employs people to tag movies with metadata.
Before they can start, they have to absorb a 36-page training document that sets out how to rate movies on categories from gore and sexual content to romance and even narrative elements like plot conclusiveness and the moral status of characters.
Combine that with the data viewers provide, and Netflix is certainly creating the most powerful movie database the world has ever seen.
Hastings recently told The New Yorker he believes Netflix’s potential American market is “60 to 90 million subscribers,” double or triple the current count in the U.S. He also thinks half of all television content will be delivered over the Internet by 2016. And therein lies Netflix’s biggest challenge.
Last week Comcast, the U.S.’s largest cable company and owner of NBC Universal, made a play to take over Time Warner Cable, the nation’s second-largest cable firm.
Consumer groups are up in arms about a deal. Most high-speed Internet is delivered by cable TV companies in the U.S., and the merger will give one company control of roughly 38 percent of the high-speed Internet market, according to figures compiled by the Leichtman Research Group.
The merger is in part being driven by “cable cutters” — people dropping their cable service and relying on the Internet for their media. Comcast clearly has an interest this fight and has already clashed with Netflix.
In a Facebook posting in 2012, Hastings accused the firm of favoring Xfinity, its own TV-based video-on-demand service, over Netflix and rivals Hulu and HBO Go. When Comcast took over NBC in 2011, it was barred from favoring its own services by giving them more bandwidth. Regulators feared it might throttle competition, and as a result imposed a “net neutrality” clause.
That deal will expire after 2017 — unless regulators add a new one to the Time Warner merger.
Traditional broadcasters, Comcast’s NBC among them, have been rattled by Netflix and its peers. The shift away from scheduled programs to binge-watching and the move from TVs to laptops and tablets are only likely to escalate in the coming months — especially if, and probably when, Apple finally enters the TV market.
The fight between Big Cable and Netflix is likely to be one for the ages: and one that Netflix’s 44 million subscribers — including Mrs. Wheeler — will be watching almost as avidly as “House of Cards.”
Click to enlarge
