The good news: more streaming. The bad news: more streaming?
This article was originally written by Stephen Lovely of The Motley Fool
Staying safe and slowing the spread of COVID-19 means staying put and staying home. Those lucky enough to have remained safe so far have an obligation to follow the orders of experts. That means that amid fear, despair, and other justifiable emotions, there’s another common feeling: boredom. And that boredom has turned people toward streaming services in a big way.
Quarantined, self-isolated, and locked-down individuals are streaming shows on the weekends. They’re streaming them at night, and even in the morning. They’re streaming when they’re supposed to be working. All of that means more streaming for the streaming services, which ought to be a good thing — as long as they can keep up with demand.
The issue is biggest for the biggest streaming service, Netflix (NASDAQ:NFLX). With a worldwide subscriber base of more than 167 million, can Netflix handle the load? And will internet service providers (ISPs) be ready too?
What Netflix needs in order to stream
When a user queues up a Netflix show, a few things affect how well it streams. Some of those things, like the user’s own internet speed and the quality of their Wi-Fi connection, aren’t really Netflix’s problem, except insofar as their standards are easy for the general public to meet (and they are: Netflix recommends 5 Mbps for standard definition and 25 Mbps for HD, both quite easy to attain in places like the United States and Europe, except in the most rural of areas).
Broadband infrastructure more generally matters, too. Netflix’s recommended internet speeds are easy to achieve in developed countries, but households don’t get the same internet speeds all of the time (in fact, they often don’t get quite what they pay for — the U.S. government’s “SpeedTest vs. Advertised” map, among other sources, shows that internet speeds are typically lower than ISPs would have us believe).
As much as we mocked Alaska’s then-Senator Ted Stevens for calling the internet a “series of tubes,” his sputtering analogy wasn’t completely wrong. The internet connections that run to U.S. homes are part of a network of cables, each with certain maximum capacities — sort of like plumbing or electrical wiring. These shared pathways — or “tubes” — have a certain amount of bandwidth. Like the width of a tube, the bandwidth of these connections has limits. When more people try to do more things on the internet at once, things may slow down; only so much stuff can fit through the “tubes” at once.
By the way, this whole issue is a big part of why net neutrality is such a big deal. When Netflix’s apps use up lots of bandwidth, ISPs have to deal with the slowdowns that result. They may wish to slow down, or “throttle,” Netflix’s traffic, or charge someone — either Netflix or the internet user — for all the data they use when they stream.
Another part of the issue is something that Netflix can control, however: its own end of the deal. The internet, after all, is just that series of cables that we talked about (plus wireless connections, of course). It’s a network; it enables communication. You’re at one end, and Netflix is at the other. But while you just have to reach one source (Netflix) and request some data, Netflix is theoretically responsible for talking to a whole lot more people at once, and it’s supposed to be the one uploading all this key data that you are merely receiving. For that, Netflix relies on a cloud computing partner and its own content delivery network.
In short, for Netflix to weather a big streaming boom of the sort that we’re seeing, it needs two things: broadband infrastructure, which it does not control, and a content delivery network, which it does. Let’s tackle these one at a time.
Can Netflix count on broadband infrastructure at a time like this? The answer depends on which place we’re talking about.
In Europe, the answer is something less than ideal. Broadband infrastructure in some countries is being overloaded by the crush of data that COVID-19 is triggering. It’s not just streaming, of course — suddenly a whole lot of people are working from home. Even if it’s the same number of people logging on each work day as a month ago, they’re logging on from a new location: their own homes. Residential areas in Europe don’t necessarily have the kind of broadband infrastructure that you might find in, for example, the Paris area’s La Defense business district.
And the traffic is not necessarily even at the same scale as it was a month ago. Bandwidth-taxing videoconferencing calls are newly standard across all types of businesses. And many companies use VPNs to protect their privacy when employees work from home. VPNs mask locations and provide other security benefits, but they work by routing internet service through a VPN server, adding a step to each user’s internet journey and using up bandwidth along the way.
When you add a spike in streaming to this mix, it’s easy to see why broadband infrastructure is struggling in places like France. That’s why Netflix and tech peers like Google (NASDAQ:GOOG)(NASDAQ:GOOGL) are slashing streaming quality in order to keep traffic down and internet speeds up. Lower quality means a less beautiful image, but it also means less data — less stuff in those proverbial tubes.
The good news for Netflix is that this appears to be much less of an issue stateside. Broadband infrastructure in the United States is looking pretty good even under pressure, and Federal Communications Comission (FCC) commissioner Brendan Carr told Yahoo Finance that U.S. networks should be equipped to handle traffic spikes, in part thanks to the country’s high-capacity wireless networks. ISPs like Comcast (NASDAQ:CMCSA) have also issued statements regarding their readiness for COVID-19-related traffic surges. This doesn’t guarantee that your internet will be as fast today as it was last month, but it does imply that Netflix won’t suffer any infrastructure-related cutbacks like it has in Europe.
Netflix’s end of the deal
But what about Netflix itself? Can it handle increased demand? Most likely. To understand why, we need to know how Netflix works.
A decade ago, Netflix was using regional data centers to run its app. But when a data center crash caused a Netflix service outage in 2008, the company started looking into alternatives. Netflix later announced that it would begin switching over to Amazon‘s (NASDAQ:AMZN) Amazon Web Services for cloud data services. It took a while, but a seven-year process culminated in the shuttering of Netflix’s last data center in 2015.
So does this mean that Netflix viewers connect to AWS cloud servers to get the movies and TV shows? Not exactly. Netflix uses AWS for just about everything that happens before a user pushes “play” on a TV show or a movie. After that, Netflix’s content delivery network relies on something very unusual: the “Open Connect” program.
Under the Open Connect program, Netflix has partnered with the very ISPs that are bothered by its excessive data use. Netflix has created Open Connect “boxes,” which are essentially just souped-up web-connected hard drives full of Netflix’s movies and TV shows. When users hit play, their shows and movies generally stream from their own ISP. That cuts down on the traffic that the ISP has to deal with, while also giving Netflix a very simple — and largely crash-proof — way to deliver its content.
Netflix has this covered
All in all, this is mostly good news for Netflix. Broadband and wireless infrastructure, while imperfect in some markets, are handling the load just fine for the bulk of Netflix’s customer base. Netflix has AWS handling its app and the ISPs themselves serving as its content delivery network. If there’s a weak link, it might be on the cloud side; Netflix did experience a brief outage of about one hour in the U.S. and Europe in late March. Netflix may take some lessons from this time as it goes forward in places like Europe, where broadband and wireless infrastructure have caused some issues. But in the near term, Netflix seems ready to face down the streaming boom in its homeland without much trouble.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Lovely owns shares of Amazon and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Netflix. The Motley Fool recommends Comcast and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.