Netflix’s SEXY New Technology

Netflix (NASDAQ:NFLX) is about to get innovative and launch its own new content delivery network called Open Connect. The big move will reduce costs, improve delivery of content, and reduce third-party reliance on companies such as Akami (NASDAQ:AKAM), Limelight (NASDAQ:LLNW), and Level 3 (NASDAQ:LVLT). Netflix could also connect directly with ISPs resulting in improved relationships with network operators.

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Open Connect allows ISPs to either choose to peer directly with Netflix via one of eight settlement-free peering exchanges or install a Netflix Open Connect appliance into their own network allowing them to cache the content locally. Both of these options will reduce Neflix’s strains going over their networks.

As Netflix becomes a larger portion of traffic delivered to users, Open Connect could reduce network overhead. Sandvine, a network optimization vendor, has recent research estimating that approximately one-third of all peak network traffic is from broadband users streaming Netflix. More efficient delivery of Netflix traffic could result in less capex required to upgrade networks reducing some strain with ISPs whose end customers stream a considerable amount of Netflix video.

Though this is great for Netflix, not everyone will reap benefits from this change. A few years ago, Comcast (NASDAQ:CMCSA) and Level 3 disagreed over a peering exchange, and one issue in the debate was the amount of traffic delivered by Level 3 into the Comcast network and the large costs. Because of the large amount of file delivery transferred from their networks, it is possible that this change could deplete revenue for third-party CDNs currently employed by Netflix. Though the amount of ISPs who will transfer to Open Connect is unknown, 5 percent of traffic is delivered via Open Connect today and Netflix hopes to have the majority of its traffic switch to its own CDN.

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