Netflix Online Video Distribution

Netflix has a problem, in that it's getting harder and harder for them
to make a profit. They break even on a renter if he/she gets 5 DVDs
per month. So, they need to find some way to augment their service
somehow.

One possible way they could do this is to start getting into the
online distribution game. They have all these DVDs, and they're a
known commodity for the studios. They would need to license the movies
for online distribution, but the fact that they also distribute DVDs
should help in those negotiations. Then, once they can offer the
movies online, they have a few options as to how to get them to their
customers.

One possibility is to have each movie streamable from the Netflix
website as long as the customer has the DVD checked out. So when they
ship you a movie, they also make available a stream so you can watch
it online. The problem with this is that they then incur the cost of
shipping and of online distribution, making it somewhat non-viable.

A second possibility is to offer an added level of service that
includes streaming movies, allowing people to watch a movie instantly,
without having to wait for the disc to come in the mail. This would
free Netflix from having to ship the movie, saving them some money.

A third possibility is to offer the movies for download, for a fixed
cost per movie. This way, Netflix would be able to recoup the cost of
the transfer in the purchase fee. However, they would have to
implement some kind of DRM scheme.

They would want to build the DRM system so that it's as fair as
Apple's FairPlay. Since the best codec for distributing video online
at the moment is H.264, and they would want their files playable on
the iPod anyway, they should try to make a deal with Apple. Apple lets
the iPod play Netflix's DRM'd video files and possibly shares
bandwidth, licensing and advertising costs, while Netflix only
supplies video in this format, helping to ensure iPod dominance. It
would be a win for both companies, while allowing them both to do what
fits within their business model.

For the client side, Netflix would need an application to play the
streamed/downloaded video. There are a few possibilities here.
1) They could roll their own client which plays H.264 files and
decodes the Netflix DRM. They would probably need to make it talk to
the iPod somehow, but this would presumably be part of the deal with
Apple. Making it cross platform is important.
2) They could do some kind of bundling deal with Apple for Quicktime.
This would give them the benefit of getting advertisement through
Quicktime even for non-subscribers, but would be difficult to do and
would get into the thorny full screen issue (do you get Quicktime Pro
when you subscribe to Netflix?).
3) They could update an open source client, such as VLC. VLC already
has support for H.264, and for streaming video over the network, as
well as being very cross platform. There are two issues here, which
are related. The client needs to be able to decode the DRM, and VLC is
an open source program. The way I see it, DRM doesn't really work when
the code is open. Even if the technical aspect were completely figured
out and the DRM was uncrackable (dubious, considering that all DRM has
been cracked), the studios would never agree to it. Say what you will
about open source (I know I like it), it doesn't instill confidence in
the major content owners.

A solution could be developing a program that opens the
downloaded/streamed file, decodes the DRM, and passes the video along
to VLC, or any other video player. This greatly simplifies the
software from Netflix's perspective and gets them away from having to
open source the decoder. However, there could be a problem with the
player receiving the unencrypted file, with no way to prevent the user
from saving the stream to the hard drive. (Of course there will be
people who figure out how to do it, but the point of DRM is to make it
at least somewhat difficult, so the process doesn't enter the
mainstream.) Because of this issue, developing their own player seems
to be the best option.

Netflix needs to do something to help the bottom line, other than
attempting to screw their customers. Withholding discs from their
happiest customers is not a good way to keep those customers happy.
This would be a good way to make more money by offering more services,
rather than fewer. And partnering with Apple would been a boon for
both companies; in fact, it's difficult to tell who would benefit
more.

Obviously, I have no inside information about this. I say it because
it's what I would do if I were in a position of authority at either
Netflix or Apple. And as a user of both, I'd certainly like to see it
happen.