Roku Adds HD Streaming and SD Upscaling, But Drives Netflix's Costs Up

As expected, yesterday morning Roku announced that the Roku player is now capable of playing hundreds of HD quality movies from Netflix (NFLX). While my Roku player got the software update over the weekend, Roku says all players will be updated over the next few weeks.

In addition to the new 720p HD support, the new Roku software upgrade also allows for upscaling of SD titles to 720p and enables Roku's switch to the new VC-1 AP streams, which previously used to be VC1-MP. The switch to the new encoding gives similar or better quality for lower bit rates. Roku's HD quality videos are now encoded at 2.7Mbps and 3.8Mbps.

While it is great to see HD quality content from Roku, I have to worry about the impact that HD quality video is going to have on Netflix's operating costs. Between the XBOX 360, TiVo, Roku and other devices capable of streaming HD quality video, Netflix is spending more money each month to deliver all of this content. And as more content is made available in HD, that delivery cost to Netflix only continues to grow each month. Even with the economics of scale kicking in and Netflix getting a lower price due to increased traffic, their overall cost continues to go up as the business scales.

While Netflix is betting that in the future they will be able to show revenue from delivering movies online, they don't have an unlimited window of time to prove this. I think sometime next year they are going to have to outline what their online video business model could potentially look like going forward, how they plan to generate revenue or how this offering might help offset other costs associated with their traditional DVD business.

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Comments

[ysroq:]

I agree that increased costs are likely, but Netflix has to get to where they can deliver lots of content with HD quality picture and sound to be competitive. They should come out with an HD offering that costs more. A/V freaks (like me) would happily pay an extra couple of bucks per month for it.

2008 Dec 23 10:25 AM

[Mister Mike:]

While increased IP delivery will increase costs, they will be partially offset by lower mailing costs. Eventually IP delivery will be a LOT cheaper. However, the real issue is that anyone can deliver IP TV/movies if they can get over the final 'connect to the TV' leg of the delivery path. Whoever does that wins the war and becomes ubiquitous. Netflix's 'free' approach just about guarantees them victory, at which point a new price model will evolve. For example, 'free' for the 12K movies now available, $10/month for about 15 online movies a month from the full catalog, and $20 for unlimited viewing-full catalog. This will eventually generate more money for all the players in the food chain than they are making today.

2008 Dec 23 10:59 AM

[Mkane:]

CDN market is still saturated with competitors.....prices will continue to drop rapidly over the next year (prices per GB have dropped 10 to 1 in the past year)...vendors like Netflix will benefit from this.....so what costs $5 to deliver today will likely cost $0.50 a year from now......anyone see it any other way?

2008 Dec 25 09:27 PM

[Ex-ISP:]

Online delivery is awesome. I don't know what the per view licensing cost of a dvd is, but the online delivery is no where near $5, even at current bandwidth prices.

Furthermore, the entire process is completely automated and can be operated from one or two facilities with VERY little labor - as compared to a distribution center.

I already use Netflix Online (to PS3 via MediaMall PlayON) and Sony Movie Rental along with traditional Netflix to the point that I don't even pay for cable or satellite TV. I have purchased the 6-movie plan from Netflix and LOVE IT.

I just can't wait for more of the movie producers to allow streaming content!

Jan 06 09:31 AM