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Netflix continues to make traditional TV nervous

A year ago, Netflix (opens in new tab) had 12 million subscribers; today, it has 20 million. During periods of peak Internet use, a fifth of all American bandwidth consumption is by people watching movies via the streaming video service.

This fast growth has made pay-TV operators nervous.

Competitors know that if Netflix can bring movies straight into the living room through the Internet, it can bring any other kind of programming as well: from news to sitcoms. If this happens, many consumers will ask themselves, “Why pay a high monthly fee for cable, satellite or telco?”

“No one can deny that Netflix has become a huge player in the industry,” Deana Myers, a research analyst at the investment firm SNL Kagan, told The Washington Post. “But there are big questions surrounding the company, and they have big obstacles ahead.”

Netflix was created in 1997 when Reed Hastings, a former Peace Corps volunteer and MIT engineering graduate, received a $40 video late fee and thought, “There has to be a better way.” He built a website for Internet users to sign up for mail-in DVD rentals, and people liked it: No more late fees and no lines. Netflix almost single-handedly wiped out the retail video rental business. In fact, Blockbuster, the major video rental house, declared bankruptcy last fall.

Now, the spread of broadband Internet service has led to the rise of online movie watching, and Netflix has led the way. If one thinks it through to its logical conclusion, the Post surmised, one winds up with TV and Internet merging. Much of the telecom industry thinks that in a few years, the newspaper said, people will watch TV and movies and surf the Web all with the same equipment.

The big question is who will deliver this future. It could be cable operators, satellite providers, phone companies or Netflix. Netflix has the advantage of its relationship with an enormous subscriber base and a total stock market value in excess of $11 billion.

“There is every reason to believe that between their market cap and public access to funds, Netflix is a buyer of content with big dollars,” John Calkins, executive vice president of Sony Pictures Home Entertainment, told the newspaper.

While some think Netflix will not last, investors in cable companies fear that TV subscribers will stop paying high subscription fees, leaving them with Internet-access businesses that simply manage traffic created by Netflix customers.

Time Warner Cable chairman and CEO Glenn Britt told a media conference this week that cable operators should focus on winning back video subscribers. Speaking at the Deutsche Bank Securities Media & Telecom conference in Palm Beach, FL, Britt said the years of basic video subscriber losses are taking its toll.

According to the NCTA, cable companies have lost a collective 4.8 million video customers from their peak in 2001 to 2009.

“It is not acceptable to me to continue to slowly lose video customers every year,” Britt said. “That has been going on for too long. We’re going to put renewed energy against that both in the product space and in marketing to see if we can slow that down.”

Netflix is certainly in their sights.

“There are many incentives to create hurdles for online video firms like Netflix,” said Parul Desai, policy counsel for Consumers Union, parent of Consumer Reports. “They are going up against powerful media and Internet service providers who are trying to come up with their own Internet video strategies and could limit access to content and access to their consumers.”

Many of the competitors have also mounted a campaign in Washington to establish regulatory roadblocks to a Netflix takeover of the American living room. They are trying to make it more expensive for consumers to watch streaming videos.

“There is no such thing as free TV or a free lunch,” Kyle McSlarrow, president of the NCTA, told the Post. “It’s expensive to run a broadband network, and I wanted to make sure my companies were able to experiment with new business models.”

Netflix has responded by hiring its first Washington lobbyist, Michael Drobac. He has told lawmakers and the FCC that allowing Internet service providers to charge fees based on how much bandwidth people use is unfair and poses risks to online video services.

Netflix is continuing to expand aggressively, offering service on gaming consoles, smart phones and tablets. It is also working to snare more top-rated video content. In the past year, it bought rights from MGM, Paramount, Sony Pictures, Viacom and CBS.