WEBVTT - Netflix to Today 0:00:04.120 --> 0:00:07.160 Get in touch with technology with tech Stuff from how 0:00:07.200 --> 0:00:13.520 stuff Works dot com. Hey there, and welcome to tech Stuff. 0:00:13.560 --> 0:00:16.240 I'm your host, Jonathan Strickland. I'm an executive producer with 0:00:16.280 --> 0:00:18.439 how Stuff Works in the love of all things tech, 0:00:18.560 --> 0:00:22.000 and we have made it. You and I together, we 0:00:22.120 --> 0:00:25.080 have crawled through the history of Netflix, and we are 0:00:25.160 --> 0:00:30.080 in the final for now at least chapter of that 0:00:30.240 --> 0:00:35.360 history where really I'm looking at the formative experiences and 0:00:35.440 --> 0:00:39.080 years of Netflix. Uh, when we get past a certain point, 0:00:39.440 --> 0:00:43.199 we'll be doing a lot of skipping forward because it 0:00:43.680 --> 0:00:46.280 ends up being sort of the story of they did 0:00:46.440 --> 0:00:50.080 more of what they just did, but with more money. 0:00:50.120 --> 0:00:52.720 That tends to be the theme of the last few years. However, 0:00:53.280 --> 0:00:55.560 in the last episode on the History of Netflix, I 0:00:55.600 --> 0:00:58.960 gave a rundown of how Blockbuster had a fighting chance 0:00:59.480 --> 0:01:04.880 to catch up to Netflix's model of online DVD rental 0:01:05.160 --> 0:01:09.280 after lagging behind, and they had introduced a feature called 0:01:09.400 --> 0:01:14.959 total Access, but the new CEO of Blockbuster, the incoming CEO, 0:01:15.200 --> 0:01:18.479 changed the direction of the company to focus back on 0:01:18.600 --> 0:01:22.080 traditional brick and mortar stores, and as a result, Total 0:01:22.120 --> 0:01:26.760 Access was discontinued. In that vacuum, Netflix was able to 0:01:26.880 --> 0:01:30.240 flourish in that online DVD rental space. They no longer 0:01:30.319 --> 0:01:33.920 had a major competitor. The closest was red Box, which 0:01:33.959 --> 0:01:36.240 was on the rise, but they had a totally different 0:01:36.240 --> 0:01:39.399 approach to DVD rentals, and they were at least initially 0:01:39.440 --> 0:01:43.800 targeting a different demographic, so that wasn't as big of 0:01:43.840 --> 0:01:47.280 a concern at least initially. So Netflix was really able 0:01:47.319 --> 0:01:51.680 to kind of grow without having to worry about an 0:01:51.760 --> 0:01:55.200 opponent taking them down. Now, to start this episode, we're 0:01:55.200 --> 0:01:58.320 actually going to backtrack just a little bit. In that 0:01:58.400 --> 0:02:00.760 last episode, I got up to two thousand eight, but 0:02:01.360 --> 0:02:05.200 for this part to talk about the streaming side of 0:02:05.240 --> 0:02:08.240 Netflix's business, because the last time it was mostly about 0:02:08.280 --> 0:02:10.720 the DVD side, we have to go back a little 0:02:10.720 --> 0:02:14.160 bit to two thousand six because it was September two 0:02:14.200 --> 0:02:17.640 thousand six when Amazon launched a service it originally called 0:02:17.720 --> 0:02:22.400 Amazon Unboxed. That was the name of a digital video 0:02:22.639 --> 0:02:26.840 download service. You could purchase movies and TV shows off 0:02:26.880 --> 0:02:30.280 Amazon and then download them to a device to watch. 0:02:30.880 --> 0:02:34.639 I would later evolve into Amazon Instant Video, and then 0:02:34.639 --> 0:02:39.120 Amazon would eventually transition away from offering video downloads and 0:02:39.160 --> 0:02:42.800 then focus instead on delivering streaming videos, so you would 0:02:42.960 --> 0:02:45.240 be able to watch that content. It would remain in 0:02:45.280 --> 0:02:47.480 your library if you if you actually purchased it as 0:02:47.480 --> 0:02:49.760 opposed to rent in it, and you could watch it 0:02:49.800 --> 0:02:51.919 whenever you wanted, as long as you were logged into 0:02:52.000 --> 0:02:55.600 your Amazon account. But the video would quote unquote live 0:02:56.160 --> 0:02:59.160 on Amazon servers, you wouldn't download it to your machine. 0:02:59.600 --> 0:03:03.480 Early on, this was not a direct competitor to Netflix's 0:03:03.480 --> 0:03:06.920 streaming video service, because again, this was more of a 0:03:07.000 --> 0:03:11.400 download a purchase process, and Netflix had already gotten out 0:03:11.760 --> 0:03:15.360 of that market in two thousand five. However, it would 0:03:15.440 --> 0:03:19.480 become a major competitor later on, and then on March twenty, 0:03:19.880 --> 0:03:24.400 two thousand seven, another competitor rose up. That's when NBC 0:03:24.520 --> 0:03:27.760 Universal and News Corps held a joint announcement for a 0:03:27.840 --> 0:03:31.760 new online service that they were going to call Hulu. 0:03:31.880 --> 0:03:35.360 The service would not go into beta testing until the 0:03:35.400 --> 0:03:38.640 fall of two thousand seven, so this was a preliminary announcement, 0:03:39.160 --> 0:03:41.880 and the official debut of the website to the general 0:03:41.920 --> 0:03:45.640 public happened almost a year later, actually, and in March 0:03:45.680 --> 0:03:48.640 of two thousand eight. This was a big deal for 0:03:48.800 --> 0:03:54.200 Netflix and it's streaming strategy. It was a real alternative 0:03:54.240 --> 0:03:57.120 to what Netflix was doing now. For one thing, the 0:03:57.160 --> 0:03:59.480 reason why this was a big deal and a potential 0:03:59.480 --> 0:04:03.120 threat is that Netflix is an independent company. It is 0:04:03.160 --> 0:04:09.200 not part of a larger conglomerate that owns content studios. Hulu, however, 0:04:09.640 --> 0:04:14.480 represented a joint venture between lots of different partners, including 0:04:14.640 --> 0:04:18.880 NBC Universal, which includes both NBC the broadcast company and 0:04:19.160 --> 0:04:23.880 Universal Studios, and also news Core, which includes the company's 0:04:23.960 --> 0:04:29.120 Fox Broadcasting and twentieth century Fox. Hulu would have a 0:04:29.279 --> 0:04:32.600 huge advantage in that the companies that were making the 0:04:32.720 --> 0:04:38.960 content we're also responsible for bringing to life this delivery system. 0:04:39.320 --> 0:04:41.680 So it was not a big stretch to guess that 0:04:41.680 --> 0:04:45.680 those companies would favor sending their content to Hulu rather 0:04:45.720 --> 0:04:48.320 than to Netflix, and that they would leverage this to 0:04:48.400 --> 0:04:53.159 make an advantage and take away some of Netflix's power. Well. 0:04:53.200 --> 0:04:58.000 Complicating matters was that Disney Studios, through its subsidiary ABC, 0:04:58.520 --> 0:05:00.719 would announce that it was going to take a steak 0:05:00.839 --> 0:05:03.920 in ownership of Hulu in two thousand nine, and while 0:05:04.000 --> 0:05:08.599 News Corporation would transfer its steak to twenty first Century Fox, 0:05:09.240 --> 0:05:11.960 the fact Disney then moved to acquire twenty first century 0:05:12.000 --> 0:05:15.480 meant that the major players were pretty much the same um. 0:05:15.600 --> 0:05:17.919 Some of the ownership was switching, but it wasn't like 0:05:17.960 --> 0:05:21.120 a lot of new players were coming in. Also, Comcast 0:05:21.160 --> 0:05:24.120 would announce an intention to acquire a majority stake in 0:05:24.279 --> 0:05:28.279 NBC Universal in December two thousand nine, which might have 0:05:28.320 --> 0:05:31.919 seemed like all these big major players in creating movies 0:05:31.920 --> 0:05:36.159 and television, we're starting to align against Netflix and Netflix's 0:05:37.040 --> 0:05:41.960 plan for streaming content. Other partners in the venture, at 0:05:42.000 --> 0:05:46.159 least initially, would include a O. L. Facebook, my Space, 0:05:46.320 --> 0:05:49.119 which was still a thing back in two thousand seven, 0:05:49.279 --> 0:05:52.120 and Yahoo, which you could argue was also still a 0:05:52.160 --> 0:05:55.320 thing in two thousand seven. Fun side fact, hulu dot 0:05:55.320 --> 0:06:00.240 com had actually existed since as a website, but it 0:06:00.320 --> 0:06:05.040 wasn't associated with streaming video, so what was going on. Originally, 0:06:05.120 --> 0:06:09.000 hulu dot com belonged to a woman named Amy Hung, 0:06:09.200 --> 0:06:13.320 who used it as a personal blog site. NBC would 0:06:13.360 --> 0:06:16.360 purchase this site sometime in two thousand seven, and it 0:06:16.400 --> 0:06:18.960 was Hung who had said that the name Hulu was 0:06:19.720 --> 0:06:22.680 her reference to a Chinese word for gourd, and that 0:06:22.760 --> 0:06:25.720 people in China would hollow out these kinds of gourds 0:06:25.760 --> 0:06:29.440 in order to store precious things inside them, so it 0:06:29.480 --> 0:06:33.840 was a container for precious things. When the Hulu dot 0:06:33.880 --> 0:06:37.640 com streaming site launched and allowed people to sign up 0:06:37.640 --> 0:06:41.359 in October two thousand seven, it included that definition. It 0:06:41.400 --> 0:06:45.479 was actually an expanded version of the definition, and it 0:06:45.640 --> 0:06:50.039 raids verbatim. Here we go. Quote in Mandarin Hulu has 0:06:50.040 --> 0:06:54.479 two interesting meanings, each highly relevant to our mission. The 0:06:54.560 --> 0:06:58.280 primary meaning interested us because it is used in an 0:06:58.320 --> 0:07:02.200 ancient Chinese proverb that describes the Hulu as the holder 0:07:02.279 --> 0:07:05.760 of precious things. It literally translates to gourd, and in 0:07:05.839 --> 0:07:08.320 ancient times the Hulu was hollowed out and used to 0:07:08.360 --> 0:07:13.200 hold precious things. The secondary meaning is interactive recording. We 0:07:13.280 --> 0:07:17.440 saw both definitions as appropriate bookends and highly relevant to 0:07:17.440 --> 0:07:22.000 the mission of Hulu. End quote. When Hulu launched, it 0:07:22.080 --> 0:07:26.440 worked in a fundamentally different way from Netflix. So Netflix 0:07:26.520 --> 0:07:30.600 would offer a digital distribution through a subscription service, and 0:07:30.600 --> 0:07:34.200 originally it was an add on to DVD rentals. It 0:07:34.200 --> 0:07:38.640 didn't exist as its own individual offering for at least 0:07:38.760 --> 0:07:43.360 not at first. Hulu did not offer up a subscription service. Initially, 0:07:44.440 --> 0:07:47.840 on Netflix, you could watch films and TV shows commercial free. 0:07:48.720 --> 0:07:52.240 On Hulu. The videos were ads supported so you would 0:07:52.280 --> 0:07:56.520 get one or two commercials either before, sometimes inserted into 0:07:56.640 --> 0:08:00.680 the middle of the content you were watching. Netflix would 0:08:00.680 --> 0:08:04.320 offer up entire seasons of shows for whatever available titles 0:08:04.320 --> 0:08:08.240 it had, although they tended to be older shows, or 0:08:08.280 --> 0:08:11.400 they were older seasons of shows, not the most recent ones. 0:08:11.440 --> 0:08:13.960 Sometimes it might be not be the most recent two 0:08:14.080 --> 0:08:18.320 or three seasons. Hulu offered up several recent episodes of 0:08:18.360 --> 0:08:22.560 currently airing shows, so usually it was five. You get 0:08:22.600 --> 0:08:26.280 the five most recent episodes, and then sporadically you might 0:08:26.360 --> 0:08:30.760 get access to earlier seasons of those shows. Uh As 0:08:30.920 --> 0:08:34.640 new shows would debut, new episodes would debut on television 0:08:35.400 --> 0:08:38.800 about a few days maybe a week later, they would 0:08:38.800 --> 0:08:41.120 find their way to Hulu and they would knock off 0:08:41.240 --> 0:08:45.000 the oldest of the most recent five episodes off the list. 0:08:45.679 --> 0:08:49.080 So once you got the episode six of a new 0:08:49.120 --> 0:08:53.960 show like It's just airing that year, then when episode 0:08:54.000 --> 0:08:56.240 six would move over to Hulu, it would knock off 0:08:56.440 --> 0:08:58.960 episode one, and then you would just have episodes two 0:08:58.960 --> 0:09:01.760 through six to view. So if you did not keep 0:09:01.840 --> 0:09:04.720 up with it, you would eventually lose the ability to 0:09:04.760 --> 0:09:08.959 watch those earlier episodes until maybe much later, when an 0:09:09.120 --> 0:09:14.560 entire completed season would join Hulu. So Hulu would later 0:09:14.600 --> 0:09:18.600 introduce a subscription service which was also ad supported, which 0:09:18.640 --> 0:09:20.559 got a lot of people upset. They thought, if I'm 0:09:20.600 --> 0:09:24.040 paying a subscription, why am I also forced to watch commercials? 0:09:24.760 --> 0:09:28.320 But that would increase the number of pieces of content 0:09:28.400 --> 0:09:33.400 viewers could access. The more recent episodes wouldn't drop off necessarily. 0:09:33.400 --> 0:09:36.640 You might be able to stick with a show all 0:09:36.679 --> 0:09:38.320 the way through a season and be able to watch 0:09:38.320 --> 0:09:42.040 those earlier episodes and later. Still, it would eliminate that 0:09:42.160 --> 0:09:46.160 free service entirely, and the only way to view Hulu 0:09:46.240 --> 0:09:49.520 content would be to become a subscriber. Now, all that 0:09:50.000 --> 0:09:52.760 is to say that Netflix is future, and digital delivery 0:09:52.840 --> 0:09:57.400 was not certain. The DVD rental business would eventually decline 0:09:57.480 --> 0:09:59.880 as the format itself would fall out of favor, with 0:10:00.080 --> 0:10:03.280 more customers shifting to digital alternatives. That writing was on 0:10:03.320 --> 0:10:07.120 the wall. Everyone could tell that sooner or later, this 0:10:07.640 --> 0:10:11.600 physical medium is going to reach a level where is 0:10:11.640 --> 0:10:15.640 no longer profitable to operate this rental business. There will 0:10:15.679 --> 0:10:18.520 still be devotees of the medium. There's still gonna be 0:10:18.559 --> 0:10:24.440 people who prefer DVDs and blue rays to streaming media. 0:10:24.760 --> 0:10:27.960 That makes sense, But there may not be enough of 0:10:28.000 --> 0:10:31.040 them to support a business. The debut of the Blu 0:10:31.160 --> 0:10:33.880 Ray and the HD DVD formats in the mid two 0:10:33.960 --> 0:10:38.200 thousand's shifted things a bit. It extended the life of 0:10:38.840 --> 0:10:42.600 physical media. Netflix actually would carry both Blu Ray and 0:10:42.800 --> 0:10:46.880 HD DVD until Netflix, like everybody else, realized that Blu 0:10:46.960 --> 0:10:49.120 ray was going to win out over h D DVD. 0:10:49.440 --> 0:10:54.200 The company would dump the h D DVD format in 0:10:54.200 --> 0:10:57.839 early two thousand eight, as did everybody else. So where 0:10:57.840 --> 0:11:01.760 did the company go from there? Well, first, it started 0:11:01.800 --> 0:11:04.800 a transition to the cloud. In two thousand and eight, 0:11:05.040 --> 0:11:10.760 Netflix's servers encountered a massive database corruption problem, and that 0:11:10.840 --> 0:11:14.240 messed up Netflix's ability to track and send out DVDs 0:11:14.280 --> 0:11:17.480 to customers. Operations had to be suspended for three days 0:11:17.960 --> 0:11:22.040 while Netflix engineers frantically tried to fix the problem. That 0:11:22.080 --> 0:11:26.960 whole mess decided or lad Netflix's executives to decide that 0:11:27.120 --> 0:11:29.280 the best thing to do is to shift away from 0:11:29.280 --> 0:11:33.560 operating their own data centers and instead moved to a 0:11:33.640 --> 0:11:37.240 really reliable cloud based service, and the one they picked 0:11:37.320 --> 0:11:41.520 was run by Amazon Amazon Web Services. That process of 0:11:41.559 --> 0:11:45.360 transitioning from their own data centers to Amazon Web Service 0:11:45.880 --> 0:11:48.719 would take several years to complete. It's starting in two 0:11:48.720 --> 0:11:53.480 thousand eight, it really didn't finish until about so this 0:11:53.559 --> 0:11:57.320 was not a quick process. It takes a while to 0:11:57.440 --> 0:12:02.280 migrate systems and do so away where you don't interrupt services. 0:12:02.960 --> 0:12:07.520 Netflix also signed content licensing deals with various studios, sometimes 0:12:07.559 --> 0:12:11.760 at a bargain price. Many executives were skeptical that online 0:12:11.840 --> 0:12:15.240 video would be able to survive, which might have contributed 0:12:15.280 --> 0:12:19.200 to some negotiations and Netflix's favor So Netflix landed a 0:12:19.240 --> 0:12:22.880 distribution deal with the premium channel Stars, for example, to 0:12:23.000 --> 0:12:26.000 carry a lot of the movie titles that Stars had 0:12:26.080 --> 0:12:29.520 the rights to, and the agreement was for twenty million 0:12:29.559 --> 0:12:32.319 dollars for two years, which is a lot of money, 0:12:32.360 --> 0:12:36.240 but it's actually not unreasonable for one of these licensing deals, 0:12:36.360 --> 0:12:38.200 especially if you compare it to something like the eight 0:12:38.320 --> 0:12:42.400 hundred million dollar deal Netflix signed with lions Gate MGM 0:12:42.480 --> 0:12:46.920 and Paramount for a five year licensing agreement. That deal 0:12:46.960 --> 0:12:50.600 prompted everyone from directors to actors to producers to also 0:12:50.640 --> 0:12:54.280 get involved in this process because they had a direct 0:12:54.320 --> 0:12:56.280 interest in this. They wanted to know, how are we 0:12:56.360 --> 0:12:59.600 going to get compensated for our work being displayed over 0:12:59.640 --> 0:13:03.000 this new medium. What what are the rules here? Because 0:13:03.040 --> 0:13:06.240 if I get residuals, how is that determined through this 0:13:06.400 --> 0:13:10.520 online service? It was a chaotic, messy time. Another thing 0:13:10.559 --> 0:13:13.240 that could have worked and may have worked in Netflix's favor, 0:13:13.800 --> 0:13:16.439 is that at that time, the big studios were looking 0:13:16.480 --> 0:13:19.119 at it as if it were a small cable distributor 0:13:19.600 --> 0:13:22.680 rather than a nationwide entity. They weren't. They're kind of 0:13:22.760 --> 0:13:26.120 underestimating Netflix in other words, But that changed as the 0:13:26.160 --> 0:13:30.400 subscriber base for Netflix would grow each year and by 0:13:30.640 --> 0:13:34.079 Netflix nearly had nearly as many subscribers as the cable 0:13:34.120 --> 0:13:38.559 company Comcast did, and by then Netflix had landed several 0:13:38.640 --> 0:13:43.240 multi year licensing agreements, and at that point the studio said, oh, 0:13:43.480 --> 0:13:46.080 we may have contributed to the growth of a real giant. 0:13:46.120 --> 0:13:51.520 And now they have clout, they have subscribers, and if 0:13:51.800 --> 0:13:56.080 we end up not coming to terms with them, and 0:13:56.120 --> 0:13:58.839 then the company turns to their customers and says says, 0:13:59.160 --> 0:14:03.560 we would love to bring you X movie, but because 0:14:03.679 --> 0:14:08.240 the studio refuses to license their work to us, you 0:14:08.280 --> 0:14:10.560 aren't going to get it. Then people might turn against 0:14:10.559 --> 0:14:13.360 that studio. And by this time, by the time they 0:14:13.480 --> 0:14:16.280 made the realization, it was kind of too late. Well, 0:14:16.280 --> 0:14:17.880 I've got a lot more to say about Netflix, but 0:14:17.960 --> 0:14:28.760 first let's take a quick break to thank our sponsor. Now, 0:14:28.760 --> 0:14:31.520 around this time, there was also a culture shift that 0:14:31.560 --> 0:14:34.240 was starting to happen and one we still talk about today, 0:14:34.720 --> 0:14:37.880 and this was the growth of the cord cutters and 0:14:37.920 --> 0:14:42.400 the emergence of the cord never's. These are populations that 0:14:42.600 --> 0:14:47.040 represent people who ended their television service, their pay TV service, 0:14:47.080 --> 0:14:50.640 whether it was cable or satellite, or they never bothered 0:14:50.680 --> 0:14:53.120 to sign up for one in the first place. Some 0:14:53.240 --> 0:14:56.040 of them would still watch television programming, but they did 0:14:56.040 --> 0:14:58.600 it through things like over the air antennas, so they're 0:14:58.600 --> 0:15:01.560 not paying for the content, They're just getting whatever is 0:15:01.600 --> 0:15:04.280 being broadcast over the air, or they were getting it 0:15:04.360 --> 0:15:08.040 through digital streaming on a computer or enabled set top box, 0:15:08.120 --> 0:15:10.000 so they were getting it delivered through the Internet, but 0:15:10.120 --> 0:15:13.920 not through the traditional satellite or cable systems. The growth 0:15:13.960 --> 0:15:17.840 in cable subscribers began to slack off, and occasionally they 0:15:17.840 --> 0:15:20.800 would actually decline in the number of subscribers, not just 0:15:21.320 --> 0:15:26.840 slow growth, but see reverse growth. They'd see people leaving 0:15:27.280 --> 0:15:32.360 these subscription services. The trend seemed to validate the Netflix 0:15:32.400 --> 0:15:36.920 corporate strategy Another battle Netflix had to wage was directly 0:15:37.000 --> 0:15:40.840 related to the popularity of the company's streaming service. As 0:15:40.880 --> 0:15:43.600 more customers began to use Netflix to not only rent 0:15:43.680 --> 0:15:47.720 DVDs but also stream movies online, the percentage of traffic 0:15:47.760 --> 0:15:52.320 on the Internet related to Netflix grew. Netflix was the 0:15:52.400 --> 0:15:57.120 source for sixty percent of all the streaming movies online. 0:15:57.480 --> 0:15:59.760 All the other services combined would make up the other 0:15:59.800 --> 0:16:05.240 four and according to several analysts, Netflix traffic accounted for 0:16:05.320 --> 0:16:09.920 twenty of all broadband traffic in the United States. Now, 0:16:09.960 --> 0:16:13.520 this was something companies like Comcast didn't care for very much. 0:16:14.040 --> 0:16:17.720 For the most part, companies that owned infrastructure on the Internet, 0:16:17.920 --> 0:16:20.960 as in like the actual series of tubes, if you prefer, 0:16:21.720 --> 0:16:25.200 they had an understanding the They would have these agreements 0:16:25.200 --> 0:16:27.720 in place, and the agreement said, all right, I will 0:16:27.800 --> 0:16:32.040 carry data that's coming from your side of the Internet, 0:16:32.720 --> 0:16:35.560 if you in turn carry data that's coming from my 0:16:35.720 --> 0:16:38.080 side of the Internet, and as long as it matches 0:16:38.160 --> 0:16:41.720 up with the amounts that we have agreed to, no 0:16:41.760 --> 0:16:45.640 one charges anyone any fees. And if it goes beyond that, 0:16:45.720 --> 0:16:49.160 then we start talking about metering that data because I'm 0:16:49.200 --> 0:16:51.400 going to be carrying more of your stuff. Then you're 0:16:51.440 --> 0:16:53.960 carrying a mine. I need to be compensated for that. 0:16:54.920 --> 0:16:58.600 So this is called peering agreements. It's a foundational part 0:16:58.720 --> 0:17:02.960 of the Internet, and it's also one of the basic 0:17:03.040 --> 0:17:08.040 concepts of net neutrality. This idea that these peering agreements 0:17:08.080 --> 0:17:11.280 are what allow massive amounts of data to pass across 0:17:11.320 --> 0:17:15.560 the Internet without getting throttled or having surcharges put on 0:17:15.600 --> 0:17:18.960 top of them. And in two thousand ten that concept 0:17:19.200 --> 0:17:21.560 was put to the test and continues to be to 0:17:21.640 --> 0:17:24.919 this day. The major players in this matter at the 0:17:24.960 --> 0:17:30.200 time were Netflix, Comcast, and a company called Level three Communications. 0:17:30.880 --> 0:17:34.199 Now Netflix, I know you guys know because I've been 0:17:34.240 --> 0:17:37.000 talking about them for three episodes before this, and if 0:17:37.040 --> 0:17:39.960 you have not listened to those, it's odd that you 0:17:40.000 --> 0:17:42.159 would listen to a part four. First go back and 0:17:42.200 --> 0:17:45.440 listen to parts one through three. Comcast is a cable 0:17:45.480 --> 0:17:48.600 company and internet service provider in the United States. But 0:17:48.680 --> 0:17:52.800 you may not know what Level three Communications is. A 0:17:52.880 --> 0:17:55.480 lot of you probably do know because you're really tech savvy, 0:17:55.520 --> 0:17:57.920 but some of you might not. You might be like me, 0:17:57.960 --> 0:17:59.320 and it might be one of those things that you 0:17:59.440 --> 0:18:03.399 understood later. Well. Level three Communications is one of the 0:18:03.400 --> 0:18:06.760 companies that owns and operates the infrastructure that we call 0:18:06.880 --> 0:18:12.160 the backbone of the Internet. They own parts of the 0:18:12.200 --> 0:18:15.239 Internet connections that other traffic will travel across as it 0:18:15.280 --> 0:18:17.440 goes from one network to a network. Because remember the 0:18:17.480 --> 0:18:22.240 Internet is a network of networks, so comcasts network which 0:18:22.600 --> 0:18:26.320 connects customers to the rest of the Internet. This backbone 0:18:26.320 --> 0:18:30.000 we're talking about will send traffic across the backbone and 0:18:30.040 --> 0:18:33.600 receives traffic coming from the backbone and then sends that 0:18:33.640 --> 0:18:37.159 onto its customers. One way content companies are able to 0:18:37.240 --> 0:18:40.600 deliver content to users, no matter where those users might 0:18:40.640 --> 0:18:43.280 be within the service area is to build out what 0:18:43.440 --> 0:18:47.159 is called a content delivery network. This is a system 0:18:47.200 --> 0:18:51.520 of servers that a company distributes in various regions, and 0:18:51.560 --> 0:18:55.159 when customers access the online service, they connect to the 0:18:55.200 --> 0:18:59.239 server best suited to give them the fastest response. So, 0:18:59.280 --> 0:19:02.679 if you've played online video games, you're probably familiar with 0:19:02.760 --> 0:19:07.400 logging into a specific server. Those servers are typically organized 0:19:07.480 --> 0:19:12.080 via region, and generally speaking, if you log into a 0:19:12.119 --> 0:19:15.639 server that's closest to you to wherever you happen to 0:19:15.680 --> 0:19:19.720 be geographically, you tend to have things like the fastest 0:19:19.760 --> 0:19:23.439 response time, less lag, things that are really important. If 0:19:23.440 --> 0:19:25.719 you're playing a game, those same things are really important. 0:19:25.760 --> 0:19:28.919 If you want to watch high quality streaming video, you 0:19:28.960 --> 0:19:31.680 want there to be as little delay as possible. Customers 0:19:31.720 --> 0:19:33.679 hate it when they have to sit there and watch 0:19:33.880 --> 0:19:37.680 a buffering logo show up and they wait to see 0:19:38.080 --> 0:19:41.359 their video content. That that's not a good experience. So 0:19:41.440 --> 0:19:45.879 Netflix would do this. They would use these content delivery 0:19:45.920 --> 0:19:48.160 networks in order to make sure that customers would get 0:19:48.160 --> 0:19:51.280 a good experience when viewing films and TV shows online. 0:19:51.880 --> 0:19:55.240 Before Netflix reached an agreement with Level three Communications to 0:19:55.280 --> 0:19:58.359 have Level three take on this task for them, a 0:19:58.520 --> 0:20:02.240 different CDN company called a com I did that job 0:20:02.280 --> 0:20:06.119 a k A m AI. So in this agreement, Comcast 0:20:06.160 --> 0:20:10.360 would actually charge a COMMA to deliver traffic to Comcast network, 0:20:11.200 --> 0:20:14.960 and a com I did not own Internet infrastructure. It 0:20:15.080 --> 0:20:17.760 was able to set up these content delivery networks, but 0:20:17.880 --> 0:20:22.080 it was not appear in the traditional sense of the 0:20:22.280 --> 0:20:26.480 peering agreements. So that's why Comcast could charge a coma 0:20:26.520 --> 0:20:29.640 I for this. It wasn't like it was this mutual 0:20:29.840 --> 0:20:33.840 relationship where Comcast would send data across servers belonging to 0:20:33.880 --> 0:20:37.480 a COMMA and vice versa. It was a one way relationship, 0:20:37.520 --> 0:20:40.399 which meant that Comcast was metering it it was charging 0:20:40.400 --> 0:20:43.480 a comma I. Well, then Netflix, which is over to 0:20:43.560 --> 0:20:47.560 Level three Communications, they take over Netflix's delivery, and things 0:20:47.680 --> 0:20:51.680 changed because Level three is a peer and had an 0:20:51.680 --> 0:20:56.080 existing peering agreement in place with Comcast. Now, the agreement 0:20:56.359 --> 0:20:59.360 would actually allow Level three to send twice as much 0:20:59.440 --> 0:21:03.000 data to Comcast as Comcast could send to Level three, 0:21:03.040 --> 0:21:06.600 So it's a two to one relationship. So if Comcast 0:21:06.640 --> 0:21:09.920 can send one units, then Level three could send two 0:21:09.960 --> 0:21:12.280 hundred units back and it was considered to be even 0:21:13.320 --> 0:21:16.320 in the eyes of the agreement. That means that twice 0:21:16.359 --> 0:21:18.960 as much traffic end up being equal traffic. But Comcast 0:21:19.119 --> 0:21:22.520 argued that this Netflix deal would mean that Level three 0:21:22.520 --> 0:21:25.840 would start sending five times as much traffic to Comcast 0:21:26.440 --> 0:21:30.920 and that would exceed this period agreement. So Comcast also 0:21:30.960 --> 0:21:33.719 wanted to charge Level three the same way it had 0:21:33.760 --> 0:21:37.040 been charging a comma I for sending this Netflix content 0:21:37.560 --> 0:21:40.879 to comcasts network, because otherwise it was going to get 0:21:41.000 --> 0:21:43.760 cut out of that revenue that was part of the 0:21:44.119 --> 0:21:47.280 you know, Comcast revenue plan. Level three argued that Comcast 0:21:47.400 --> 0:21:50.840 was trying to wriggle out of net neutrality, and Comcast 0:21:50.920 --> 0:21:54.199 argued that Level three was inappropriately claiming that this was 0:21:54.240 --> 0:21:57.719 a net neutrality issue when in reality it was appearing issue. 0:21:58.560 --> 0:22:01.840 And I'm not a big support of Comcast, but i 0:22:01.880 --> 0:22:04.399 do feel like the company had a bit of a 0:22:04.480 --> 0:22:07.239 leg to stand on in this particular argument. If the 0:22:07.280 --> 0:22:10.199 peering agreement was for a certain amount of traffic and 0:22:10.320 --> 0:22:14.640 Level three was going to exceed that, then by my estimation, 0:22:14.720 --> 0:22:17.120 Level three should have been expected to pay a meter rate, 0:22:17.240 --> 0:22:20.119 and it didn't matter where the data came from. It 0:22:20.240 --> 0:22:24.359 wasn't that specifically came from Netflix. It was that the 0:22:24.400 --> 0:22:28.480 amount of data was exceeding the agreement. Whether that came 0:22:28.480 --> 0:22:33.240 from Netflix or from a spreadsheet doesn't really matter. But 0:22:33.280 --> 0:22:35.199 that would also mean Level three would likely have to 0:22:35.200 --> 0:22:38.240 pass those expenses onto Netflix, which would then of course 0:22:38.280 --> 0:22:41.000 pass those expenses on to customers, and that would have 0:22:41.040 --> 0:22:44.320 been a pretty negative experience all around. The fight would 0:22:44.359 --> 0:22:47.040 stretch for years with worries that Comcast would end up 0:22:47.080 --> 0:22:51.560 throttling Netflix traffic, not because it was Netflix necessarily, though 0:22:52.000 --> 0:22:56.640 that service did compete with comcasts own Internet video delivery 0:22:56.640 --> 0:22:59.960 services that it provided to its customers, but rather because 0:23:00.000 --> 0:23:02.320 as level three would be in violation of that agreement. 0:23:02.640 --> 0:23:05.840 Netflix ended up extricating itself out of this problem in 0:23:07.359 --> 0:23:09.320 and that's when it was announced that it was going 0:23:09.359 --> 0:23:13.240 to pay Comcast for a direct connection from Netflix servers 0:23:13.520 --> 0:23:16.920 to Comcasts network, So they were no longer employing anyone 0:23:16.960 --> 0:23:19.400 else to become a content delivery network. They were essentially 0:23:19.400 --> 0:23:23.320 doing it themselves and paying Comcast for the privilege. But 0:23:23.400 --> 0:23:26.480 the bigger dispute reached something of a resolution in two 0:23:26.480 --> 0:23:29.840 thousand fifteen, just a short time before the FCC was 0:23:29.920 --> 0:23:33.800 to start hearing complaints under some new net neutrality rules, 0:23:34.080 --> 0:23:37.400 rules which I should add have since been overturned by 0:23:37.560 --> 0:23:43.920 the most recent FCC leadership, So the mess keeps on going. Meanwhile, 0:23:44.160 --> 0:23:47.440 on the executive side over at Netflix, read Hastings was 0:23:47.480 --> 0:23:52.320 apparently becoming less approachable. According to the book Netflix, which 0:23:52.359 --> 0:23:55.800 I have cited several times in these episodes, it was 0:23:55.840 --> 0:23:58.840 getting harder to change hastings mind about things. He would 0:23:58.880 --> 0:24:01.640 make up his mind on something, and challenging his ideas 0:24:01.720 --> 0:24:04.919 was becoming more and more difficult to do. Some of 0:24:04.960 --> 0:24:07.840 his top executives would leave around this time. They saw 0:24:07.880 --> 0:24:10.800 a very little opportunity to grow at Netflix. They saw 0:24:10.840 --> 0:24:13.120 a little indication that they would have a shot at 0:24:13.200 --> 0:24:16.760 leading the company themselves, and figured that they pretty much 0:24:16.920 --> 0:24:20.440 achieved their goals that they set out to do when 0:24:20.440 --> 0:24:25.000 they joined Netflix. Things like fighting off Blockbuster or launching 0:24:25.000 --> 0:24:29.239 a digital videos uh you know service. Those things had 0:24:29.359 --> 0:24:32.240 happened already, so rather than just sit around, they decided 0:24:32.240 --> 0:24:35.080 to leave and take on new challenges or even retire. 0:24:35.720 --> 0:24:39.879 On November twenty ten, Netflix really showed off how it 0:24:40.000 --> 0:24:43.000 believed the streaming service was going to be the future, 0:24:43.240 --> 0:24:45.680 because for the first time, they would offer customers the 0:24:45.720 --> 0:24:49.080