Standing Watch

Typical error screen with a 30 Mbps (very fast) connection

I contacted Netflix last night, after experiencing security issues on our home network involving Microsoft’s Silverlight, the application required to use Netflix’s streaming video services.  According to my security logs, Silverlight was the cause for our router experiencing issues which crashed our home network, a process that began the day before at 11:39 am CST.  The end result was three computers crashed, and a router damaged, the whole mess requiring all of Sunday night to reinstall operating systems from scratch (clean installs), reinstalling updates, and reprogramming the router to isolate the computer we use Netflix on, etc.

The resulting discussion leads me to believe Netflix will not survive 2012, if they even survive 2011 at this point.

Netflix’s response to the issue encountered with Silverlight was to contact Microsoft.  That proved useless today, when I discovered that Microsoft will only provide support to install and uninstall the application.  If any other issues arise, it is up to independent developers and content providers to provide the necessary support.  Netflix, for its part, provides zero support for Silverlight.  Silverlight only runs on Microsoft Windows XP SP2 or later (support for XP is ending soon) and Apple Mac OSX 10.4.11+ or later, with both operating systems also requiring the use of Google Chrome, Apple Safari, Firefox, or Internet Explorer.  Regardless of browser, Silverlight does not run on any version of Linux, an Open Source operating system that is available free to the typical end user.  Netflix itself is available for various game consoles, though most require a seperate subscription to access Netflix, on top of Netflix’s own subscription rate.

Despite the fact that Netflix actively uses Open Source operating systems based on Linux (mainly Apache for their servers), they refuse to allow the creation of software for Linux end-users, Open SOurce or otherwise.  Netflix claims this is due to digital rights management (DRM) security issues.  Of course, anyone who uses Linux knows this is bogus, and nothing but a perpetuation of a myth that only hackers and digital media pirates use Open Source operating systems and software, a myth that largely benefits the two major corporations that oppose even the concept of Open Source, Microsoft and Apple.  It is interesting to note that, contrary to popular belief and advertisements, these two corporations are business partners, each heavily invested in the other.

I mention all this for a reason.  While Netflix itself relies heavily on Open Source operating systems and software it pays nothing for, they require their customers to utilize commercial operating systems and closed source Silverlight, or spend hundreds on gaming consoles and pay an additional subscription rate.  This policy effective eliminates tens of millions of potential customers, at a time when Netflix is struggling just to stay afloat after a couple of years of really bad business decisions.  In addition, they felt so strongly that Silverlight was reliable that they laid off most of their technical support personnel, which has left customers with no support at all if Silverlight is the issue the customer is dealing with.  With that in mind, if Silverlight were Open Source, I could have located the security flaw (seems everything from Microsoft has security issues), fixed it myself, and then shared the fix with others.  But, Silverlight isn’t Open Source, and I now have to wait until Microsoft themselves experiences the issue and fixes it, if they ever do.  Those who still use Windows XP know exactly what I am talking about, as they are getting security updates still for the decade old operating system.  Reinstalling XP on one of my computers the other night took an hour, getting the nearly 1 GB of security updates, service packs, and bug fixes took nearly the whole night.

Clearly, the issue with Silverlight involves Microsoft, not Netflix per se.  But the dedication of Netflix to Silverlight, including their internal belief that Silverlight is the end-all-be-all of content delivery, is symtomatic of a much larger corporate arrogance that has come to define Netflix over the last couple of years.

Most are familiar with the failed attempt by Netflix to spin-off their DVD rental service into a seperate entity called Qwikster, chargin a seperate $7.99 per month for that and the Netflix streaming media service.  For customers who used both originally, that amounted to a 60% increase in the monthly subscription rate.  There was also considerable customer confusion, so much so that Netflix decided against the split.  Unfortunately for customers, Netflix kept the seperate pricing, and the result was an 800,000 net loss in customers.  It would appear Netflix thought their customers were suffering from a combination of collective ADHD and stupidity, and would forget about the significant price increase.  They didn’t, and the exodus of customers continues, as confusion turns to outright anger.

Of course, the idea to split the DVD and streaming services came about after Netflix faced accusations of “throttling” both, a method of restricting content availability and deliver rates to a pre-determined reduced level familiar to cellular data users, primarily to increase profits.  Netflix, for its part, has tried to blame the US Postal Service for any delays getting DVD’s from them, and Internet Service Providers (ISP’s).  On the streaming video side, I can firmly claim my ISP is not the problem.

I have a connection, verified by Netflix themselves, that is more than adequate to the task, about 10 times the recommended bandwidth (speed).  As I watch Netflix right now, the picture is pixelated and stuttering, and the audio and video are out of sync by about two seconds.  This, Netflix claims, is not them, but Silverlight that is the cause of that now three week old problem.  Those who have watched the old Japanese martial arts movies from the 60′s and 70′s know what I am talking about when it comes to the audio being out of sync, except this time it’s English being out of sync with English, not a timing issue due to language differences.  With Netflix confirming I have sufficient speed to receive content, I have to assume I am being “throttled.”  Netflix advised reducing the quality by one level, until I explained I’ve already reduced it down to the lowest level available.  Any lower, and I might as well be watching a webcam video.  NTSC video rates for North America is 30 frames per second (fps).  I estimate that Netflix’s best quality over a 30 Mbps connection is 5 fps.  Yes, throttled is the most likely cause for this issue.  I have little doubt the same is being done to DVD customers as well.  The one Windows computer I use only does Netflix or other streaming content, and various Windows based commercial games, nothing else.

If one were to just look at the technical issues and the really bad business decisions that went into the Qwikster debacle, that would be bad enough.  But Netflix has made a number of calculated decisions that have hurt their customers in recent months, and have resulted in the ongoing exodus of customers, most of whom have switched to competing services that offer better quality for a much lower subscription rate.  One such mistake was their questionable non-competition agreement with Walmart, in which Netflix agreed to not provide recent content, if Walmart agreed to get out of the DVD rental business.  Netflix also agreed to promote Walmart’s DVD sales as well.  That deal, struck in 2005, eventually resulted in a class action lawsuit, thrown out of federal court today as without merit.  The lawsuit contended that, in making the deal, Netflix was able to artificially inflate the cost of DVD rentals.  While I agree there was little, if any, merit in the case, Netflix’s arrogance shown throughout the case, which they fought vigorously despite the resulting negative publicity.  Walmart, for its part, settled their part of the case, turning it into a very profitable advertising gimmick.  Netflix may have won, but they also lost due to yet another negative publicity blow.

Another issue that hurts Netflix is over their aforementioned refusal to allow Linux users access to streaming content.  This effects tens of millions of potential customers.  That may translate into as much as $400 million in lost potential revenues for the financially strapped content provider per month, which makes even the most inexperienced business operator wonder why.  Again, Netflix’s bogus DRM claims hold no water, since there are Open Source and commercial packages available for Linux users far more secure than Silverlight.

The Open Source claims by Netflix bother more than just I in the Open Source community.  Again, institutional corporate arrogance comes into play here.  This is because Netflix itself relies heavily on Open Source technology, right down to their Apache servers (Apache is a server version of Linux).  Netflix themselves actually stated last year that they support Open Source, but only indicated they support it as far as reporting bugs and fixes to the Open Source community.  For those unfamiliar, Open Source does not imply free.  It means you get the source code for the operating systems and software, allowing the user to modify it to their specific needs.  If the tens of millions of Linux users are nothing but hackers, Netflix goes beyond that, they are hypocritical hackers, using Open Source to save millions of dollars, while demanding Linux users spend billions on commercial products (Windows or Mac) to be able to use the streaming services on their computers.  So long as Netflix continues to insist that only software that runs on commercial (read expensive, buggy, and plagued with security issues)) operating systems provided by the two biggest opponents to Open Source, namely Microsoft and Apple, they will continue to anger millions.  In a bad economy, a business making potential customers angry is, well, just plain stupid, far more stupid than Netflix assumes their customers are.

Another sign of corporate arrogance is Netflix’s response a while back to the hearing impaired and deaf about problems with, or the lack of, closed captioning.  That community has claimed Netflix is in violation of the Americans with Disabilities Act (ADA), in that they are being excluded from benefiting from the service.  Netflix’s response is they “can’t be all things to all people.”  That should sit quite nicely with the estimated 10 million hard-of-hearing and one million deaf persons in the United States.  They can explain their decision to potential investors why they blew off an additional potential $88 million per month in potential revenues with such an arrogant statement.

Another huge mistake by Netflix was their claim that they were financially sound, followed by a complete 180 degree turn-around, in the form of a cash grab.  Their stock values have dropped more than 70% in the last three months, over 66% in the last year since they started making really bizarre business decisions.  Much of the loss can be attributed to the exodus from Netflix of both DVD and streaming content customers, largely over the 60% price increase for getting both DVD’s and the streaming content.  Most new customers now opt for one or the other, which has resulted in a 10% decrease in revenues (on top of losses from the customer exodus).

Another issue that negatively impacts Netflix is the content itself.  Much of their “new releases” for streaming content is hardly new at all, much of it being older than I am, and I’ve been around for a while (my first memories are prior to the JFK assassination and the Cuban Missle Crisis).  It might be new for them, but I’ve likely seen it a thousand times before they got it.  When I do a search for content, 90% of it is only available for DVD rental (which I can sign up for by doubling what I currently pay), 5% is totally unavailable through them.  The rest is at least 2 years old or more.  I can’t help but think that there’s something wrong with that, especially when, if I do a category search, I can generally find what I’m looking for, but specific searchs require I pay twice as much, to wait for it to arrive in the mail, one at a time.  Given all the complaints I’ve seen online about delayed or damaged DVD’s, there’s no way I’ll go for that one.  That little issue is yet another reason for the increasing exodus of customers from Netflix.

Greed, arrogance, and short-sighted decisions, have finally combined to hurt Netflix in a way it is likely to never recover from.  If I had to guess, I would say they are going to be out of business fairly soon.  Given the financial reports coming in, and the seriously downgraded ratings they are getting from various investment houses, I suspect fairly soon will seem optimistic.  I had hoped Netflix would turn things around, despite the harm done by really stupid business decisions lately.  But they’ve swirled the bowl for quite a while now, and one more flush is all it will take for them to go down the drain for good.  The $400 million they are trying to raise, which they plan to “park” somewhere, is the last “dash for the cash” for Netflix, founded on a dislike for paying what was agreed to, built on free software, reliant on technology they don’t have to pay for, run mainly by those who are not privy or part of the decision making process.  My guess is, while a couple of thousand people are likely to be laid off, the executives will enjoy that $400 million, likely to be parked in some offshore bank somewhere.

Hopefully others who run businesses will learn from Netflix’s mistakes, missteps, and arrogance, and not repeat those things themselves.  In the end, executives and business owners of service oriented business are going to find out that they are far more exportable, and disposable, than manufacturing ever was.  They will quickly find themselves out of business as people facing their own personal financial crisis choose to drop those businesses that are greedy, stupid, and arrogant like a dead fly.  Netflix will be the object lesson on how easily that can happen.