For Apple and AT&T: Does Netflix matter?

As a long time Netflix subscriber, a buyer of a Netflix-ready Blu-ray player, and a regular user of Watch Instantly (even when it results in masochistic acts such as enduring "Mary Shelly's Frankenstein") I have awaited Netflix's arrival on the handset. And  so have others since according to Strategy Analytics' Global Handset Data Traffic Forecast 2001-2015, video will grow from 20 percent of all mobile traffic in the United States in 2009 to 52 percent in 2015.

Netflix, for its part, has done everything correctly. It has partnered with multiple OEMs--to date Microsoft and most recently Apple--and continues to build out its library of available content. But despite the announcement that Netflix would finally grace the iPhone's Retina Display this summer, I have a few concerns. And they left me thinking, does Netflix's arrival really matter and what does it mean for mobile video?

Broadband caps

My primary concern is broadband caps. AT&T, the iPhone's exclusive home, recently implemented them and the trend favors this becoming the norm for most carriers after the transition to 4G. While existing users can keep their unlimited plans, new users will be subjected to caps. Today's tools do no provide enough instant and in-depth information for users to truly understand how much bandwidth their activities consume. When data caps become the rule and not the exception, carriers will have to provide improved tools--a speedometer widget for example--to show how much bandwidth consumers are using at any given time. This is the first step to warding off fears that streaming the first season of "Dexter" over 3G will result in bankruptcy.

The second step is offloading traffic. WiFi is an ideal choice since all devices support it and it is ubiquitous throughout the world. Carriers will need to either utilize existing hotspots or partner with hotspot providers to offer free WiFi access that seamlessly hands of cellular traffic. Informing consumers of hotspot locales will also be imperative to assuage concerns over bandwidth consumption. Such a solution is a start to alleviating concerns that users will be always reliant on 3G when on the go.

The second option is broadcast. Companies such as MediaFlo and MobiTV have invested in mobile broadcast technology. The services are often sold through a carrier for $10-$15 per month and are currently available on select handsets. The business model and the lack of on-demand features have subjected these services to secondary status and the technology is not adequate for Netflix, Hulu or others. In fact, according to Strategy Analytic's Global Mobile Media Forecast 2001 - 2015 there will be less than 2.5 million U.S. subscribers to such services in 2010.

A third, newer option is WiFi sideloading. At the CTIA trade show this year, AT&T announced such a service for Uverse subscribers which allows users to download the same content stored on their DVR to their handset over WiFi for 3G free viewing. Other services such as Quickplay Media's Primetime2go and Fox Mobile's newly launched BitBop will also allow subscribers to download high value content over WiFi and then watch anywhere.

The final option is PC sideloading. iTunes and Amazon are the heavyweights in this area which could be a boon to the companies as, according to Strategy Analytics, U.S. consumers are expected to spend nearly $1 billion on a la carte mobile content in 2015.

Cost

The second concern is cost. Netflix has done an excellent job of adding incremental value for existing subscribers first with streaming to the television and now to the handset. But Netflix is already has a relationship with 14 million subscribers and provides access to content otherwise unavailable on broadcast. Therefore, newer mobile services will face an uphill battle to win consumer dollars. And if as expected many content owners continue drawing the proverbial line in the sand at distributing free content to the handset the mobile video marker will be stifled.

Usability

YouTube has been successful in the mobile space not only because users love watching cats in dryers but also because it offers snackable content of an ideal length for the mobile user. It remains to be seen if users want to watch a TV show or movie in bite sized chunks over multiple viewing sessions.

Providing a high quality experience thus becomes incumbent upon and a means of differentiation for services. Content on the mobile Web cannot keep a user's place for later viewing making it an unattractive option. NBC's mobile website addresses this problem by breaking up episodes into short chunks. Some native apps, such as Netflix, bookmarks where a user left off (regardless of which device they last watched it on) but others--such as ABC's iPad app--do not. Sideloaded content of course allows a user to pause and pick up at any time. Ultimately, native apps should be the short-term option to ensure proper usability--a trend that is starting--and sure to help the mobile video market.

Can the challenges be overcome?

In short, yes, but it will require effort by the carrier, education by the consumer, and availability by content owners. All the necessary factors are slowly converging to provide a high quality experience with top tier content for users wherever they go. Even Hulu is rumored to finally launch its mobile service soon.

So, is Netflix important? Absolutely. Not only will it help carriers better understand data usage when high value content is available to millions of users, help content owners evaluate the best ways to distribute content, but it will also continue ushering in an age where high quality content is readily available to millions of handsets. Mobile video could also open the door for dark horse wireless carriers such as Cablevision, which has blanketed it's footprint with free WiFi. Offering unlimited bandwidth for could be an enticement for users who are worried about 3G overages.

This will be incredibly important because as devices such as the Evo 4G launch with their large HD displays and the iPhone 5 could bring more multimedia features as discussed in my article last month the consumption of video on the handset is just getting started.

Josh Martin is a senior analyst for wireless media services in the Global Wireless Practice of Strategy Analytics.