Problem: On a normal weeknight, Netflix accounts for almost a third of all Internet traffic entering North American homes. That's more than YouTube, Hulu, Amazon.com , HBO Go, iTunes, and BitTorrent combined. Traffic to Netflix usually peaks at around 10 p.m. in each time zone, at which point a chart of Internet consumption looks like a python that swallowed a cow. By midnight Pacific time, streaming volume falls off dramatically. As prime time wound down on Jan. 31, though, there was an unusual amount of tension at Netflix. That was the night the company premièred House of Cards, its political thriller set in Washington. Before midnight about 40 engineers gathered in a conference room at Netflix's headquarters. They sat before a collection of wall-mounted monitors that displayed the status of Netflix's computing systems. On the conference table, a few dozen laptops, tablets, smartphones, and other devices had the Netflix app loaded and ready to stream.
When the clocks hit 12 a.m., the entire season of House of Cards started appearing on the devices, as well as in the recommendation lists of millions of customers chosen by an algorithm. The opening scene, a dog getting run over by an SUV, came and went. At 12:15 a.m., around the time Kevin Spacey's character says, "I'm livid," everything was working fine. "That's when the champagne comes," says Yury Izrailevsky, the vice president in charge of cloud computing at Netflix, which has a history of self-inflicted catastrophes. Izrailevsky stayed until the wee hours of the morning-just in case-as thousands of customers bingewatched the show. The midnight ritual repeated itself on April 19, when Netflix premièred its werewolf horror series Hemlock Grove. Netflix has more than 36 million subscribers. They watch about 4 billion hours of programs every quarter on more than 1,000 different devices. To meet this demand, the company uses specialized video servers scattered around the world.
When a subscriber clicks on a movie to stream, Netflix determines within a split second which server containing that movie is closest to the user, then picks from dozens of versions of the video file, depending on the device the viewer is using. At company headquarters in Los Gatos, Calif., teams of mathematicians and designers study what people watch and build algorithms and interfaces to present them with the collection of videos that will keep them watching. Netflix is one of the world's biggest users of cloud computing, which means running a data center on someone else's equipment. The company rents server and storage systems by the hour, and it rents all this computing power from Amazon Web Services, the cloud division of Amazon.com , which runs its own video-streaming service that competes with Netflix. It's a mutually beneficial frenemy relationship. Over the years, Netflix has built an array of sophisticated tools to make its software perform well on Amazon's cloud. Amazon has mimicked the advances and offered them to other business customers. At any moment, Netflix draws upon 10,000 to 20,000 servers running in Amazon data centers somewhere. The computers handle customer information, video recommendations, digital rights management, encoding of video files into different formats, and monitoring the performance of the systems.
When a new device like an upgraded Xbox or a Samsung (005930) smartphone comes along, Netflix uses thousands of extra servers to reformat movie files and deal with the new users. By day, some servers handle the grunt work tied to streaming video; by night, they're repurposed to analyze data. The company has been pushing Amazon Web Services to its limits. "We're using Amazon more efficiently than the retail arm of Amazon is," says Adrian Cockcroft, Netflix's cloud architect. "We're pretty sure about that." Few relationships in the technology industry are as complex as Netflix and Amazon's. Netflix's status as Amazon's biggest customer has earned it favorable pricing and direct lines of communication to Amazon's top engineers. When Netflix wants a new software feature, Amazon is quick to deliver it, and other customers eventually benefit from that work. "There's no question in my mind that our platform is stronger from a performance and functional standpoint because of the collaboration we have with Netflix," says Andy Jassy, who heads Amazon's cloud business. Netflix has been forced to build from scratch much of the software it needs to survive. Since it relies on Amazon for data centers, its 700 engineers focus on coming up with tools for, say, automating the ways in which thousands of cloud servers get started and configured. In Silicon Valley, Netflix has become best known for its so-called Simian Army, a facetiously named set of applications that test the resilience of its systems. Chaos Monkey, for instance, simulates small outages by randomly turning services off, while Chaos Kong takes down an entire data center.
Netflix can now hire just about any engineer it wants. That's a function of the computer science the company does and its reputation as the highest payer in Silicon Valley. Managers routinely survey salary trends in Silicon Valley and pay their employees 10 percent to 20 percent more than the going rate for a given skill. Each night, Netflix performs an analysis to see which shows were the most popular where. From 2 a.m. to 5 a.m. local time, it fills its servers with the appropriate programs. If Battlestar Galactica is popular in Houston on Tuesday, then servers in Texas will be loaded up with more episodes in time for Wednesday night. The most popular videos go on high-speed flash storage drives; everything else gets stored on cheaper, slower hard disks. "We use this predictive model to make sure the content is there before the user asks for it," says Ken Florance, vice president for content delivery at Netflix. The biggest bets Netflix is making now are on its original shows. The company won't disclose how much it paid for two seasons of House of Cards, though the Hollywood blog Deadline.com says it was about $100 million. Rather than make it a weekly show, Netflix released all 13 episodes at once. That meant viewers could watch the whole season in one marathon sitting. It also meant the producers didn't have to alter the plot to give every episode a cliffhanger ending. "If you give people a more creative format, then they can tell their stories better," says Ted Sarandos, the company's Beverly Hills-based content chief. He adds that Netflix's goal is, in part, to become HBO before HBO can become Netflix.
"They do great content that people love. What are the things we do well? It's the delivery technology, the user interface stuff, the integration into computing devices, and the seamless streaming." Amazon is introducing its own series, too, and Hollywood is abuzz with hope that Netflix and Amazon will spend wild sums of money on even more shows. Netflix's critics argue that the company has sacrificed too much control over its technology in its effort to get ahead of rivals. "The problem with Netflix is that they are inextricably bound into Amazon for all eternity," says Paul Maritz, a computing infrastructure veteran and CEO of the cloud computing startup Pivotal. "If they want to go somewhere else, it will be hard." Hastings and his staff characterize such criticism as sour grapes. Another concern is that the studios will stop licensing content now that Netflix is in the originals business. Hollywood is right to remain wary of letting any single entity get too powerful. As Netflix expands overseas, it intends to strike worldwide licensing deals instead of hammering them out country-by-country. From a studio perspective, that could give Netflix the ability to come up with lucrative terms that no regional competitor could match. Over the past five years a chart of Netflix's share price has shifted from a smooth, upward curve to more of a scribble. Hastings seems unperturbed. The experimentation is a goal in itself, whether it's big things like corporate missions or little things like the personal technology he uses. For one month, he'll only use products made by Apple and the next he's on to phones, tablets, and laptops running Windows. May is Google month, and Hastings has one of the company's touchscreen Chromebook Pixel laptops. "I just keep it rotating," he says.
Questions: 1. What different kinds of IT software and hardware is Netflix using to promote its competitive advantage?
2. What are the advantages and disadvantages of its heavy use of Amazon.com's IT skills to help it manage its own IT?
3. Search the Internet to see how Netflix has been performing against Amazon and RedBox.