Netflix’s Open Connect program and codec optimisation helped ISPs save over USD1 billion globally in 2021

Demand for online content, particularly video streaming, continues to grow worldwide, enabled by new providers, new content and technical architecture that allows ever more content to be delivered, efficiently and cost effectively, to millions of consumers.

Netflix is one of the most popular video streaming services worldwide. In support of the rapid growth it has experienced over the last decade, Netflix has invested to continuously improve the efficiency of its traffic delivery, in close partnership with hundreds of internet service providers (ISPs) around the world. In this context, Netflix commissioned Analysys Mason to quantify the impact that initiatives such as Open Connect, its caching and traffic delivery programme, and the implementation of advanced, highly efficient video encoding standards (codecs) are having on the economics of broadband networks.

Consumers stream content on Netflix through a broadband connection they have purchased from an ISP. The cost of providing access to the internet, and content available on the internet, is borne by the ISP, and the ISP seeks to recover these costs through the charge that consumers pay for their broadband internet access. To make the delivery of content more efficient and to improve the performance of its service, Netflix has invested in content delivery infrastructure and video streaming technology, made available to ISPs through a programme called Open Connect. This brings Netflix’s content to ISPs’ networks, and can also be deployed by ISPs deep within their networks to reduce further their traffic-sensitive costs.

We conducted an analysis that quantifies the impact of both Open Connect caches and advanced codecs in the UK and South Korea. We built a simple, bottom-up model of the cost structure of a hypothetical ISP, which has a significant market share in its retail market and purchases wholesale inputs (for example, from Openreach in the UK). The model’s inputs are ISPs’ traffic levels, network topologies, type of caching deployed and costs of network equipment and wholesale inputs. We extrapolated our results to a worldwide level based on Netflix’s traffic flows.

The aim of this analysis was to:

• provide an overview of the overall cost structure of a large ISP and the costs associated with consumers’ use of streaming video services, including Netflix
• show the evolution of traffic and network costs over time
• estimate the cost savings generated by Open Connect, broken down into the cost savings that caching through Open Connect at different levels of the network unlocks for ISPs, and the cost savings enabled by Netflix making available highly optimised video compression technologies, through state-of-the-art codecs that can be used by end users with compatible devices.

The analysis concluded the following.

• The network costs of the modelled ISP, which we estimate to be around 50% of revenue, can be grouped into the two following elements.
  • Access network costs. These are largely insensitive to traffic levels, and represent the majority of network costs (around 80–90%). These costs are related to ‘last mile’ access infrastructure between an ‘edge’ or ‘local’ network node and end-user premises (now increasingly fibre-based), and are largely invariant with traffic. They are primarily driven by the deployment of the network to homes and offices, and the connection of end users to the network.
  • Costs in the core and backbone network. These are partly sensitive to traffic and represent around 10–20% of network costs. These costs are expected to remain stable over time (on an annualised basis) as a result of economies of scale, decreasing equipment and link costs for high-capacity links and the continued delivery of traffic through caches located deep in the modelled ISP’s network, including Open Connect appliances (OCAs) provided by Netflix.

• Open Connect (like other similar partnerships between content providers and ISPs) ensures that growing demand from end users can be handled sustainably without increasing network costs over time. State-of-the art codecs further reduce the traffic intensity of video content; the impact of this will increase as more end-user devices become compatible with those codecs.

• Global savings resulting from Netflix's investment in Open Connect and codec improvements amounted to an estimated USD1 billion to USD1.25 billion for ISPs around the world in 2021.

The report provides further details of our analysis and is freely available to download.