After seeing several red envelopes at a friends house the other day I started to wonder what Netflix‘s cost structure would look like if streaming video replaced sending DVDs by mail. Mindful of Andrew Tanenbaum’s adage about never underestimating the bandwidth of a station wagon full of tapes hurtling down the highway, I thought it might make sense to do a cost model and see if streaming DVDs would be as cost effective as shipping them. This is a very simple model that does not take into account several crucial factors such as the First Sale doctrine, licensing for streaming, partnering with studios instead of sourcing DVDs etc. Leaving those aside and focusing on the technological aspect of the cost modeling is still quite illuminating.
The article was improved thanks to contributions by Ben Black, Randy Epstein and Alex Pilosov