Netflix iPhone App  (Source: iTunes)
Netflix pays 3 cents to stream SD movies and 5 cents for HD flicks

The world of movie rentals and how the average consumer views them has rapidly changed over the last few years. Consumers have moved away from traditional movie rental chains like Blockbuster and moved to mail-order services like Netflix and are now transitioning again to streaming rentals.

Bloomberg cites research firm comScore stating that 35.7 billion people watched video online in June of this year, up from 19.5 billion last year. One of the biggest companies behind streaming video is Akamai Technologies. Akamai works behind the scenes offering sites that stream video the servers and software needed to host the video and play it for viewers.

For a long time Akamai was the only game when it came to streaming video backend services, but the market now has competition and that competition is hurting Akamai to some extent. Akamai was the best performing stock on the S&P 500 through July 28 growing 75%, but those times are changing. Akamai dropped 13% over only two days when the firm announced that its margins before interest, taxes, and depreciation had dropped 2% for Q2 2010.

That decline was due to falling prices for streaming services and increased competition. Akamai also warned that the margins could slip again in Q3. The increased competition and other factors combined to cut the price that websites pay to stream video by 40 to 45% in 2009 and the cost to stream video could decline another 25% this year.

Netflix pays about $0.03 to stream a SD format movie and about $0.05 to stream a HD movie. Akamai and other firms like it are looking to increased streaming of HD content online to help push their profits back up. Some are saying that the video streaming market is becoming commoditized, but Akamai's CEO Paul Sagan disagrees. 

Sagan said, "I don't agree there is a fundamentally new pricing dynamic. Unit prices fall every year as volumes grow. If this were a mature, saturated business that would be a concern. We're at about 1 percent of the opportunity that has been tapped."

Another thing that will help firms like Akamai grow their profits and return to better performance is the increasing number of devices that are able to stream video. Netflix has already had its streaming software placed in various devices from Blu-ray players to game consoles. With Netflix now available for the iPhone and iPod touch (the application was released previously for the iPad), the streaming market will only continue to grow.

"Paying an extra $500 for a computer in this environment -- same piece of hardware -- paying $500 more to get a logo on it? I think that's a more challenging proposition for the average person than it used to be." -- Steve Ballmer
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