Roku Adds HD Streaming, SD Upscaling, But Drives Netflix’s Costs Up

As expected, this morning Roku announced that the Roku player is now capable of playing hundreds of HD quality movies from Netflix. While my Roku player got the software update over the weekend, Roku says all players will be updated over the next few weeks. In addition to the new 720p HD support, the new Roku software upgrade also allows for up
scaling of SD titles to 720p and enables Roku's switch to the new VC-1 AP
streams, which previously used to be VC1-MP. The switch to the new encoding gives similar or
better quality for lower bit rates. Roku's HD quality videos are now encoded at 2.7Mbps and 3.8Mbps.

While it is great to see HD quality content from Roku, I have to worry about the impact that HD quality video is going to have on Netflix's operating costs. Between the Xbox 360, TiVo, Roku and other devices capable of streaming HD quality video, Netflix is spending more money each month to deliver all of this content. And as more content is made available in HD, that delivery cost to Netflix only continues to grow each month. Even with the economics of scale kicking in and Netflix getting a lower price due to increased traffic, their overall cost continues to go up as the business scales.

While Netflix is betting that in the future they will be able to show revenue from delivering movies online, they don't have an unlimited window of time to prove this. I think sometime next year they are going to have to outline what their online video business model could potentially look like going forward, how they plan to generate revenue or how this offering might help offset other costs associated with their traditional DVD business.