Netflix now the largest commercial operation in the cloud

Netflix's business is booming, and the company says it couldn't have fueled its meteoric growth without cloud computing.

Starting from a novel, yet simple, idea a decade ago -- get DVDs in the mail rather than schlep to the video rental store -- Netflix has boomed in recent years, thanks to its new online video delivery.

It is now the biggest online distributor of streaming video, with more than 40% growth in new customers this year. It's gone from shipping movies to your mailbox to streaming them directly to PCs, then to consoles like the Xbox and now to smartphones and set-top boxes. It competes in an exploding market of online entertainment with firms old and new, including Blockbuster, Hollywood Video, Hulu and Amazon.

Netflix made $600 million in profit on $1.6 billion in sales last year. Based on those numbers, it can claim to be the largest commercial operation in the cloud. Wall Street thinks Netflix is  worth $8 billion; if you had bought the stock at the IPO seven years ago, you'd be 1,000% richer by now.

Cloud computing is one reason the company has been able to grow so fast, after more than 10 years of decent, but not amazing, success. Specifically, Netflix fueled growth by using Amazon Web Services (AWS), although the company said the concept could work with any resource-rich cloud provider.

The beauty of this is, just like AWS, it's all very clear that there is no model to follow.
Steve SwaseyVP of corporate communications, Netflix

Netflix decided to move operations from its own data centers to AWS last year. According to Adrian Cockcroft, cloud architect for Netflix, the move is mostly complete. A presentation slated to be delivered by Cockcroft in November says Netflix moved its video encoding farm to AWS first in 2009, then large-scale log and analytics based on Hadoop were put in place. In 2010, Netflix jumped its on-demand streaming to AWS, and it's in the final process of moving more than 80% of its Web functionality onto AWS in the coming weeks.

Netflix's application programming interface (API) service for developers is also on AWS. In the presentation, Cockcroft says that the last ties to traditional IT infrastructure -- including Netflix's "system of record" -- will cut over in the next few years. Presumably, the system of record is the company's regulated financial transaction data. As a public company and a merchant, Netflix is subject to several federal requirements, including Sarbanes-Oxley and PCI-DSS, that have not been readily translated to cloud infrastructure services for various reasons.

Netflix gives AWS a workout

Netflix, with its loads of rich data, really put AWS through its paces.

"The number of servers they use has gone up roughly parallel to their stock price," joked Jyoti Bansal, CTO of AppDynamics, a next-generation application monitoring platform that Netflix has used since last year. It's been estimated that Netflix has grown from a few dozen servers in mid-decade to thousands of instances at a time, taking advantage of cloud's vaunted elasticity to scale up huge server farms and turn them back down again as demand flows and ebbs.

For Netflix, the true value of a cloud service was the sheer amount of computing power it can bring to bear on advanced "rich services," Bansal said. It takes an awful lot of horsepower to encode and deliver high-quality video streams to relatively puny computers like those embedded in smartphones. Netflix has to perform almost all of the work necessary for a satisfactory video experience on its own servers.

Last November, Netflix committed to making a fast transition to cloud computing. "The cloud capacity allows them to develop products that are compute intensive without having to scale up the physical data centers," Bansal said.

Bansal also said that Netflix pushed AppDynamics hard during the transition, and the end result was that he gained new product features and a better understanding of how to operate a production environment in the cloud.

"There are a lot more moving parts now. When you get to cloud, that dynamism goes to another level…the monitoring and management has to be really self-learning," he said.

That means perfecting policy-based automation and learning what happens when you set your environment loose. Only experience shows where the friction points are, Bansal noted, and a cloud user on a really large scale has to be able to adapt unthinkably quickly compared to an operator used to managing individual servers.

That's not really feasible, because the rate that things change is not vast in scope when dealing with a multi-thousand server horizontal environment like Netflix. "You can't really monitor around a node or a server anymore, because they are so fungible; they come and go so frequently," he said.

Netflix also takes pains to keep its operations as agnostic as possible from the AWS infrastructure; one of the goals on Cockcroft's roadmap is to enable "multiple vendor deployments" and "international expansion." Cockcroft anticipates the arrival of large-scale "AWS clones" that Netflix can turn to if the money looks right.

Netflix proves cloud rationale

The reasons Cockcroft cites for the Netflix cloud move will sound familiar by now.

"By using AWS, we are leveraging a huge investment made by Amazon and paying a small amount for it on a month by month basis," wrote Cockcroft on his blog in August. Amazon will pay better attention to its infrastructure than Netflix could and deliver benefits to him for a fee instead of having to build them himself, reinventing the virtualized data center wheel.

His reasoning is that $10 million spent on a servers and floor space could be better directed to licensing new movie content to deliver and make a profit on. That's the kind of calculus that Amazon and other cloud providers have been touting for years, and Netflix appears to be a very large scale validation of that worldview.

Netflix recently signed a $1 billion licensing arrangement with content distributor EPIX. It's hard to see where a billion dollars worth of server hardware could have made the company more money than a billion dollars worth of saleable content.

But the growth process was a two-way street, apparently, which highlights the relative newness of the cloud model. According to his blog, Cockcroft said Netflix drives AWS hard and "Amazon is taking the input and improving their product rapidly in ways that benefit all the users of AWS."

Finding parallels between Netflix and AWS

Steve Swasey, Netflix VP of corporate communications, said that the company, which went public in 2002, is blazing a trail in technology and service delivery and navigating a course weirdly parallel to that of Amazon itself. "The beauty of this is, just like AWS, it's all very clear that there is no model to follow," he said.

The number of servers they use has gone up roughly parallel to their stock price.
Jyoti BansalCTO, AppDynamics

Swasey said there wasn't direct line from AWS to Netflix's market performance, but AWS is the best option for their needs.

"Credit where credit is due, we chose Amazon for a number of reasons, but we do want a holistic view of evolving our service," he said.

Swasey said that Netflix is essentially reinventing video delivery online, just as it did when it began mailing DVDs to people's homes and short-circuiting the video rental and retail business in a new way. Swasey said that it was precisely the growth of streaming online delivery that drove Netflix's IT operations out of normal enterprise scale and into supercomputer territory.

After all, mailing DVDs all over is essentially a logistics operation; not many computers are needed to handle the brainpower necessary to run a warehouse and talk to the shipper of choice. It's likely that more of Netflix's IT infrastructure went to customer management and the online shopping system than delivering movies.

But things took a distinct turn in 2007, when Netflix began to move into online streaming. It first delivered movies to PCs, available seconds after placing an order. Then it added new endpoints -- the Mac, then consoles and so on. Now, the company boasts it can deliver high-quality, skip-free (mostly) and consistent video to more than 200 devices. Cloud computing was the best way to harness the computing power available to do that.

"We take a very scientific approach to investing in infrastructure and its supporting elements," Swasey said.

It paid off. Netflix opened a set of APIs to developers in 2008 and company growth, which had been incremental, turned meteoric. In October of 2009, while the company was beginning its transition to the cloud, Netflix shares went for $49, a little more than three times their IPO price of $15. Yesterday, a year later Netflix closed at $153 per share.

"Netflix changed the way people rented movies, and now we're changing the way people watch movies," Swasey said. Apparently, it's changing the cloud, too.

Carl Brooks is the Technology Writer at SearchCloudComputing.com. Contact him at cbrooks@techtarget.com.

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