Netflix and YouTube Dominate Online Video. Can Amazon Catch Up?

Wondering what other people are doing on the Internet? More likely than not they’re watching something on Netflix or YouTube. Measured by bytes, the two sites now make up more than half of Internet traffic in the U.S, according to Sandvine’s latest Global Internet Phenomena Report pdf) using data from September.

Video always dominates these traffic surveys because of the vast amount of information required. Last year, for instance, Netflix and YouTube made up 47.8 percent of total downstream traffic (what people are consuming rather than creating). This year the duo crossed the halfway point, hitting 50.3 percent. Netflix lost a bit of ground, while YouTube ticked up, but the rest of the online video pack sure doesn’t seem to be gaining much ground on the leaders.

Notably lagging are two other widely discussed video services: Hulu and Amazon. Both companies are slipping from their already lowly traffic numbers: Amazon accounted for 1.6 percent of total downstream traffic in September, compared with an average of 1.75 percent in the second half of 2012. For Hulu, meanwhile, September’s 1.29 percent came up short of the 1.38 percent it captured last year.

This mammoth disparity is a way to set the stage for what should be a big week for Amazon’s video streaming service, which is releasing its first original television series. Starting Friday, the first three episodes of Alpha House, about several boozy lawmakers sharing a house in Washington, will be available to Amazon Prime subscribers (and the pilot is already available online.)

Lavishly financing the production of an original drama about Washington politics in a bid to lure new subscribers sounds like a familiar strategy. House of Cards was the first show in Netflix’s foray into original content, and it seems to be working. Netflix told investors that each subsequent show it launches has more viewers in the first week than the last. Richard Greenfield, an analyst with BTIG, a New York institutional broker, singled out original content as a major reason that Netflix viewers have been streaming more shows and movies.

Another interesting tidbit from the traffic report: File sharing is losing ground. BitTorrent, the dominant file-sharing technology, accounted for only 7.4 percent of total traffic in September, down from more than 10 percent last year, and file sharing as a whole has dropped from 31 percent of traffic in 2008 to less than 10 percent today. If you want to argue that legal alternatives are the best way to cut down on piracy, this seems like a pretty compelling statistic.

More legal options are coming. Netflix currently spends less than 10 percent of its content acquisition budget on original content but recently said it could see that doubling over time. Last week it said it would produce several new shows based on characters from Marvel Comics.

Netflix said last month it has more than 30 million subscribers. Amazon doesn’t reveal how many people have subscribed to Prime, but R.J. Hottovy, an analyst at Morningstar, said that Prime had 10 million customers and accounted for one-third of Amazon’s operating income.

Not every Prime subscriber is even interested in watching online video, but Amazon’s chief financial officer, Thomas Szkutak, told investors this summer that streaming video was a major factor in inspiring new customers to pay the $79 subscription fee for its Prime service, which also offers free two-day shipping and the ability to borrow Kindle content. Even as it insists it is making progress with streaming, Prime’s distinguishing feature continues to be moving boxes. Exhibit A: Amazon’s new Sunday delivery option through the U.S. Postal Service.

    Before it's here, it's on the Bloomberg Terminal.