The Time Bomb in Netflix's Streaming Strategy

JULY 14, 2011   THE WALL STREET JOURNAL

By MARTIN PEERS

How much casual driving would the average American do if gasoline cost $6 a gallon? A similar question may confront Web companies pushing bandwidth-guzzling services one day.

Several Web companies, including Amazon.com, Google and Netflix, are promoting services like music and video streaming that encourage consumers to gobble up bandwidth. Indeed, Netflix's new pricing plans, eliminating the combined DVD-streaming offering, may push more people into streaming. These efforts come as broadband providers are discussing, or actually implementing, pricing plans that eventually could make those services pricey to use.

Most obviously this is an issue for the mobile Web, still a small portion of consumer Internet traffic in North America. Verizon Communications' majority-owned wireless service last week introduced tiered data pricing, about a year after AT&T made a similar move. But potentially much more disruptive is consumption-based pricing for "fixed broadband," landlines that provide Internet access for consumers in their homes, either via a cable or a home Wi-Fi network. Long offered on an effectively unlimited basis, American consumers aren't used to thinking about the bytes they consume online at home.

Associated Press

That will change. Time Warner Cable Chairman Glenn Britt said last month, "it's inevitable that there will be a consumption dimension" to broadband billing, although his company hasn't yet introduced it. One of the few to have done so is AT&T. Since May, subscribers to its high-speed U-Verse broadband service get 250 gigabytes a month. For every 50 GB they use above that, they pay $10. Comcast also limits its broadband customers to 250 GB a month as a traffic-management tool; it eventually cuts off customers who breach it.

To be sure, for most people right now, 250 GB is plenty. Cisco Systems estimates that only 12% of U.S. households with the Internet consumed more than 100 GB a month in Internet traffic last year, while the average household used 31.8 GB. But by 2015, it projects 17% of households with the Internet will use more than 200 GB a month, with 5% using more than 500 GB. These figures exclude mobile-data use.

Associated Press

Netflix's new pricing plans may push more people into streaming services.

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Which services will put households in danger of breaching the 250 GB threshold? Music streaming or video chats on Skype or Facetime certainly won't help. Neither will gamers playing online. But the most obvious bandwidth hog is long-form video, particularly movies or TV shows such as those streamed via Netflix, according to Cisco. No surprise Netflix has been vocal about warning of the dangers of usage-based pricing. It means that Netflix's streaming consumers eventually will have to factor in both the $7.99 a month cost of the service plus the implications for their broadband bill of using it.

It's hard to argue broadband providers shouldn't be able to offset the cost of network upgrades by charging more for heavy users, particularly given the threat posed to their video and phone businesses. For investors in Netflix and other Web companies, this is a sleeper issue they can't afford to ignore.