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Summary:

Netflix has been very successful in attracting new subscribers, specifically around its streaming video service. But the video subscription company says its business could be hurt by ISPs moving to tiered data plans, which Netflix claims are incredibly overpriced.

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Netflix posted better-than-expected growth Wednesday, adding 3 million users to top off at 20 million subscribers. But the company said tiered data plans being introduced by ISPs would not only hurt takeup of its online streaming service, but that broadband providers moving to those plans are overcharging their subscribers. In a statement issued along with today’s earnings announcement, Netflix CEO Reed Hastings said:

“An independent negative issue for Netflix and other Internet video providers would be a move by wired ISPs to shift consumers to pay-per-gigabyte models instead of the current unlimited-up-to-a-large-cap approach. We hope this doesn’t happen, and will do what we can to promote the unlimited-up-to-a- large-cap model. Wired ISPs have large fixed costs of building and maintaining their last mile network of residential cable and fiber. The ISPs’ costs, however, to deliver a marginal gigabyte, which is about an hour of viewing, from one of our regional interchange points over their last mile wired network to the consumer is less than a penny, and falling, so there is no reason that pay-per-gigabyte is economically necessary. Moreover, at $1 per gigabyte over wired networks, it would be grossly overpriced.”

That means that ISPs introducing tiered data plans could be overcharging subscribers by up to 100 percent. Netflix also takes issue with the way that some ISPs treat traffic coming into their network. While Netflix doesn’t call out Comcast by name, the country’s largest cable provider recently got into a spat with Level 3, one of Netflix’s content delivery networks. That fight resulted in Comcast asking Level 3 to pay higher interconnection fees for connecting to Comcast’s last-mile network.

“Delivering Internet video in scale creates costs for both Netflix and for ISPs. We think the cost sharing between Internet video suppliers and ISPs should be that we have to haul the bits to the various regional front-doors that the ISPs operate, and that they then carry the bits the last mile to the consumer who has requested them, with each side paying its own costs. This open, regional, no- charges, interchange model is something for which we are advocating. Today, some ISPs charge us, or our CDN partners, to let in the bits their customers have requested from us, and we think this is inappropriate. As long as we pay for getting the bits to the regional interchanges of the ISP’s choosing, we don’t think they should be able to use their exclusive control of their residential customers to force us to pay them to let in the data their customers’ desire. Their customers already pay them to deliver the bits on their network, and requiring us to pay even though we deliver the bits to their network is an inappropriate reflection of their last mile exclusive control of their residential customers.”

As a provider of streaming video, which consumes large amounts of bandwidth and is a competitive product to many ISP’s pay TV operations, Netflix is a canary in the coal mine when it comes to anti-competitive behavior by ISPs.

Image courtesy of Flickr user Scott Feldstein.

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  1. Mr. Hastings may be forgetting that many of the ISPs he’s calling out are some of the same people who [still] charge $1,500.00 a megabyte for SMS.

    …in their mind, 100% mark-up is a “deal”.

    http://techcrunch.com/2008/07/01/atts-text-messages-cost-1310-per-megabyte/

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  2. “The ISPs’ costs, however, to deliver a marginal gigabyte, which is about an hour of viewing, from one of our regional interchange points over their last mile wired network to the consumer is less than a penny, and falling,”

    “That means that ISPs introducing tiered data plans could be overcharging subscribers by up to 100 percent.”

    The math here is wrong. If the marginal cost to transfer a gig of data is $0.01, and the price charged is $1.00, the markup is 9900%.

    nearly ten THOUSAND percent, not one hundred percent.

    and I agree with Todd, the cost of SMS is obscene, even scandalous. these companies should be sued into oblivion.

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  3. It’s not %100, it’s 100 times

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  4. [...] What could hit Netflix hard is the trend towards ISPs switching from unlimited-up-to-a-large-cap models to pay-per-gigabyte models for data usage. Along with other online video companies, any such move could harm its business in a big way. The statement from CEO Reed Hastings is discussed further on GigaOM. [...]

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  5. A war is definitely brewing.

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  6. Why? ISP’s do nothing to market, manage, or package the content. This is like saying FEDEX deserves to charge extra for delivering packaged for Amazon. The bottom line is that ISP’s do deserve to make a profit from their infrastructure investments. But unlike FEDEX they face no legitimate competition. In my above example, there’s nothing stopping FEDEX today from charging extra to deliver Amazon’s packages other then the fact that Amazon will just ship with UPS instead.

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  7. [...] 3 Communications in its peering dispute against Comcast (see video explanation).  Hastings told Gigaom that ISPs were overcharging content providers like Netflix and consumers alike, but his analysis is [...]

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  8. I would dare to say that “last mile infrastructure” in many markets is paid for many times over. The actual “last mile infrastructure” has changed little since CATVs also started deploying internet services over their physical plant.
    On top of that, in many jurisdictions, they are “protected” from any real competition by franchise agreements, making it hard for new players (although expensive) to enter the market.
    The lack of alternatives in the “last mile” is one of the biggest issues we have to overcome in order to provide for any real competition in the “connectivity” market.

    And, as all technology, price erosion is a factor. HW gets better/more performing over time (lets’ just look at our mobile networks), but ISPs still manages to literally pull our legs and keep raising prices. They CAN do that since there is little to no competition in the “last mile infrastructure”.

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  9. This fascinates me to no end. Having spent my early work years mired in the details of UNEs and collocation, I can’t read about streaming content providers and broadband/content conglomerates without wondering if this is the new CLEC v. ILEC showdown. At the end of the day, it was technology, not regulation, that brought real competition to telecom; I wonder what developments will shape this market.

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  10. [...] Netflix: ISPs Overcharging Subs With Tiered Data Plans By Ryan Lawler Jan. 26, 2011 http://gigaom.com/broadband/netflix-tiered-data/ [...]

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