Hogging Bandwidth Could Crack Netflix’s Piggy Bank

If there’s a downside to the staggering amounts of broadband traffic Netflix (NSDQ: NFLX) is responsible for generating, it’s the boundless creativity of those intent on punishing the company for that privilege.

The latest comes from Consumer Federation of America director of research Mark Cooper, who was quoted Wednesday by technology blog Hillicon Valley suggesting Netflix be taxed to subsidize the Universal Service Fund, which the FCC is currently trying to transition from its original mission of financing phone use in rural areas to doing same for broadband.

“The Internet is not an infant industry anymore. It can certainly bear the burden of making sure that wires and the communications mediums are there,” said Cooper.

“Netflix takes up about 10 percent of every telco’s bandwidth,” chimed Shirley Bloomfield, chief executive of the National Telecommunications Cooperative Association.

Cue teeth-grinding from Reed Hastings. The Netflix CEO is finding it increasingly difficult to ignore the outstretched hands being waved in his face, even if they’re not looking to collect from him directly.

First there’s the matter of Netflix’s backbone provider Level 3, which is embroiled in a nasty dispute with Comcast (NSDQ: CMCSA) over who has to foot the bill for the traffic Netflix generates on its network. Hastings alluded to the matter last month on the Q4 earnings call, noting that cable operators were looking to make life more difficult for his company simply because Netflix represented competition for their own video services.

Then there’s usage-based billing, which is already instituted in Canada where Netflix launched a streaming-only service last year. With metered broadband a distinct possibility in the U.S. as well, Netflix has to face the harsh reality that its subscribers can’t just consume all the video they want each month without risking an additional charge above and beyond their monthly Netflix bill.

Hastings was forced to break his silence on this subject as well, criticizing internet service providers in a letter to shareholders in January. Netflix and ISPs are clearly headed for war, especially after Netflix had the temerity after its last earnings call to distribute a chart grading their streaming performances.

But as this sudden call for a Netflix tax indicates, the company is facing multiple pressure points on its business model. While analysts tend to dwell on Netflix’s increasing programming costs, its distribution strategy is looking troubled as well. It’s starting to seem unrealistic that Hastings will be able to cram broadband networks with his product without some concession on his part.

Something’s got to give, and it just might be Netflix.

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