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Netflix: Is it broadband’s cash cow or data hog?

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We’ve recognized that Netflix (s nflx) has become the new face of evil for wireline Internet service providers as they seek to impose caps or tiers on subscribers, as AT&T (s t) recently did in May. But Netflix is also willing to play the part of consumer advocate, as it seeks to point out some of the bigger myths that ISPs perpetrate around broadband scarcity. In an editorial in the Wall Street Journal on Friday, Netflix general counsel David Hyman disabuses people of the scarcity myth:

The analogy is a false one. Wireline bandwidth is an almost unlimited resource due to advances in Internet architecture. Adding more capacity is easy. The marginal cost of providing an extra gigabyte of data — enough to deliver one episode of “30 Rock” from Netflix — is less than one cent, and falling.

That’s a very different sum from what AT&T in May began charging customers of its DSL and U-verse services. AT&T is adding new charges that are 20 times the price of providing the service. Twenty cents a gigabyte is a far cry from the $4 or $5 being charged for the same amount of data by some cable companies in Canada, where consumption-based billing has long been an accepted practice. But it sets a dangerous precedent for much larger charges in the future.

From an ISP’s perspective, Netflix forces them to put out for investment and upgrades many don’t want to do. Hence the caps. But what if, instead of seeing Netflix as a bandwidth hog, ISPs viewed it as a gateway drug to subscribers choosing better and more expensive broadband connections?

As I consume more broadband, I also find it worthwhile to upgrade my broadband service to a higher-speed tier. Granted, not everyone is willing to do this, but as an early adopter I am pretty confident that more folks will join me in upgrading their service as cooler apps proliferate. And since providing broadband has a higher up-front cost for building out the infrastructure, it is a benefit to ISPs when more folks start to subscribe to the services they have built out.

But as Hyman points out, the issue may be less about investment costs for ISPs and more about protecting existing voice and pay TV businesses and keeping margins up as consumers bring more broadband-consuming devices into their homes:

Any such backlash would also likely focus on the anticompetitive aspects of consumption-based billing. With online-content delivery providers like Netflix and voice services like Skype experiencing explosive growth, competitors see consumption-based billing as a convenient way to slow that growth by making the use of online services more expensive.

Netflix is clearly not an impartial observer in this fight. And perhaps there are things it could or should do to make its traffic more ISP-friendly, but caps will hurt both Netflix, consumers and startups. Hyman closes with something we already know, that bandwidth caps stifle innovation and the growth of services such as Netflix, Skype, Google’s new Hangouts service (s goog) and any number of services yet to be introduced. What’s ironic here is that some ISPs already get it, and they have built out the infrastructure for the future. Verizon (s vz) has, in the Bay Area is and municipalities and Google are as well. We don’t have to live in a broadband backwater, but many of our largest ISPs think we should. What’s wrong with that picture?

Image courtesy of Flickr user Scott Feldstein

16 Responses to “Netflix: Is it broadband’s cash cow or data hog?”

  1. Brett: Here is where you’re wrong. If you view GigaOm as a tragic comedy, it all makes perfect sense. Oh, and NetFlix doesn’t have massive profits. Actually, they’re having to double their prices in an attempt to have any sense of profitability. Just like our cost per user is going up, their licensing costs could very quickly be 10x what they are now.

    Kwasi: What do you need more than 15 megabit to do? I’m quite curious as to what application you’ve found that demands more than that. It must be some really killer app. When you let me know, I’ll pass it along to my customers after I bring up some new fiber circuits and increase their rates. I’m sure they’ll love it.

  2. Another GigaOm article that isn’t thoroughly researched or well written. Party A chants this! Oh, party B? We really don’t care what they have to say. We won’t fact check either side’s argument. We’ll just beat our drums and make a lot of noise! GRRRRR!!!!!!

  3. Oh give me a break.

    This is such a non-issue.

    Netflix needs to grow up, and negotiate terms for its customers.
    They managed, single-handedly, to negotiate cheap bulk rate content from the major studios – they can certainly deal with the ISPs.

    • Kwasi

      I definitely “see” that the HD they offer is compressed. Since they’re compressing down the video to match people’s bandwidth, wouldn’t the implication be that over time (as ISPs naturally improve their networks), they should be allowed to reduce the compression so that people that can afford it (with fast connections) can use it, and people on even mobile can use it?

      Not being able to “see” the compression differences is subjective. My parents watch SDTV on the HDTV and they don’t find it unbearable. I think it’s a disaster.

      Unless you’re talking bitrates and numbers, i’m not convinced that there isn’t legitimate reason for the bandwidth increase.

      I’ve paid about $50/month to Comcast for 5+ years, and my speed hasn’t increased in a really noticeable way. (I’d say from maxing out at 1MB/sec to 1.5MB/sec) That’s not going to cut it.

  4. There are two things wrong with the picture:

    1. The inherent conflict of interest when broadband service providers are also content providers. This is a conflict of interest that the government should be more proactive in breaking apart. It is in no way good for the long run.

    2. The capitalistic inertia of the broadband service providers who want to get the highest profits for the lowest investment. If these people were the administrators of our roads when most people were still using horses and carts, and automobiles were just being manufactured, you’d have seen a similar inertia to building a modern road suitable for modern automobiles. Coast-to-coast freeways, the pride of USA, the infrastructure that changed the face of the country and contributed to an economic boom, could never have been built by capitalistic corporations.

  5. TimeKeeper

    “The companies that make ketchup get rich not on the ketchup you eat but on the stuff you leave on your plate”

    If you check your triple play allocations, Internet costs are going up and TV costs are going down. I believe this is in a response to the threat of people canceling their TV services over their Internet service. Why cancel your TV if it is only $10/month for basic service?

    Caps don’t hurt – they encourage higher usage.

    Most services charge their customers up to $80 for an extra 150GB of metered usage. After that, any additional bits are free.

    Users should be demanding metered billing right down to the 1st bit of data. This way you pay more for heavy usage months and less for light usage months.

    Data rate caps should also be lifted. Let users download as much as they want, as fast as they can have it. Limiting speed and tiering the billing is only limiting the ISP’s revenues.

    By making a true metered billing system with unlimited speed ISPs will maximize revenues and users will pay only for what they use. Right now, ISPs are not getting rich on what we use but what we are “leaving on the plate”.


    • How about they get off they’re lazy fatcat butts and improve they’re freaking network to fiber optics and give us all the freaking Internet we want. It costs them almost nothing. I’m sick of this crap and people like you that encourage it!

      • Kwasi

        For reals. My Comcast speed has literally not gotten faster in at least 7 years. If they networks had grown at the correct rate and they were up to the level of other countries, no one would have a problem.

        The problem is people are now by default consuming the amount of internet that I was consuming 7 years ago because services like Netflix are commonplace.

        It’s the ISPs own faults and now they want us to pay for it twice while they still don’t improve the networks. And no, paying $100 for 100Mbps Comcast contingent on a 2 year agreement does not equal the internet getting faster.

      • Kyle, you have no idea what you are talking about. It costs $30k per mile to put in fiber. That doesn’t include the cost of getting it to your home from the street. Add another few thousand.

      • Sorry for the additional reply to Kyle, as I just now noticed the site doesn’t prompt me to reply directly to Kyle’s responses.

        Kwasi: In 7 years, the available speed from Comcast in my town has gone up 20x. Not only that, but usage has gone up tremendously as well. Actually, yes, 105 megs is faster than 5 megs.

        Greg: $30/mile is usually cheap. It can very easily hit $100k/mile.

  6. ATT has made me a fan of Sprint in the wireless world (our last defense against a collusive duopoly), and is making me a supporter of cable companies in the wireline world. Their goal is to provide as little value as possible, while charging as much as they can before the government does anything, and by all accounts, they are succeeding.

  7. It is quite unfair that NetFlix is being singled out in all of this. There are so many file servers from which movies, TV-series are streamed by millions of people every single day. If you go to an indexing site like — it will give you links to video content on fileservers like putlocker, sockshare, megavideo, etc. Why aren’t they being projected as the bad-guys? And they all host illegal content — so that is a double whammy! I guess NetFlix is being targeted because they are an actual company with a well publicized presence.

    It will be interesting to see how much bandwidth YouTube consumes in a day? I can imagine that randomly clicking through a LOT of 2 ~ 3 minute long videos can eat up a good amount of bandwidth too by millions of users (especially on videos that go viral). Also YouTube is free — so it will have a greater user base. My guess is that the bandwidth consumption of YouTube will rival that of NetFlix. I looked at the charts in your article ( but something seems amiss there… but then again I may be wrong here :)