Will Broadband-Usage Surcharges 'Stifle the Internet'?

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In one breath, Netflix president and CEO Reed Hastings says he’s actually fine with large bandwidth-usage caps.

But in the next, he says he doesn’t want ISPs to be able to put in a pricing structure (i.e., per-gigabyte charges) that would provide a disincentive for subscribers to consume more than their fair share.

So usage caps are OK — as long as they’re toothlessly employed?

Hastings acknowledged that wireline Internet service providers “have large fixed costs of building and maintaining their last mile network of residential cable and fiber” and thus are justified in setting monthly usage limits, in an April 6 letter to Rep. Fred Upton (R- Mich.), chairman of the House Energy & Commerce Committee, and Rep. Henry Waxman (D-Calif.).

It’s per-gigabyte pricing he’s worried about: “The ISPs’ costs, however, to deliver a marginal gigabyte 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.”

Netflix and other broadband-video providers are watching this issue closely. AT&T on May 2 adopted a cap-and-surcharge model (150 GB for DSL users; 250 GB for U-verse Internet users) — with $10 tacked on for every 10 GB beyond those. Other providers, including Cable One, are moving toward similar pricing plans (see Cable One Rolls 50-Mbps Tier With Caps And Surcharges).

The move toward pay-per-gigabyte models “threatens to stifle the Internet,” Hastings argued. “We hope this doesn’t happen, and will do what we can to promote the unlimited-up-to-a-large-cap model.”

Not everyone believes usage-based billing is The End of the Internet As We Know It.

Rather, it is “evidence of a maturing broadband industry, in which growth has slowed and players increasingly must try to nab customers from each other,” columnist Holman W. Jenkins Jr. wrote in The Wall Street Journal last Wednesday.

To Hastings’ point that the incremental cost to deliver the next Gigabyte is minimal, Jenkins Jr. pointed out: “Filling an empty seat at take-off time costs airlines little more than a bag of peanuts (if that), but even in their fiercely competitive industry they still get away with charging top dollar to late bookers.”

Hastings doesn’t spell out how big a cap is enough, but he’s previously said Comcast’s 250 GB limit is perfectly fine (see Broadband Sticks, Or Carrots?). “Comcast has had 250-Gigabyte caps for years without overage charges, and that hasn’t been a problem for Comcast customers or for us,” Hastings and CFO David Wells wrote in an April 25 letter to shareholders.

Netflix now represents the largest video-subscription service in the world, with 23.6 million subscribers in the U.S. and Canada as of the end of March. In the U.S., Netflix offers DVDs-by-mail as well as Internet video streaming, while in the Great White North it sells a streaming-only service.

Meanwhile, Hastings — not surprisingly — has weighed in on the side of Level 3 Communications in the still-unresolved dispute between Comcast and Level 3. Last fall the cable operator asked Level 3 to pay interconnection charges after Level 3 landed a content delivery contract with Netflix to deliver streaming video.

“As long as we pay for getting the bits to the regional interchanges of the ISPs’ choosing, we don’t think ISPs 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,” Hastings wrote to the lawmakers. “The ISPs’ customers already pay the ISPs 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.”

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Programming Note: Join execs from ESPN, Samsung, TiVo, HBO, Warner Home Video, CEA, Nielsen and Rovi at the Connected TV & 3D: Supplying the Demand conference in New York on Tuesday, May 24. Click here for more info: www.multichannel.com/connectedtv.

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