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Netflix: Metered Broadband a Pure Cash Grab
Company Not Pulling Punches in Per Byte Debate
by Karl Bode 12:16PM Friday May 13 2011
Netflix initially tried to downplay metered billing as a threat to their business, though in recent months the company has gotten increasingly vocal about the issue -- especially after launching streaming video service in Canada and running face first into that country's low caps and high per byte overages. Netflix has insisted such a pricing model is in no way tied to economic reality, is a move by ISPs to to protect traditional television revenues, and recently stated AT&T's new caps were moving "in the opposite direction" from what consumers want.

Consumer advocates have long agreed, arguing that the move toward overages is about cashing in on Internet video while protecting TV revenues -- and contrary to carrier claims -- is in no way an act of financial or congestion management necessity. This week Netflix ramped up their arguments, meeting with FCC boss Julius Genachowski and publishing a letter (pdf, via GigaOM) sent to the agency that doesn't pull any punches. In the letter, Netflix CEO Reed Hastings reiterates that the pricing models Canadians in particular have seen popping up are simply not based on any financial reality:
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 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.
Granted there are additional costs for upgrades, labor and everyday operational services, but these too are already covered by the already very profitable flat-rate pricing models. Per-byte pricing on landline networks simply isn't necessary, unless you're an investor or exec looking to create artificial scarcity and drive up bandwidth prices. To drive this point home, Netflix includes a very interesting Lemay-Yates report that's worth a read. The report explores in detail the bandwidth prices incurred by Bell Canada in transmitting each gig of bandwidth to the end user, while noting that greater traffic does not necessarily have any incremental effect on congestion.
Netflix further notes that the Lemay-Yates Report concludes that the wholesale incremental cost for delivery of Internet traffic, for average “heavy users”, ranges from below 1 to at most 1.4 cents per GB, with a figure of below 1 cent per GB being the most likely. Consequently, the prices proposed in Bell’s GAS tariff provide margins in excess of 99%. Further, it concludes that the incremental cost decreases with increasing usage.
The dramatic disjunction between incremental cost and the UBB rates proposed belies any argument that the incumbents’ UBB rates are primarily intended to recover any additional costs to the system occasioned by “heavy users” and not already covered by the flat-rate component: such excessive margins clearly have more to do with maximizing the size of the incumbents' windfall. Indeed, the Lemay-Yates Report establishes that greater traffic does not necessarily have any incremental effect on congestion.
With AT&T recently imposing new 150-250GB caps and $10/50GB overages, it would be nice to see more studies like this exploring the U.S. market -- before carriers here continue their relentless pursuit of following in Canada's pricing footsteps.

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Jason Levine

2 recommendations

Caps versus online video

The cable companies are blatantly trying to make online video too expensive to compete with their own offerings. Take AT&T's cap, for example. DSL users have a 150GB cap and UVerse users have a 250GB cap.

Netflix typically uses a codec that runs between 2600kbps and 3800kbps. Assuming the lower of the two numbers, this means watching a video via Netflix would take up about 1.2GB for every hour.

A 150GB cap would mean just over 128 hours of viewing per month, or about 4 hours 15 minutes per day. A 250GB cap would mean just under 214 hours per month or 7 hours per day. This might seem like a lot, but remember that this is without other activity (e-mail, web surfing, Skyping to grandma, etc).

The viewing hours also get eaten up quicker if more than one stream is being viewed at once. If your kids are watching Dora via Netflix-on-Roku in the living room while you and your wife enjoy a romantic comedy on your bedroom's Roku, you'll eat through your daily hours quickly.

Meanwhile, watching cable TV won't count towards your cap and (as the caps drop and the overage charges rise), becomes a better deal financially.
-Jason Levine