Usage-Based Pricing, Netflix Drive Up Broadband Bills, Analysts Say
Usage-based pricing may increase consumer costs and thereby limit the reach of online video, but it won’t diminish Internet streaming’s threat to traditional pay TV, Credit Suisse analysts concluded in a report to investors Friday. Analysts used Canada -- which has allowed usage-based pricing since 2008 -- to set up a case study. Credit Suisse’s Canadian cable analyst, Colin Moore, volunteered as the guinea pig. He found that using Netflix streaming services to watch 32 episodes of “Mad Men” in a month raised the family’s bill by $12.
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Last month, the FCC’s net neutrality order permitted usage-based pricing (CD Dec 2 p1). Though it’s still too early to say how such pricing plans will be structured, and FCC Chairman Julius Genachowski and his staff have made clear that they're willing to let the market determine matters, “it appears that [usage-based pricing] for wireline broadband in the U.S. could result in a material increase in the cost of broadband,” Credit Suisse analysts wrote.
Netflix offered online-only video in Canada last year and millions rushed to sign up. During peak hours, as much as 20 percent of North American computers are streaming Netflix video, an earlier study said. Credit Suisse analysts said they believed Canada is the model for Netflix’s future expansion. And it’s likely that its streaming-only services will “ramp” up through next year. Canadians currently only have access to about 9 percent of the streaming titles that their American cousins do.
Netflix is “bullish” about its streaming future, spokesman Steve Swasey said. He declined to discuss the analyst report. The DVD-by-mail and online movie company said Tuesday it’s teaming with big electronic companies and retailer Best Buy to sell remotes with a designated “Netflix” button for even easier streaming.
Despite the prospective increase under usage-based pricing, streaming is still a threat to pay TV, Credit Suisse reported. “While we may be early, in a nutshell, we remain concerned that the emergence of Internet delivered video and low-cost subscription streaming services like Netflix could result in cord-cutting.” If that happens, cable operators “would be hurt by lower affiliate and advertising revenue,” and even “a moderate decrease in subscribers could have a disproportionate impact on” earnings, they wrote: Cable networks could be “marginalized over the long run” if Netflix acquires content directly from movie studios. Though studios may benefit from a Netflix deal, “the issue for media conglomerates is cable network profit dollars are much bigger than studio profit dollars and [Wall] Street applies a higher multiple to cable network assets v. studio assets,” Credit Suisse wrote.
There’s the matter of consumer and political backlash: “The consumer outcry that developed in 2009 after” Time Warner Cable said that it would test the concept “scared operators and has shelved pursuit of the practice for now,” Credit Suisse wrote. “At this state, we would expect a similar reaction if operators moved forward with the approach again.” Credit Suisse analysts said they expect any tiers or caps “to be generous.” Comcast, for instance, already offers up to 250 GB per month to its subscribers, Credit Suisse said.
Technology also gives streamers plenty of flexibility. “For example, streaming services like Netflix could encode videos at a lower bit rate,” the analysts wrote. “In turn, this would reduce the amount of bandwidth consumed when these video files are streamed over the Internet, resulting in a lower impact on cost to the broadband user.”