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Andrea Peterson

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Posted at 08:55 PM ET, 07/25/2011

Netflix proclaims Internet as future, but data caps loom as threat

Netflix Chief Executive Officer Reed Hastings demonstrates how various gaming devices can be used to stream content. (MIKE CASSESE - REUTERS)
Netflix on Monday officially declared its future is the Internet, saying the DVD market has “peaked.”

But experts wonder if the online streaming giant — now with 25 million subscribers in the second quarter — and other Web firms face a looming threat to their businesses. They aren’t talking about competitors such as Hulu, HBO Go and Amazon Prime — the threats outlined by Netflix said in its earnings report.

Experts are pointing to broadband data caps.

More fixed-wire and wireless Internet service providers have introduced data caps on broadband use, ending flat-rate monthly fees. Some tech policy experts say data caps, or metered billing, could curb competition and lead to higher bills for consumers.

Why would a user watch HD feature films on Hulu or Netflix if they could blow past their monthly data limits? And is it fair if Comcast or AT&T doesn’t charge by the bit for their own television services?

Internet service providers say they need to charge more as their networks get overloaded by videos, cloud-based apps and large graphic files. To expand capacity, they need to spend more. So why wouldn’t the heaviest users get charged more, they say?

Netflix, one of the Internet’s biggest bandwidth hogs, could be among the companies hardest hit by the billing changes.

In its second quarter conference call, CEO Reed Hastings said 75 percent of all new subscribers are just getting streaming video.

That’s what prompted its unpopular decision to hike the price of DVDs.

“We hate making our subscribers upset with us, but we feel like we provide a fantastic service and we’re working hard to further improve the quality and range of our streaming content in Q4 and beyond,” Netflix said in its letter to investors.

In the past, Netflix has told investors and U.S. federal regulators that they fear usage-based fees can hurt their business. The Silicon Valley firm has protested data caps in Canada where some ISPs aren’t counting data used for their Internet-based TV services but are counting bits consumed by competitors such as Netflix.

“Users hate it, and the burden of watching the bandwidth meter deters them from trying innovative new services,” said University of Pennsylvania professor Kevin Werbach, an innovation and telecommunications policy expert. “Carriers should be able to manage congestion on their networks, but there are technical solutions that are superior to usage-based billing.”

The New York Times editorialized last week that the practice could squash new Web competitors and consumers would lose.

“They are billed as a way to manage traffic, but they could also hamstring the user’s experience, blunt competition online and stymie innovation on the Internet,” the Times editorial said. “This problem is of particular concern because there is hardly any competition in high-speed broadband services (speeds above 10 megabits per second).”

The FCC blessed usage-based data billing in its “net neutrality” passed late last year. Sources close to the making of the rule said cable companies represented by the National Cable and Telecommunications Association insisted FCC chairman Julius Genachowski put that language in the rule.

So it could be difficult to take up data caps as a regulatory issue.

“But it’s becoming increasingly difficult to ignore,” said Harold Feld, a policy expert at the public interest group Public Knowledge.


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By  |  08:55 PM ET, 07/25/2011

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