Combined, Netflix, YouTube and other online video sites create about 46 percent of all Internet downloads during peak hours, according to Sandvine. The company forecasts that the category for on-demand entertainment will represent a combined 55 to 60 percent of peak traffic by the end of 2011.
That shift has threatened cable and telecom companies, who are responding by changing their billing practices to charge Internet users for how much data they consume instead of offering flat-rate monthly fees.
“My sense is something will have to give. If they are using more bandwidth, the question is, who is going to pay for it?” said Jeffrey Silva, an analyst at Medley Global Advisors.
That creates fresh questions for Netflix, which has quickly gained 23 million subscribers as a low-cost alternative to cable. It has recently inked deals with Hollywood studios Miramax Films and Twentieth Century Fox, and the company’s stock has more than doubled in value in the past year.
The Los Gatos, Calif., company declined to comment about the Sandvine report. But it is concerned about Internet providers charging customers based on amount of usage. In letters to shareholders and in filings to regulators in Canada and at the Federal Communications Commission, Netflix chief Reed Hastings warned that metered billing, or usage-based pricing, could present a risk to its business.
Users could curb how much video they watch online if they are afraid of blowing monthly caps, analysts say. After Canadian Internet service providers approved of usage-based billing in March, Netflix said it deteriorated the quality of its streaming videos to those customers so that they use up less data. About 30 hours of streaming video on Netflix consumes about 30 gigabytes of data.
Last week, Cable One introduced metered prices for U.S. customers that include 50 to 100 gigabytes per month. According to its Web site, the company (owned by The Washington Post Co.) will charge customers 50 cents for each gigabyte beyond the caps, but it will continue to offer a flat-rate monthly plan also.
Beginning this month, AT&T began limiting data usage to 150 gigabytes for DSL subscribers and 250 gigabytes for its UVerse broadband customers. Users will be charged an extra $10 a month if they exceed the cap. Comcast also has a 250-gigabyte cap for its broadband users.
The FCC, in an Internet access order last December, endorsed usage-based pricing for broadband providers. FCC Chairman Julius Genachowski has introduced a proposal that forces wireless providers to text or call customers who are about to exceed their data caps.
“Pricing decisions are important in any business. But in businesses with high fixed and low variable costs, pricing is the very essence of strategy,” analyst Craig Moffett of Bernstein Research wrote in a recent research note.