Netflix: ISPs Overcharging Subs With Tiered Data Plans

Netflix (s NFLX) posted better-than-expected growth Wednesday, adding 3 million users to top off at 20 million subscribers. But the company said tiered data plans being introduced by ISPs would not only hurt takeup of its online streaming service, but that broadband providers moving to those plans are overcharging their subscribers. In a statement issued along with today’s earnings announcement, Netflix CEO Reed Hastings said:

“An independent negative issue for Netflix and other Internet video providers would be a move by wired ISPs to shift consumers to pay-per-gigabyte models instead of the current unlimited-up-to-a-large-cap approach. We hope this doesn’t happen, and will do what we can to promote the unlimited-up-to-a- large-cap model. 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, which is about an hour of viewing, 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.”

That means that ISPs introducing tiered data plans could be overcharging subscribers by up to 100 percent. Netflix also takes issue with the way that some ISPs treat traffic coming into their network. While Netflix doesn’t call out Comcast (s CMCSA) by name, the country’s largest cable provider recently got into a spat with Level 3, (s LVLT) one of Netflix’s content delivery networks. That fight resulted in Comcast asking Level 3 to pay higher interconnection fees for connecting to Comcast’s last-mile network.

“Delivering Internet video in scale creates costs for both Netflix and for ISPs. We think the cost sharing between Internet video suppliers and ISPs should be that we have to haul the bits to the various regional front-doors that the ISPs operate, and that they then carry the bits the last mile to the consumer who has requested them, with each side paying its own costs. This open, regional, no- charges, interchange model is something for which we are advocating. Today, some ISPs charge us, or our CDN partners, to let in the bits their customers have requested from us, and we think this is inappropriate. As long as we pay for getting the bits to the regional interchanges of the ISP’s choosing, we don’t think they 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. Their customers already pay them 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.”

As a provider of streaming video, which consumes large amounts of bandwidth and is a competitive product to many ISP’s pay TV operations, Netflix is a canary in the coal mine when it comes to anti-competitive behavior by ISPs.

Image courtesy of Flickr user Scott Feldstein.

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