Netflix Inc. (Nasdaq: NFLX) has tapped a startup to help the over-the-top video provider take on one of its biggest enemies: ISP consumption caps and metered broadband policies.

Netflix emerged as the marquee customer of EYE IO LLC , an encoding firm founded in December 2010 that claims its H.264-compliant technology will help reduce Netflix's bandwidth consumption by 20 percent to 50 percent without sacrificing video quality.

EYE IO didn't detail how Netflix is deploying its encoding systems, but Netflix, which streamed more than 2 billion hours of TV shows and movies in the fourth quarter, is EYE IO's first announced licensee. NewTeeVee estimates that standard-definition Netflix streams currently eat up about 2.2Mbit/s, with 720p HD requiring about 3.8Mbit/s, and 1080p HD streams chowing down up to 4.8Mbit/s.

EYE IO CEO and CTO Rodolfo Vargas, a former Microsoft Corp. (Nasdaq: MSFT) exec, says the company optimizes streaming using software-based core encoding, but confirmed that it does not employ an adaptive bit rate scheme that would fluctuate video quality based on available bandwidth.

Why this matters
ISP bandwidth caps and metered broadband tiers are as much an enemy to Netflix's business as a rival OTT video service. It doesn't own the access network, so strict caps and meters can do damage to Netflix's value proposition.

Netflix especially grapples with this in Canada, where broadband meters and caps are rampant, and it could be in for another dose as Netflix sets its sights on more international markets. More U.S. ISPs are also expected to adopt similar bandwidth policies that could spell trouble for OTT companies. Netflix is popular on mobile devices, too, so the problem there is amplified in the face of even more limited cellular data plans.

More efficient encoding could help Netflix reduce its exposure to that risk. Netflix has also tried to combat caps by letting users adjust streams to lower bit rates, which reduces picture quality. (See Netflix Canada Cuts Video Streaming Quality.)

Netflix is obviously a big win for a young startup like EYE IO. Chairman of the Board Charles Steinberg wouldn't say how much seed money the company, which employs five full-timers, has raised, but noted EYE IO is not looking to raise any more cash at this point.

For more
Read more about broadband meters and bandwidth caps.

— Jeff Baumgartner, Site Editor, Light Reading Cable