Netflix Fears by-the-Byte Tiers

If U.S. broadband service providers end up charging subscribers based on their data consumption, Netflix Inc. (Nasdaq: NFLX) has yet another big worry to add to its list of challenges, which include its ability to source premium and exclusive content and remain competitive with other over-the-top video players.

A move to per-byte, metered billing models by ISPs is "an independent negative issue for Netflix," the company acknowledged in a letter to investors Wednesday, published in tandem with its fourth-quarter results and an announcement that Netflix had breached the 20 million subscriber mark. "We hope this doesn't happen, and will do what we can to promote the unlimited-up-to-a-large-cap model." (See 20 Million for Netflix.)

As far as Netflix is concerned, the situation in the U.S. remains manageable as cable operators, including Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Charter Communications Inc. , have only installed relatively large consumption caps to keep "excessive" users in check. Time Warner Cable Inc. (NYSE: TWC) and AT&T Inc. (NYSE: T) tested metered billing, but shut the trials down amid a firestorm of criticism.

But the Federal Communications Commission (FCC) 's new network-neutrality rules have sparked fears that ISPs might consider usage-based billing models. (See Comcast Draws the Line at 250GB, TWC Mothballs New Metering Trials and Charter Tries On Consumption Caps .)

The environment is much different in Canada, where Netflix has foregone DVD rentals in favor of a streaming-only service. There, Netflix is having to deal with broadband tiers from operators such as Rogers Communications Inc. (Toronto: RCI), Shaw Communications Inc. and BCE Inc. (Bell Canada) (NYSE/Toronto: BCE) that impose by-the-gigabyte fees after customers exceed their base limit. (See Netflix Streams to Canada and Rogers Takes Internet Meter to the Masses.)

Netflix to ISPs: Don't be greedy
And Netflix isn't buying the argument that ISPs need to enact metered billing tactics to keep up with the real costs for delivering data. In fact, Netflix thinks charging $1 or more per gigabyte is downright greedy ISP behavior.

The cost to an ISP to deliver a "marginal gigabyte" (equal to about an hour of viewing via streaming) from one of Netflix's regional interchange points over the ISP's access network to the consumer is "less than a penny [Netflix's emphasis] 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."

"It's something ... we're definitely worried about," Netflix CEO Reed Hastings said on Wednesday's earnings call, before adding that many Canadians "probably don't understand their plan." On that point, he said Netflix intends to work with consumer groups there as part of an effort to "get a better costing structure."

Other nuggets from Netflix's fourth quarter results and future plans include:

Netflix is to publish an ISP Hall of Fame/Shame of sorts that ranks them on how well they support Netflix streaming, based on user data. No word yet on who's not up to snuff, but Netflix has already identified Charter as the best-performing ISP in the U.S.

Netflix's low-end $7.99 plan currently allows for one stream at a time. Later this year, Netflix will offer options (pricing to be determined) that allow those customers to watch multiple simultaneous streams.

Netflix is working on an "extensive" integration with Facebook .

— Jeff Baumgartner, Site Editor, Light Reading Cable