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Netflix: Broadband's Cash Cow or Data Hog?

We’ve recognized that Netflix (NFLX) has become the new face of evil for wireline Internet service providers while they seek to impose caps or tiers on subscribers, as AT&T (T) did in May. Netflix, however, is also willing to play the part of consumer advocate as it seeks to point out some of the bigger myths ISPs are weaving around broadband scarcity.

In an op-ed in the Wall Street Journal on Friday, Netflix general counsel David Hyman disabuses people of the scarcity myth: “The analogy is a false one,” he writes. “Wireline bandwidth is an almost-unlimited resource, due to advances in Internet architecture. Adding more capacity is easy. The marginal cost of providing an extra gigabyte of data—enough to deliver one episode of 30 Rock from Netflix—is less than 1¢ and falling.”

That’s a very different sum from what AT&T in May began charging customers for its DSL and U-verse services. AT&T is adding new charges that amount to 20 times the cost of providing the service. It’s true that 20¢ a gigabyte is a far cry from the $4 or $5 being charged for the same amount of data by some cable companies in Canada, where consumption-based billing has long been accepted. Still, it sets a dangerous precedent for much larger charges in the future.

Hyman continues: “From an ISP’s perspective, Netflix forces them to put out for investment and upgrades many don’t want to do. Hence the caps. But what if, instead of seeing Netflix as a bandwidth hog, ISPs viewed it as a gateway drug to subscribers choosing better and more expensive broadband connections?”

Consumer Upgrades, Massive Profits

As I consume more broadband, I find it worthwhile to upgrade my broadband service to a higher-speed tier. Granted, not everyone is willing to do this. As an early adopter, I am pretty confident that more folks will join me in upgrading their service as cooler apps proliferate. Since providing broadband has a higher up-front cost for building out the infrastructure, it is a benefit to ISPs when more folks start to subscribe to the services they have built out.

As Hyman points out, though, the issue may be less about investment costs for ISPs and more about protecting existing voice and pay-TV businesses and keeping margins up as consumers bring more broadband-consuming devices into their homes: “Any such backlash would also likely focus on the anticompetitive aspects of consumption-based billing,” he writes. “With online-content delivery providers like Netflix and voice services like Skype experiencing explosive growth, competitors see consumption-based billing as a convenient way to slow that growth by making the use of online services more expensive.”

Netflix is clearly not an impartial observer in this fight. Perhaps there are things it could or should do to make its traffic more ISP-friendly. Nevertheless, caps will hurt Netflix, consumers, and startups. Hyman closes with something we already know—that bandwidth caps stifle innovation and the growth of such services as Netflix, Skype (MSFT), Google’s new Hangouts service Google’s new Hangouts service (GOOG), and any number yet to be introduced. What’s ironic here is that some ISPs already get it and have built out infrastructure for the future. This applies to Verizon, in the Bay Area, certain municipalities, and Google. We don’t have to live in a broadband backwater, but many of our largest ISPs think we should. What’s wrong with that picture?

Also from GigaOM:

The New Video Paradigm: Discovery Is King (subscription required)

Twitter Co-Founder Evan Williams on Blogger and Blogging’s Future

Why OS X Lion Is the Biggest Test for Digital Downloads

Wow! Mobile Is Now 2% of Global GDP

How Video Chat on Android Tablets Is About to Improve

Higginbotham is a writer for GigaOM.

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