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Netflix Meets Its Kryptonite

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Netflix (Nasdaq: NFLX  ) has been able to vanquish more jealous exes than Scott Pilgrim.

The physical and digital movie rental service has sprinted to the 20 million subscriber mark, flicking off the threats of local DVD rental chains and tech giants with streaming intentions.

It has defeated fears of obsolescence stemming from restrictive release windows on new titles, major studios reluctant to feed Netflix's digital catalog, and the smarter wave of combatants aping Netflix's unlimited streaming buffet.

Even the mighty Superman had his kryptonite, though. In Netflix's case, its downfall may come at the hands of broadband data caps.

There's a slap for that
Broadband Reports is confirming that AT&T (NYSE: T  ) plans will top out at 150 gigabytes of monthly usage for DSL customers and a 250 gigabytes on U-Verse.

AT&T is tiptoeing into these restrictive waters. It won't begin hitting customers with a charge of $10 for every extra 50 gigs of monthly data they consume right away. The overage charges won't kick in until the third time that a customer is over the cap.

In other words, it's not some sinister Machiavellian move. Other broadband providers testing out usage caps have experimented with dramatically reducing bandwidth speeds when accounts max out, if not booting its biggest data hogs entirely. This has been going on for three years.

I still don't like it, and neither will Netflix, along with any other company relying on home-based Wi-Fi connectivity to make a living. Consumers behave differently when the meter's ticking. When it's no longer a brainless notion to stream Pandora, Hulu, or Netflix, value propositions start to deteriorate.

Two sides to every bandwidth story
AT&T is claiming that just 2% of its users will be affected by the move, with its average DSL customer only going through 18 gigs of data a month.

Cranking out supporting statistics isn't new for AT&T. It's exactly what it did when it nixed unlimited wireless data plans last year. AT&T claimed that just 2% of its smartphone customers were sucking up more than 2 gigabytes of data a month on its network.

However, here's where hypocrisy meets an ironic Nostradamus.

"Customers can also use unlimited Wi-Fi at home, in the office or elsewhere if available," AT&T pointed out during last year's press release that axed unlimited data plans for new smartphone customers.

Well, it's pulling that rug from users in a few weeks.

Not everyone was an incensed as I was during AT&T's original cap shoot. Some readers went on to comment how they didn't consume a lot of 3G data on AT&T because they switched over to speedier Wi-Fi at home.

"This is just the beginning," I wrote at the time. "The limits will begin to work their way through broadband providers, too. Once it becomes acceptable to sell broadband by the gigabyte, what will stop them from adopting similar pricing plans for home Internet users?"

Nailed it, huh?

Bait and router switch
This isn't some rant by some spoiled brat who thinks that he has a God-given right to unlimited data. I think a smorgasbord has every right to switch to a "food by the pound" dining establishment.

We've been hoodwinked, though. We've been buying netbooks, Wi-Fi tablets, and Web-tethered home theater appliances -- as well as subscribing to streaming video and music services -- under the value proposition that one broadband data plan can keep all of gadgetry connected.

Now every purchase is going to come with the caveat that we price in its actual data consumption the same way we count calories or buy a new car based on mileage rates. Netflix and Hulu Plus will be the initial victims, but then comes tablet leader Apple (Nasdaq: AAPL  ) as well YouTube and Google TV parent Google (Nasdaq: GOOG  ) .

We probably should have seen this coming a few months ago, when Comcast (Nasdaq: CMCSA  ) and Netflix streaming partner Level 3 (Nasdaq: LVLT  ) were locking horns over peering agreements. The media played this out to be a net neutrality issue, but in reality it was more about who would pay the tab for heavier data consumption. Comcast? Level-3? Netflix?

How about you?

You may not go through dozens of Netflix streams a month, but odds are that you are going through more now than you did a year or two ago. Chunky data files are now working their way through the pipes to feed your TV, tablet, and iPod touch with rich multimedia. The 18 gigabytes of data that the average AT&T DSL customer is eating through a month will only ramp higher in the coming months, but the pace will slow now that taxicab meters are being virtually stapled to home routers.

The revolution isn't dead, but it will pay the price of consumption awareness.

Is metered broadband data as big a deal as Rick thinks? Share your thoughts in the comment box below.

Google is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers selection. Apple and Netflix are Motley Fool Stock Advisor picks. The Fool has written puts on Apple. Motley Fool Options has recommended a bull call spread position on Apple. The Fool owns shares of Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz is thankful that he's not on AT&T for his home broadband, and now will make it a point to boot door-to-door peddlers of U-Verse or AT&T broadband from his porch. He does not own shares in any of the companies in this story, except for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (17) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 14, 2011, at 7:22 PM, Henry3Dogg wrote:

    It could impact AppleTV, but would have little impact on Apple's video purchase activity.

  • Report this Comment On March 14, 2011, at 7:23 PM, FoolInFL wrote:

    How long before we hear the ISPs saying:

    Only 2% of our users are using more than 150GB, then...

    Most of our users are using more than 100GB, then...

    Most of our users are using less than 80GB, then...

    Well, you get the picture.

  • Report this Comment On March 14, 2011, at 7:24 PM, lofiluther wrote:

    Oh the irony. . . When Sean Fanning freed music from its price tag, little did he dream that AT&T would end up getting paid for it. How wonderful that a major communications conglomerate is actually profiting from starving musicians who are giving their music away for free (at the hands of P2P network owners).

  • Report this Comment On March 14, 2011, at 7:39 PM, desirevideo wrote:

    How the intellectual property system currently works...

    Think of a restaurant where the servers and hosts (cable/DSL companies, Apple, Google) kept almost all the money and gave little or nothing to the owners and the chefs (media companies, film makers, game designers, writers, musicians) ...of course you'd enjoy going to these restaurants because it'd be like going to a place where you received high quality food but then the server would cut the bill in half and keep the money for himself. Problem is, if the chefs stopped getting paid then they would quit and eventually the high quality food will stop coming. People keep saying to me, but Mike this is just the new paradigm...and I understand this, but no matter what the paradigm very few have the luxury of performing their professions at a high quality for free. All that will remain after the smoke clears is a couple centralized distributors that control all commerce and artists will get even less than they did before. If companies curb heavy bandwidth use with 150 or 250 gb caps... the students and the poor will still be able to pirate low quality streams but at least the intellectual property businesses will be able to make money off of high def and future generation services. If no caps are enforced... the film/television industries will continue to decline as well as the gaming industry and professional sports. Who's going to pay billions for the next ESPN negotiations if you can simply cut the cord and watch hi def streaming for free?

  • Report this Comment On March 14, 2011, at 8:08 PM, TheDumbMoney wrote:

    If you don't like it, got to another ISP, people!

    The alternative is: A) slow networks; and/or B) severe margin erosion at the ISPs if they are expected to foot the bill for vastly expanded infrastructure to support unlimited downloads.

    Do you think the ISPs are running a charity? Do you think they are in business to make sure people can download unlimited Netfilx pics? No and no. This was inevitable, and predictable.

    Likewise, it is inevitable that other ISPs will eventually do it, no matter what they say to you. Otherwise, see A and B above, for them, after they (temporarily) lure T's customers. The networks simply cannot support the increased traffic. And the ISPs simply cannot affort to upgrade the networks without passing on costs. Period.

    See also, e.g., Tragedy of the Commons (lookitup on Wiki if ya gotta); see also solutions, e.g., toll lanes as solution to traffic problems = empirically good solution, despite moo-mooing that goes on about them.

  • Report this Comment On March 14, 2011, at 8:20 PM, xmmj wrote:

    Do you think the ISPs are running a charity?

    No - they are running a monopoly. The problem is there are no other ISPs seriously. Comcast and ATT together form a duopoly that is essentially a monopoly.

    Monopoly means they can charge whatever they want until the law of diminishing returns sets in.

  • Report this Comment On March 14, 2011, at 8:32 PM, TheDumbMoney wrote:

    xmmj, bs, there is Time Warner, Charter, etc., at least where I live. Now in NYC, I recall there being specific apartment buildings that had specific deals with specific providers, so that's all you could get, which I hated. But in that case, talk to the landlord. Everywhere else I have lived, there are alwasy at least two providers, and where I live now there are four. In most places AT&T U-Verse is itself a new alternative to the established providers. There is also Verizon Fios.

    To the extent ISPs function in a utility-like scheme, the deal utilities make with government is that they provide a service while being allowed to earn a reasonable rate of return on investment. ISPs will eventually no longer be allowed to earn a reasonable rate of return if their customers can increasingly use unlimited amounts of data, being sent through limited amounts of 'pipe,' which can only be upgraded using limited amounts of ISP money. It is just a mathematical reality.

  • Report this Comment On March 14, 2011, at 11:17 PM, cflak wrote:

    We consumers need to pick the winners and AT&T is the looser.

  • Report this Comment On March 14, 2011, at 11:43 PM, TMFBritcodeftw wrote:

    I am really curious to know whether ISP's are capping because they truly need to in order to meet growing demand, or if this is pure and simple greed. If it is the latter we have every reason to be outraged. I am currently with Verizon (FIOS) and keeping my fingers crossed they don't follow suit anytime soon as I am definitely one of the maximum bandwidth users that ISP's hate.

    Good and timely article.

  • Report this Comment On March 15, 2011, at 1:10 AM, GameDeveloper wrote:

    Ars Technica has an awesome breakdown of the arguments for and against this AT&T Cap. For example based on their yearly reports their delivery cost per gig is actually decreasing.

  • Report this Comment On March 15, 2011, at 9:42 AM, MacDaddy00 wrote:

    I have had AT&T uVerse Internet, Cable, & Phone bundled for 2 1/2 years. My bill went up $10/month last year and just went up $10/month again this year. Now they want to restrict my services. Charge more and provide less. Their customer service is horrendous. Their sales people outright lie to you. Not a very good company from a consumer view point. It is time to move on.

  • Report this Comment On March 15, 2011, at 11:32 AM, TheDumbMoney wrote:

    TMFBritcodeftw, try thinking about it more in terms of how quickly your Netflix movies download at 9am on a Tuesday, versus how quickly they download at 8pm on a Friday.

  • Report this Comment On March 15, 2011, at 11:47 AM, lividmonkey wrote:

    You know where the real monopoly is? Netflix. Why are we worried about poor Netflix and blaming the cable companies for limiting them? Seriously. I'll run with the restaurant simile that was presented before. But, think of a restaurant (Comcast, Time Warner, etc) that is serving its tasty wares (internet, TV and movies) and then someone else opening an all you can eat buffet inside the restaurant (Netflix). Yeah, I can understand why they want Netflix out. Actually, I don't think they want Netflix out, but rather tethered. Tethered or not, Netflix will still be running strong as it really doesn't have any serious competition (other than the cable companies). With Netflix moving more towards digital distribution over physical DVD & Blu-Ray distribution, Netflix is gradually reducing their overhead which only means more profit to them. So, let's not fret too much over poor Netflix getting shut out on bandwidth limitations. A novel approach to the whole situation is to promote active lifestyles over watching 100's of gigs of movies per month. There's your real solution.

  • Report this Comment On March 15, 2011, at 11:47 AM, TheDumbMoney wrote:

    "We expect the cable operators to follow AT&T's move by introducing pricing plans that include caps for lower end packages," said Craig Moffett, analyst at Sanford C. Bernstein & Co. Moffett said the logical reaction to more cord-cutting would be usage-based pricing."

  • Report this Comment On March 26, 2011, at 6:38 PM, MrLightRail wrote:

    No one has mentioned the markets outside of major metropolitan areas. In these cases, there are only three choices at best. 1. Telco 2. Cable (sometimes), and 3. HughesNet, or other satellite provider.

    In reality, most customers do NOT have a choice in broadband connectivity. In my case, I only have ATT, dialup and satellite. So in my opinion, caps are total garbage, especially when the cost of bandwidth continues to drop.

    The MAIN REASON this is being done, is NOT bandwidth, but to prevent the cable and telco's own video streaming revenue from being cannibalized by Netflix/Hulu. If they want caps, fine. BUT, if they offer streaming video, then Netflix and other streaming apps need to be exempted from the data counts. Fair is fair.

  • Report this Comment On March 27, 2011, at 2:18 PM, tancho wrote:

    There are several alternatives coming to major and minor markets in the future, which will all be wireless ISP's. There is a lot of spectrum reallocation which will allow more competition to broadband.

    With more competition what will ultimately happen is there will be some payment standard per gigabyte and you will be able to shop for your best deal. Had to happen at some point anfter the broadband addition took hold.....

    Get use to it, there are no free lunches, you want to play you gotta pay....

    Now what they have to work on is getting the royalty licensing straitened out worldwide. Presently I have to set up a bulky VPN just so I can stream my Netflix and Pandora in Mexico.....

    I have no objection to paying the artists, but for some reason there are blocks against this kind of delivery......

  • Report this Comment On March 29, 2011, at 5:13 PM, DaveatOpanga wrote:

    Wireless operators and broadband providers have really only three options here:

    1) Continued network infrastructure investments (the question remains why an AT&T would heavily invest in their network so a Netflix can make money off it if with no “skin in the game”)

    2) Limits on subscriber data usage.

    3) Developing more efficient ways to deliver video over digital networks.

    And we are seeing them do all three in some regard to manage the exploding data consumption – driven mainly by video. This data usage is only going to increase, especially with the power and functionality of tablet devices.

    Once consumers become more aware of how much they pay for a MB, they are going to be looking for apps that work “outside data caps.” We are already seeing innovations in deliver video more efficiently, like content pre-positioning.

    For more, read my blog post on “Data Caps: Good for the Consumer or Good for the Operator.”

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