Will This Be the Death of Netflix?

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The market sent shares of Netflix (Nasdaq: NFLX  ) nearly 6% lower yesterday, and it wasn't just a case of Wall Street jitters: FCC Chairman Julius Genachowski threw his weight behind tiered broadband pricing at a cable-industry trade show yesterday.

"Usage-based pricing would help drive efficiency in the networks," he said, arguing that it would be fairer and encourage competition.

Consumers certainly wouldn't mind the lower rates that would come from competition, but we've seen what happened when AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) nixed unlimited data plans in favor of similar tiered pricing. Not only are both companies still the two dominant players in the field, but they are also actually making more -- not less -- off each subscriber since rolling out different levels of pricing plans.

Netflix is naturally opposed to anything that ends the data buffet. It's a major component of Internet consumption, especially during primetime usage.

Cox Communications President Pat Esser, at the same conference, pointed out that 40% of his 4 million Internet customers generated Netflix streams during the month of March. Comcast (Nasdaq: CMCSA  ) (Nasdaq: CMCSK  ) bumped its monthly broadband cap higher earlier this month, but the country's largest cable provider is also testing tiered pricing in two markets.

What will it mean if broadband customers are on the clock? Tiered pricing for Internet usage is the norm in many foreign countries, but a rollout here would naturally make it less attractive to stream chunky video files.

Netflix obviously doesn't want that, and you can be sure that it lets Genachowski know that while cracking down on data hogs by installing tollbooths may seem like a good strategy on paper, it may kill the spirit of streaming media.

Netflix has more riding on this trend than you can probably imagine. Shareholders had better hope that the days of guilt-free streaming consumption aren't numbered.

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The Motley Fool owns shares of Netflix. Motley Fool newsletter services have recommended buying shares of Netflix. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He owns no other stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (5) | Recommend This Article (4)

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  • Report this Comment On May 23, 2012, at 9:41 PM, JLeBlanc09 wrote:

    If the Internet companies are going to have tiered plans, why wouldn't Netflix try to partner up with one of the Internet companies? Seeing how redbox and Verizon have a partnership - Netflix should partner up with Comcast and/or cox. These Internet providers could still have the tier systems - but if the users are streaming Netflix shows - they have unlimited usage. I'm sure this is possible. This could potentially bring more customers to those Internet providers that team up with Netflix, and at the same time, Netflix wouldn't be hurt by these new tiered Internet plans. Or does this just make too much sense?

  • Report this Comment On May 24, 2012, at 12:56 AM, mattmosa wrote:

    Tiered pricing isn't gonna help Netflix, higher broadband cost would slow growth and cut down usage, however people still will want to rent movies.

    If viewing costs get very high, maybe that old slow dinosaur dvd library has more value than its given credit for. Movies by snail mail are slower to customers but relatively inexpensive.

    Netflix is still the big name in video rental and I believe they will survive. Stock price may see adjustment but Netflix will still be around

  • Report this Comment On May 24, 2012, at 11:01 AM, phillipdampier wrote:

    It is a common misnomer that usage caps are ubiquitous overseas. In fact, outside of North America providers are moving -towards- unlimited, flat rate service, not away from it. Australia and New Zealand, which have international capacity issues that were the proximate cause of usage caps, are now building national fiber networks coinciding with additional underseas cable capacity with the full intention to rid themselves of innovation-killing metered broadband.

    North American providers are responding to investor calls for additional ARPU and since video isn't going to get it for them, voice is revenue flat, and broadband has reached just about everyone who has it, the only solution is to jack prices up on the service people cannot do without -- broadband.

    With almost no competition, pricing is at the behest of the operator, at least until enough consumers complain and Washington steps in.

    Make no mistake, a metered broadband marketplace will constrain over-the-top video and other innovative high bandwidth services. Consumers do not want tiered pricing and providers are earning quite a killing at current pricing, so this is a regulatory issue waiting to happen if the broadband industry further abuses its duopoly position.

    Net Neutrality precludes wired broadband providers from favoring some content over others under a usage cap regime, and rightly so. It allows providers to pick winners (usually themselves or companies they can control) over losers (their competition). That's why a Netflix partnership is the wrong idea. How does someone with a service better than Netflix get started if the entry price is a high dollar partnership agreement with companies like Comcast?

    The success story of the Internet is that is a wide open marketplace where customers, not providers and their preferred content partners, get to choose the best services. Letting a handful of corporate partnerships make those decisions on an unlevel playing field would leave us stuck with something like Friendster or MySpace instead of Facebook.

    Phillip Dampier

  • Report this Comment On May 24, 2012, at 11:06 AM, chopchop0 wrote:

    No control over content costs. No control over bandwidth costs/tiered pricing initiatives.

    NFLX is a perfect definition of a value trap with no moat.

  • Report this Comment On May 24, 2012, at 11:16 AM, Arty50 wrote:

    While many other countries offer tiered pricing, there is usually an unlimited option to go along with that.

    Here's a great study that covers this:

    The problem in the US is that where usage based billing or caps are being implemented, there is no unlimited option. Ask our friends in Canada how wonderful that is.

    The problem with UBB is that it costs a service provider almost nothing to provide data. It does however cost them to provide bandwidth. Bandwidth is essentially the speed of the data. They don't pay for the data, they pay for how fast the data comes in and out of their network. How fast this occurs is largely due to capital investments in infrastructure.

    So, the current pricing model used in the US which is based on bandwidth is the most accurate measure of the service you're getting. UBB at best is just a cash grab, especially when there's not unlimited option. At worst, it's an anti-competitive practice which is used to stifle competing services.

    We're starting to see this with Comcast and their XFinity TV on Demand service for the XBox. Basically, Comcast is giving its service an advantage over Netflix, Hulu, etc. by providing extra bandwidth for its service and not the others.

    This is great if you're a Comcast shareholder, but really bad if you own shares in a competitor like Netflix. It also discourages investment in competing services.

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