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Comcast Is Going to War With Netflix Inc.

By Jeremy Bowman – Feb 1, 2016 at 5:20PM

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The cable giant is imposing data caps on broadband subscribers, with a particular eye on video streamers.

It's no secret that streaming providers like Netflix Inc. (NFLX -1.78%) are taking away subscribers from cable companies like Comcast Corporation (CMCSA -3.62%).

Now Comcast has come up with a solution to its dwindling subscriber base and its customers probably aren't going to like it. The cable and Internet giant is slapping an extra fee on its broadband customers who go over their data limits, namely by watching Netflix or YouTube. The fee, which is being assessed in some cities, is a way for Comcast to leverage the stronger side of its business in order to make up for the declining pay-TV side. 

In its test markets, Comcast is charging $10 for every additional 50 gigabytes beyond 300 used per month, which is the equivalent of streaming five hours of high-definition video per day.  

As a business move it makes sense. Comcast said only 8% of its subscribers exceed the limit, and that the extra usage comes with costs.

Streaming providers are not happy with it, however. Roger Lynch, CEO of DISH Network's (DISH -2.19%) Sling TV, called the limits "very restrictive" and "clearly designed to discourage customers from over-the-top services" in a Bloomberg article. Netflix has also responded by changing its product so that it uses less bandwidth. Considering the normal fee for Netflix is just $10 per month or less, a $20 surcharge for bandwidth significantly changes the economics of the service.

Notably, there is no such restriction on Comcast's Stream TV streaming service, which the company argues is delivered by the same means as cable and therefore not subject to data caps. Stream TV is also available through other devices like phones and tablets. The move has sparked an inquiry from the FCC over equal access to Internet content. 

Other cable providers have toyed with the idea in the past, and Time Warner Cable (NYSE: TWC) imposed such a cap in 2008 before removing it the following year due to a public backlash. Charter Communications (CHTR -2.96%) has also promised to forgo such a cap for three years if regulators allow its merger with Time Warner Cable.  

Netflix's Achilles' heel
Netflix has won itself 75 million subscribers from around the globe by providing a tremendous service. First, with its DVD-by-mail service, it made the task of going to the video store obsolete, and now it's given consumers an option aside from linear TV, so they can watch what they want when they want. 

But Netflix owns none of the pipes that deliver its content into users' homes, nor does it own many of the other components its business depends on. Arguably, no other company's success is more dependent on its rivals. Netflix needs broadband service from companies like Comcast, programming from traditional TV networks with whom it's competing, and it even uses Amazon Web Services for cloud storage. Though Amazon seems to have no intention of retaliating against Netflix, its other rivals have taken notice of its success.

TV networks are starting to realize that selling shows to Netflix may only undermine its own business model as those companies are highly dependent on advertising and ratings have gone down as streaming has gone up. Cable providers, meanwhile, are most at risk from the cord-cutting phenomenon and many are already losing subscribers. Therefore, a cap such as Comcast's is not a surprising move, and we could see more of it from other cable providers.

The biggest problem for Netflix may be that there is little it can do to prevent data caps. It's already making efforts to trim its broadband consumption. Now, its best tactic may be to push for regulatory and customer intervention.

Even if the data caps remain, the small percentage of customers who go over the limit may simply elect to pay, but Comcast can continue to tighten that vise whenever it wants. That could present more serious challenges for Netflix down the road. As long as the streamer is dependent on its rivals for its basic needs, it remains in a precarious position.

Jeremy Bowman owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. 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. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$235.44 (-1.78%) $-4.27
DISH Network Corporation Stock Quote
DISH Network Corporation
$13.83 (-2.19%) $0.31
Comcast Corporation Stock Quote
Comcast Corporation
$29.33 (-3.62%) $-1.10
Charter Communications, Inc. Stock Quote
Charter Communications, Inc.
$303.35 (-2.96%) $-9.24

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