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Netflix CEO: We Support Large Caps, But Not Per-Gigabyte Pricing

Netflix president and CEO Reed Hastings is fine with large bandwidth-usage caps -- but he said consumption-based pricing "threatens to stifle the Internet."

"Moves by wired ISPs to shift consumers to pay-per-gigabyte models instead of the current unlimited-up-to-a-large-cap approach, threatens to stifle the Internet," Hastings wrote in an April 6 letter to Rep. Fred Upton (R- Mich.), chairman of the House Energy & Commerce Committee, and Rep. Henry Waxman (D-Calif.). "We hope this doesn't happen, and will do what we can to promote the unlimited-up-to-a-large-cap model."

Netflix included that in a letter in a May 10 letter to FCC chairman Julius Genachowski, according to an ex parte filing.

The company operates what is believed to be the largest video-subscription service in the world, with 23.6 million subscribers in the U.S. and Canada as of the end of March. In the U.S., Netflix offers DVDs-by-mail as well as Internet video streaming, while in the Great White North it sells a streaming-only service.

Hastings acknowledged that wireline Internet service providers "have large fixed costs of building and maintaining their last mile network of residential cable and fiber. The ISPs' costs, however, to deliver a marginal gigabyte from one of our regional interchange points over their last mile wired network to the consumer is less than a penny, and falling, so there is no reason that pay-per-gigabyte is economically necessary."

On May 2, AT&T became the biggest U.S. wireline broadband provider to establish overage charges for customers whose usage exceeds pre-set limits. The telco's traditional DSL users are capped at 150 GB, while U-verse Internet users have a 250 GB limit; additional usage is $10 per 50 GB.

Some large MSOs, including Comcast, Cox Communications and Charter Communications, impose usage caps but warn offenders instead of charging them for additional usage.

The main message of Hastings' missive to Upton and Waxman was to "express our concern with the House of Representative's proposal to utilize the Congressional Review Act (the ‘CRA') to vacate the Federal Communications Commission's Open Internet order."

Hastings argued that using the CRA would "create a legal vacuum" because it would "in essence, strip the FCC of any power to preserve an open Internet. Instead, we would support the Committee working on comprehensive legislation that provides a common-sense structure for our 21st Century media and communications platforms -- legislation that assures consumer choice and innovation while preserving incentives for broadband network operators to continue to invest in their infrastructure."

Hastings also alluded to the still-unresolved dispute between Comcast and Level 3 Communications. The cable operator asked Level 3 to pay interconnection charges after Level 3 landed a content delivery contract with Netflix to deliver streaming video.

"As long as we pay for getting the bits to the regional interchanges of the ISPs' choosing, we don't think ISPs should be able to use their exclusive control of their residential customers to force us to pay them to let in the data their customers desire," Hastings wrote. "The ISPs' customers already pay the ISPs to deliver the bits on their network, and requiring us to pay even though we deliver the bits to their network is an inappropriate reflection of their last mile exclusive control of their residential customers."

The FCC filing from Netflix, which includes Hastings' letter, is available here: http://fjallfoss.fcc.gov/ecfs/document/view?id=7021347963.

Netflix also included its comments filed March 28 with the Canadian Radio-television and Telecommunications Commission, citing a study that "demonstrates that greater traffic on a network does not necessarily have any effect on incremental congestion."

The report by Lemay-Yates Associates Inc. found that usage-based billing is "ineffective in curbing any alleged inequalities, or even as a mechanism to reduce monthly aggregate Internet usage."

In addition, according to the Lemay-Yates report, given the average incremental cost of Internet traffic by "heavy users" is likely 1 cent or less per Gigabyte -- the wholesale usage-based billing rates of Bell Canada incumbent telco, provided margins in excess of 99%.

"This belies any argument that such rates are primarily intended to recover any additional costs to the system: rather, such excessive margins clearly have more to do with maximizing the size of the incumbents' windfall," Netflix said in the comments to the Canadian Radio-television and Telecommunications Commission.