It just might if it frightens them enough to accelerate their efforts to make people pay for broadband based on how much they use — the same way they pay for electricity or water. “This isn’t just a side show,” independent analyst Craig Moffett says. “This is THE central issue defining the value of the cable industry going forward.” And the pricing model could rock streaming companies including Netflix or, perhaps, Sony. It would be “a material risk” to Netflix’s prospects if a Sony-Viacom agreement leads to usage-based pricing, Bernstein Research’s Carlos Kirjner says.
The subject’s on everyone’s mind following this week’s startling news that Viacom has agreed on a preliminary basis to let Sony stream channels including MTV, Nickelodeon, and Comedy Central. That could create a Web-based alternative to the video packages offered by cable and satellite distributors — what’s known in the industry as an over-the-top service (or OTT). Competition sure sounds like a great idea, especially if Sony decides it can live with lower profits than traditional players collect and offers consumers cheaper packages and slicker services. If the companies actually make a deal, the thinking goes, then dominoes start tumbling. Other programmers led by Disney, Time Warner, News Corp, and CBS would quickly cut their own deals with Sony. Then it’s just a matter of time before others join the fray. Intel, Google and Apple are interested in creating national video services. And don’t rule out cable or satellite companies — especially Comcast, which also owns NBCUniversal.
Here’s the problem: Consumers would use far more Internet capacity than they do now if they watch TV on the Web instead of conventional cable or satellite. Most homes download about 20 GB a month. Kirjner figures it would take 300 GB a month to accommodate the average household where the TV’s on for 8 hours a day. Moffett estimates 500 GB. There’s a simple solution for cable companies if customers, eager to save money, drop their conventional TV service and open the Internet faucets. Operators can replace today’s all-you-can-eat plans with ones that charge people based on how many bits they use.
Cable companies are already introducing the idea, positioned as a consumer-friendly option to help casual broadband users reduce their monthly bills. There has been “more activity on the [usage based pricing] front in the past month than there has been in the last three years,” Moffett says. For example, Comcast recently picked Fresno, Calif. as a test market for a plan that charges as much as $39.95 a month for 5 GB — and then $1 for each additional gigabyte. Time Warner Cable’s new Essentials broadband offering makes a similar offer: Subscribers can shave $5 from the normal local broadband charge (it varies by market) if they use less than 5 GB a month — and agree to pay $1 for each gigabyte above the threshold. You can expect to see a lot more offers like these, the analyst says, if Liberty Media’s John Malone — the biggest investor in Charter Communications — succeeds in his effort to consolidate cable companies.
The upshot: Consumers would find it a lot less appealing to spend a weekend binge-viewing Orange Is The New Black on Netflix, or possibly watching The Daily Show on a Sony service, if they have to worry that they’re running up the meter.
Ultimately, the FCC may have to decide what will happen to consumers and programmers who might suffer from usage based pricing. If they challenge the plans, and cable companies stand their ground, then operators “would win,” Kirjner says. The FCC endorsed the usage pricing model in its 2010 Open Internet Order. And even if regulators changed their mind, there’s a good chance that the courts will rule that the FCC doesn’t have the authority to regulate broadband. But Moffett wonders whether it’s too late for cable companies now that Netflix has 30M subscribers. The FCC “has gone out of its way to discuss OTT as a ‘competitor’ to cable,” he says. “This would seem to set the stage for arguments that anything that undermines the value proposition of OTT video — and [usage based pricing] most assuredly does precisely that…could be construed as anti-competitive. The race is on.”