Demand for Netflix Could Lead to Higher Cable Bills on Astini News
Netflix Viewing Seen Swelling Cable Bills
Time Warner Cable Inc. and U.S. pay-TV companies, weighing how to profit from surging Internet demand spurred by Netflix Inc. and Hulu, are on the verge of instituting new fees on Web-access customers who use the most.
Time Warner Cable Inc. and U.S. pay-TV companies, weighing how to profit from surging Internet demand spurred by Netflix Inc. and Hulu, are on the verge of instituting new fees on Web-access customers who use the most. Photographer: Jin Lee/Bloomberg
Nov. 21 (Bloomberg) -- Michael Pachter, an analyst with Wedbush Securities, talks about Netflix Inc.'s agreement to sell $400 million in stock and convertible notes to bolster cash as it increases spending for online rights to films and TV shows. Pachter speaks with Jon Erlichman on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)
Time Warner Cable Mulls Web Toll Booth on Netflix Users
Cable operators are rethinking their Internet pricing strategy because Netflix and Hulu's subscription services have driven up usage at peak hours once reserved for watching TV. Photo: Jin Lee/Bloomberg
Cable operators are rethinking their Internet pricing strategy because Netflix and Hulu's subscription services have driven up usage at peak hours once reserved for watching TV. Photo: Jin Lee/Bloomberg
Time Warner Cable Inc. (TWC) and U.S. pay- TV companies, weighing how to profit from surging Internet demand spurred by Netflix Inc. (NFLX) and Hulu, are on the verge of instituting new fees on Web-access customers who use the most.
At least one major cable operator will institute so-called usage-based billing next year, predicts Craig Moffett, an analyst with Sanford C. Bernstein & Co. in New York. He said Cox Communications Inc., Charter Communications Inc. (CHTR) or Time Warner Cable may be first to charge Web-access customers for the amount of data they consume, not just transmission speed.
"As more video shifts to the Web, the cable operators will inevitably align their pricing models," Moffett said in an interview. "With the right usage-based pricing plan, they can embrace the transition instead of resisting it."
U.S. providers like Time Warner Cable have weighed usage- based plans for years as a way to squeeze more profit from Web access, and to counter slowing growth and rising program costs in the TV business. While customer complaints hampered earlier attempts, pay-TV companies are testing usage caps and price structures that point to the advent of permanent fees.
"We're basically a broadband provider," Peter Stern, chief strategy officer for New York-based Time Warner Cable, said Nov. 17 at the Future of Television conference in New York. "As a convenience for our customers, we package and distribute television and provide service around that."
Google (GOOG) Deterrent
Rogers Communications Inc., the largest Canadian cable company, has been billing broadband customers based on consumption since 2008. U.S. providers AT&T Inc. (T) and St. Louis- based Suddenlink Communications LLC are experimenting with usage-based plans.
Cable companies see usage-based billing as a way to limit the appeal of online services like Netflix and Hulu LLC, and reduce the threat from new entrants like Amazon.com Inc. (AMZN) and Google Inc.
"It's the reason why Apple or Google would inevitably be reticent about committing a significant amount of capital to an online video model," Moffett said. "You can't simply assume just because you can buy the content more cheaply, you can offer a product that's cheaper to the end user."
Netflix and Hulu's subscription services have driven up Web usage at peak hours once reserved for watching TV. Google, Amazon, Apple (AAPL) Inc. and premium channels HBO and Showtime have also put shows online and followed viewers onto mobile devices like iPads and Android tablets.
Web Demand
While demand for Web service grows, cable operators are battling to preserve profit in the mature pay-TV business and withstand competition from satellite carrier DirecTV (DTV), Verizon Communications Inc. (VZ)'s FiOS and AT&T's U-Verse. Programmers like Walt Disney Co. (DIS)'s ESPN are also demanding higher fees.
Time Warner Cable, the second-largest U.S. cable operator behind Comcast Corp. (CMCSA), lost 126,000 pay-TV accounts in the third quarter.
The incentives to focus on Web access are compelling. Cable's broadband gross margins are about 95 percent, versus 60 percent for video, according to Moffett. As programming costs increase nearly 10 percent a year, video margins are crimped, he said.
Time Warner Cable is testing meters to measure broadband consumption for the purpose of tiered pricing, Chief Executive Officer Glenn Britt said in June. In April, he said usage-based billing is "inevitable." A previous attempt in 2009 was abandoned amid customer complaints.
Low-Impact Users
"Some form of usage-based billing might have some utility for customers who use the Internet very little, or only use low- bandwidth applications like e-mail," said Alex Dudley, a Time Warner Cable spokesman.
AT&T, based in Dallas, charges digital subscriber line, or DSL, customers who exceed a monthly limit of 150 gigabytes in three consecutive months $10 extra for every additional 50 gigabytes of data they use.
Suddenlink, with about 1.4 million customers in states including Missouri, Arizona, Texas and North Carolina, began instituting usage caps in some markets in October. Users pay $10 for each 50 gigabytes they use over their monthly allowance.
Data usage is surging by almost 50 percent a year, Chief Executive Officer Jerry Kent said in an interview. Suddenlink's broadband revenue rose 12 percent in the third quarter, versus a 1.6 percent gain from pay-TV.
"Our video business is challenged," Kent said. "My broadband margins are double my video margins."
Movie Quotas
Cox, the third-largest U.S. cable company, segments Web- access customers based on data speed, allowing those who purchase faster service to use more data overall.
While those who exceed the caps aren't charged, they are told to reduce usage or choose a different plan, said Todd Smith, a spokesman for Atlanta-based Cox. He wouldn't say whether Cox will start charging based on total data used.
Comcast, based in Philadelphia, and St. Louis-based Charter, No. 4 in the U.S., have instituted caps large enough that most customers aren't affected. Neither charges overage fees, nor do they have near-term plans to charge subscribers based on consumption, according to Comcast spokeswoman Jennifer Khoury and Charter's Anita Lamont.
The standard cap for Comcast, Charter, Cox and Suddenlink is 250 gigabytes per month. That's enough for a household to send or receive 12,000 one-page e-mails and watch 60 standard- definition movies with excess capacity for other tasks, according to Suddenlink.
Netflix Protests
Netflix steers customers with enough bandwidth toward high- definition movies, which soak up about double the data. If the average U.S. household, which watches more than five hours of television a day, were to transfer all that viewing to an online, high-definition source, their usage would total almost 10 gigabytes a day and break through the current caps.
Charging by Web usage, cable companies may discourage customers from dropping traditional pay-TV service and slow the growth of Netflix, Hulu and an expanding list of online alternatives, Moffett said.
The possibility of usage-based pricing has brought protests from Los Gatos, California-based Netflix and warnings from Charlie Ergen, chairman of rival Dish Network Corp. (DISH), which operates the Blockbuster movie-rental business.
$20 Surcharge?
"That Netflix subscription of $7.99 could go to an extra $20 a month for bit streaming," Ergen said during Dish's conference call on Nov. 7, making a total monthly subscription "the equivalent of $27.99."
Consumption-based pricing is anti-competitive if the goal of broadband providers is to boost revenue by diminishing the value of rivals, wrote Netflix General Counsel David Hyman in a July Wall Street Journal editorial.
The practice "is not in the consumer's best interest as consumers deserve unfettered access to a robust Internet at reasonable rates," said Steve Swasey, a Netflix spokesman.
Federal Communications Commission Chairman Julius Genachowski publicly supported usage-based pricing in December, a victory for cable companies concerned that usage-based billing would run afoul of net neutrality rules prohibiting Internet services from favoring one form of content for another.
While lower caps may slow the online shift, cable companies won't be able to stop it. According to media researcher SNL Kagan, about 12.1 million U.S. households will receive TV shows and movies from Internet services rather than a traditional pay TV provider by 2015, up from 2.5 million homes at the end of 2010, SNL Kagan estimates.
Cable's best option is to find ways to profit from the online shift, said Moffett. If the companies were to lose all of their video customers, the revenue decline would be more than offset by a lower programming fees and set-top box spending, he said.
"In the end, it will be the best thing that ever happened to the cable industry," Moffett said.
To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net
To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net; Peter Elstrom at pelstrom@bloomberg.net
