Netflix Nightmare now a reality?

The FCC rules that required Internet Service Providers be unbiased and neutral when restricting bandwidth were struck down by the U.S. Court of Appeals. Although this may be appealed to the Supreme Court, their last resort, what this means now is that with the elimination of Net Neutrality, ISPs are now allowed to pick and choose between different websites how much bandwidth to allow for transmitting data.

ISPs can now require businesses transmitting the most data to pay more money because they are getting preferential treatment. Websites that stream high definition videos will really feel the pinch. Until now the ISPs have been charging their end users fees based on how much bandwidth they consumed, but they weren’t able to charge the websites transmitting the data over the Internet.

Internet Service Providers have never wanted to have caps on bandwidth for consumers or end users, although cell phone companies do this, it just hasn’t been widely used for household data plans. The opinion of many is that the ISPs waged this fight to do away with the Net Neutrality rules because they wanted to be able to charge websites based on the bandwidth they were using to transmit data. Then of course, it only makes sense that the websites would recoup this cost from their advertisers and customers.

This can be seen as a double edged sword for Netflix. With all their money these companies can probably afford to pay for preferential treatment to get all the bandwidth they need to transmit their data, and in the case of Netflix, stream their movies. But, being motivated by profit, the ISPs are likely to charge an arm and a leg, to all the websites they are legally able to charge, for this privilege. It’s very likely that ISPs will hammer the users of Netflix and others unless they agree to pay for unrestricted delivery of data. They may try to charge a set fee to Netflix per gigabyte (GB) of data transmitted. One way or another, this is predicted to either cost Netflix more in fees to the ISPs, or Netflix’s subscribers will end up absorbing these additional costs.

In all likelihood Netflix is probably going to see huge fees being imposed by the Internet Service Providers. At this point in time Netflix has accumulated about 30 million U.S. users. Each one watches approximately 40 hours of content each and every month. One GB of data is transmitted every hour for standard definition video. But if you want to view in 1080p HD, then about 6.5 GBs of data are used in an hour when streamed to a large 40” – 50” TV. If these estimates are correct, customers of Netflix in the U.S. use somewhere between 14 billion – 93 billion GBs of data each and every year. Internet Service Providers, may try to profit by this change in the Net Neutrality rules by increasing fees on websites providing data on the scale of Netflix and others.

No one can really guess what the ISPs will do, but investors need to be made aware that changes may come. They need to have an example of what can happen. The ISPs have always had the ability to charge end users more by using data caps. The U.S. has been free from this practice so far and the ISPs still seem hesitant to change this. Because they fought so hard to do away with Net Neutrality the ISPs are likely to go after the data provider for higher fees, not their subscribers or customers.

If they do decide to charge Netflix based on the information calculated in previous paragraphs, it is reasonable to surmise that they could charge in the range of $139 - $929 million in fees to Netflix annually.

It’s reasonable to believe that the ISP might charge a penny for every GB transmitted, or even more. Those of us in the U.S. pay about $20 per month for access to the Internet and about $40 a month if we use broadband. The average person uses somewhere between 20 – 100 GBs of data every month.

If these figures are correct, the average person in the U.S. pays $0.20 - $0.40 per GB consumed, and maybe higher if they don’t really use that much. Data plans in the U.S. do not cap data usage currently.

There are about 84 million homes in the U.S. and each one pays an average of $500 annually to access the Internet. This comes to a total of $40 billion every year. If the ISPs do end up charging data providers a penny per GB, they will have a gain of 2% - 5% in revenue thanks to the repeal of rules of Net Neutrality.