Like the Cable Channel Bundle? Netflix and ESPN are bringing it to Broadband.

Posted By on Mar 21, 2014 | 2 comments


Everybody loves the cable television channel bundle, right?

Ok, perhaps that’s a slight overstatement.  Not all consumers are exactly thrilled about being forced to purchase, for example, sports channels like ESPN and regional sports networks, costing many dollars per month, in order to be able to get their favorite channels that may cost only tens of cents per months, each.

But the companies that bring you all those bundled channels definitely are thrilled about it, and without a doubt, they are equally thrilled about the possibility of bringing that bundle to your broadband service in the future.  In fact, they’ve already started.

No, we’re not talking about cable companies.  As we explained recently, it’s not your cable provider (or your satellite provider, or your telco provider) that actually drives that channel bundle.

Rather, we’re talking about cable programmers/broadcasters—the companies that supply all those channels in your current channel bundle.  Companies like Disney, NBCUniversal, CBS, Fox and Viacom benefit tremendously from the current channel bundling paradigm that forces most consumers who purchase cable to purchase many channels they don’t want.  It’s these companies that actually drive the channel bundle, by forcing all distributors (cable, satellite, and telco) to bundle their channels, in order to get must-have channels they control.

Many consumers are hoping for a la carte access to cable channels, possibly coming eventually from a virtual MSO, delivering cable television services via the internet.

However, a la carte access to channels via any distributor (virtual, or otherwise) would require the programmers to offer their channels to distributors on an a la carte basis—something they’re not about to do voluntarily.

But it turns out, maintaining the current bundle paradigm is not enough for programmers.  They would also like to bundle their content with your internet access, just like they do with cable television—so that if you want internet access, you have to buy their bundled content too.

For example, ESPN (part of Disney) has been offering ESPN3 (previously known as ESPN360) as an internet-only channel.  Unlike other internet-only video channels, however, you can’t sign up for a subscription to ESPN3.  Only your internet provider can sign you up for the service, and only by paying for access by all of its customers.

If that sounds to you a lot like the cable channel bundle, where everybody is forced to pay for channels whether they want them or not, you’re right—it’s exactly like that!  And as ESPN sees success with this strategy, you can bet that others will look to follow.  (In fact, the idea isn’t limited to television channels.  Some have proposed to bundle subscriptions to online newspapers in with internet access.)

But traditional cable programmers like ESPN aren’t the only ones looking to bundle their costs into your broadband bill.  And strangely enough, the way that ESPN has gone about this is comparatively above-board compared to Netflix.

Netflix?  Since when is Netflix trying to force consumers to buy their service as part of a bundle?  They’re the bundle busters, aren’t they?

Well Netflix isn’t trying to force consumers to subscribe to Netflix, but they very much are trying to force consumers to pay for much of the cost of Netflix, even if they don’t subscribe.

You see, when a consumer subscribes to Netflix, the cost for that service is actually split between the subscription fee they pay directly to Netflix, and internet access costs they pay to their broadband provider.  Because home broadband is predominantly delivered at a flat-rate price, consumers tend not to think about that cost.  But the cost turns out to be quite significant, indeed.  Netflix currently accounts for approximately one-third of broadband traffic and an even higher percentage of the growth in broadband traffic.  And as we pointed out in our article on broadband costs, the cost to deliver broadband service is dominated by the capital investments required to build capacity.

So Netflix realistically accounts for as much as one-third of the cost of broadband.  Recent data from Speedtest.net puts the average cost of broadband in the US at roughly $54.  At one-third, the portion associated with Netflix would be $18.  And even if the one-third estimate were off by a factor of two, the broadband costs for Netflix would still be greater than the $7.99 subscription fee that most Netflix users pay!

This would be fine, if all broadband subscribers were also Netflix subscribers.  But of course, that’s not the case.  In fact, with 33 million US streaming subscribers, a little more than one-third of broadband households subscribe to Netflix.  That means that nearly two-thirds of the broadband costs for Netflix are actually being borne by broadband users who don’t subscribe to Netflix!

Now, personally, I subscribe to Netflix.  I watch it on my Tivo, along with my cable package, and in fact, it has become one of my favorite “channels,” right up there with HBO, Showtime and AMC.  And I’m perfectly happy to have those of you who don’t use Netflix subsidize my Netflix costs to the tune of $18 to $36 per month.  (The fact is, if I had to pay that much, myself, I’d probably drop my subscription.)  But I have to confess, I don’t feel like it’s fair to the schmos who don’t use Netflix, but are nonetheless paying for it.

More galling still are the loud objections from people including Reed Hastings, CEO of Netflix, to anything that would actually shift some of these costs from non-subscribers and onto subscribers.  For example, just yesterday, Reed Hastings denounced a recent deal between Netflix and Comcast that, perhaps arguably, had the effect of shifting just a tiny percentage of these costs from Comcast (and therefore, all broadband subscribers) to Netflix (and therefore, only Netflix subscribers).  And Reed Hastings has similarly denounced any other alternative that would require Netflix subscribers to bear a higher percentage of their own costs, such as metering or usage caps.

I suppose in one sense we can’t really blame Netflix for trying to maintain the status quo of shifting their costs to others.  It’s just good business for them.  Still, it seems outrageous that they do so while claiming to be advocating for broadband consumers.  In fact, they are advocating only for themselves, and for Netflix subscribers, at the expense of the majority of broadband consumers, who don’t subscribe to Netflix.

For the two-thirds of broadband consumers who don”t subscribe to Netflix, this should be just as galling as being forced to pay for cable channels that they don’t want.  In fact, it ought to be more galling, given that the subsidies involved are larger than for any other single content provider, and the people paying the subsidy don’t get any access at all to the service they are subsidizing!

This is the new world order in broadband.  Eventually, everybody will be forced to subscribe to the likes of Netflix, or be rendered a fool for paying most of the cost, without getting any of the benefit.  Couple that with direct plays to bundle content into broadband, like ESPN’s, and we can all expect to soon be enjoying the full “benefits” of the cable channel bundle on our broadband bills….

For more on cable channel bundling, see Comcast-TWC and the Broken Market for Program Carriage.  For additional analysis on Netflix’s impact on broadband costs, see US Broadband Update—First Half 2014.

 

  • dbjungle

    What you are saying makes sense to a degree, but the reality is the network is a service that has a limit in the total bandwidth thar can be used at one time, but not a total bandwidth number in general. For example, I can only use 50 Mbps in theory, but obviously I can use 50 Mbps for the entire month. That means I can use in theory 15820 GB in a 30 day month. That’s what they sold to me atleast. If their network is truly capable of supporting what they are selling then this should be no problem. But if I do that they will cancel my account under their fair use policy.

    Back to how this relates to Netflix. The bandwidth you use for streaming on Netflix is way less than 50 Mbps. But if every single subscriber streamed HD on Netflix at the same time their network would come to a screaching halt. So there are 2 problems here. 1, they are over selling their capabilities (think AT&T’s mobile network) and 2, they are increasing the prices without resolving the issues. Why does Netflix need to form special agreements with Comcast? Because the ISP doesn’t operate as advertised and in order for Netflix to operate properly they need better access to the Comcast network to service their subscribers. Comcast has to limit outside traffic so their network isn’t exposed as being over sold.

    • J. S. Greenfield

      No ISP is selling residential or small business customers a guaranteed/constant bandwidth service, as you are describing. What you’re describing is a commercial-class service that would cost thousands of dollars per month, not in the $40-$75 range that residential customers typically pay for 50 Mbps service.

      What your ISP sells you for that (low) price is a burst service. For example, if you want to download a large file, you can complete the download quickly, because your service is capable of 50 Mbps. And the reason the cost is much lower than a commercial customer who needs sustained bandwidth of 50 Mbps is precisely because they’re selling you a service predicated on normal residential utilization.

      This is no different than back in the days of dial-up, when you could find dial-up providers that offered flat-rate service. And though they didn’t charge by the minute, they also weren’t offering a constantly-connected leased line service, just at much lower residential prices.

      And it’s just the same as phone companies that offer flat-rate phone service. They don’t charge per-minute or per-call, but they’re also not offering a commercial-class service where it’s acceptable for a residential customer to run a call center out of their home and tie up the line continuously.

      Normal residential customers don’t need a commercial-class continuous-use service, and they certainly aren’t willing to pay the commercial rates that such would cost. That’s why residential ISPs sell burst services, not commercial-class continuous-use services.

      Going back to broadband service, the range of normal residential utilization varies widely among customers. And over time it has gotten much, much greater. In the last 5 years, per customer usage has grown by about a factor of 8. In the last 10 years, it’s a factor of more than 20. Growth for the last number of years has been driven predominantly by video (and Netflix accounts for the lion’s share of that).

      And as online video has seen ongoing adoption, the variation among residential users has gotten much larger. Presently, the bottom 50% of users account for just 6.8% of utilization, while the top 50% account for 93.2%. The top 20% of users, alone, account for nearly 70% of utilization. This is reflective of the divide between between users that consume significant amounts of online video, and those who don’t.

      To this point in time, because of the way the services developed, almost all consumers pay the same rate, regardless of their usage. But as the costs go higher because of new services (most notably video, at present), and the disparities become greater, it’s really hard to argue that it’s fair for light users, who can easily be consuming 100 times less resources than heavy users, to continue to subsidize the heavy users, by virtue of completely flat pricing.

      Netflix wants flat rate pricing to continue, because its subscribers are heavy broadband users, and the light broadband users are not Netflix subscribers. Netflix wants for substantial costs of their service to continue to be hidden inside broadband bills, and heavily subsidized by people who don’t subscribe to Netflix.

      That’s a good deal for Netflix and Netflix subscribers. But it’s quite unfair to the nearly two-thirds of broadband households that don’t subscribe to Netflix.