New Web Access Fees Would Hurt Netflix, Hulu -- Which Might Be the Point

'Anti-Competitive' If Designed to Protect Traditional TV, Says Netflix

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Time Warner Cable and U.S. pay-TV companies are on the verge of instituting new fees for heavy users of their web-access services -- fees that would help them profit from demand for services like Netflix and Hulu while mitigating those threats to traditional TV.

At least one major cable operator will institute so-called usage-based billing next year, predicted Craig Moffett, an analyst with Sanford C. Bernstein & Co. in New York. He said Cox Communications, Charter Communications or Time Warner Cable could be first to charge web-access customers for the amount of data consumed, rather than just transmission speed.

"As more video shifts to the Web, the cable operators will inevitably align their pricing models," Mr. Moffett said in an interview. "With the right usage-based pricing plan, they can embrace the transition instead of resisting it."

Cable companies see usage-based billing as a way to limit the appeal of online services like Netflix and Hulu while reducing the threat from new entrants such as Amazon and Google.

"It's the reason Apple or Google would inevitably be reticent about committing a significant amount of capital to an online-video model," Mr. Moffett said. "You can't 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 and premium channels HBO and Showtime have also put shows online and followed viewers onto mobile devices like iPads and Android tablets.

While demand for web service grows, cable operators are battling to preserve profit in the mature pay-TV business and to withstand competition from satellite carrier DirecTV, Verizon's FiOS and AT&T's U-Verse. Programmers like Walt Disney's ESPN are also demanding higher fees.

"Our video business is challenged," Suddenlink CEO Jerry Kent said. "My broadband margins are double my video margins."

Overall pay-TV subscriber rolls are expected to decline next year. Time Warner Cable, the second-largest U.S. cable operator, behind Comcast Corp., lost 126,000 pay-TV accounts in the third quarter.

Time Warner Cable is testing meters to measure broadband consumption for the purpose of tiered pricing, CEO Glenn Britt said in June. He had said in April that that usage-based billing was "inevitable." An attempt to implement the structure in 2009 was abandoned amid customer complaints.

"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.

Dallas-based AT&T charges digital subscriber line customers who exceed a monthly limit of 150 gigabytes for three straight months $10 extra for every additional 50 gigabytes of data used.

Cox, the third-largest U.S. cable company, segments web-access customers based on data speed, allowing those who buy faster service to use more data overall. While those who exceed the caps aren't charged, they are advised to decrease usage or choose a different plan, said Todd Smith, a spokesman for Cox. He wouldn't say whether Cox will start charging based on total data used.

Comcast and Charter, No. 4 in the U.S., have instituted caps high enough that most customers aren't affected. Neither company imposes overage fees or has near-term plans to charge subscribers based on consumption, according to Comcast spokeswoman Jennifer Khoury and Charter's Anita Lamont.

The possibility of usage-based pricing has brought protests from Netflix and Dish Network, which operates the Blockbuster movie-rental business. Consumption-based pricing is anti-competitive if the goal of broadband providers is to enhance revenue by devaluing rivals, Netflix General Counsel David Hyman wrote in a July Wall Street Journal editorial.

Steve Swasey, a Netflix spokesman, said the practice "is not in the consumer's best interest, as consumers deserve unfettered access to a robust internet at reasonable rates."

Federal Communications Commission Chairman Julius Genachowski publicly supported usage-based pricing in December, a victory for cable companies concerned that such billing would run foul of net neutrality rules prohibiting internet services from favoring one form of content over another.

While lower caps may slow the online shift, cable companies won't be able to stop it.Media researcher SNL Kagan estimated that 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.

-- Bloomberg News --

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