Aol Internet Security Central

A free lunch for Netflix?

Editors' note: This is a guest column. See the bios of Robert Hahn and Peter Passell below.

All right, we'll say it: We love Netflix, the company that has made it so easy to watch any of thousands of movies anywhere, with hardly a moment's forethought. And we're not alone. The company boasts close to 26 million subscribers in the United States and Canada, and it recently announced plans to expand to 43 countries in Latin America and the Caribbean.

But Netflix can't succeed without a lot of help from its partners in the digital supply chain. The company is only as good as the programming it offers. And content owners are apparently inclined to drive a harder bargain these days: Netflix paid a whopping nine times as much for streaming rights in the second quarter of 2011 as it did the same quarter a year earlier.

More relevant here is Netflix's rapid shift from being a supplier of rental DVDs by mail to video-streaming delivery on demand. The company last month separated its DVD-by-mail service from its streaming business by creating a DVD-only subscription and raising the base price for the combined service by nearly 60 percent, a move that raised the ire of many subscribers .

Netflix is crying foul : the last thing it wants is for subscribers, who buy their entertainment from a dozen vendors, to be counting bytes. But can the company make a case for regulatory intervention?

In principle, maybe. But it's not easy to demonstrate that broadband caps are anticompetitive. More precisely, it is far from obvious that the shift away from flat-rate pricing reflects an attempt to increase revenues that would not be possible if there were more competition among Internet service providers.

Most of the cost of providing Internet services reflects the cost of building the massive networks of cables and switches that carry the digital traffic. When a network isn't fully utilized, the cost of delivering another e-mail message--or, for that matter, all 86 episodes of "The Sopranos"--is next to nothing. Hence flat-rate pricing, in which users share the network costs with fixed monthly payments but pay nothing extra to watch another hour of James Gandolfini making mayhem, is easy to justify in economic terms.

Well, it's not that simple. Internet providers must design their systems to deliver high-quality signals at peak-use periods. Indeed, no form of content is more sensitive to congestion slowdowns than streaming video. So the most efficient pricing system would be one that charged extra for service at periods of peak demand, reflecting the reality that a good portion of network capacity is only intermittently needed.

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