Netflix’s Options If Tiered Data Pricing Is Implemented By Cable Companies

As the U.S. Justice Department investigates cable companies for discriminating against Netflix (NASDAQ:NFLX) and other online video service companies, Netflix faces the threat that cable companies may shift to a usage-based pricing sooner. ^[1] That strategy might allow the cable companies to more legitimately control Netflix’s data flow, which weighs quite heavy on broadband networks at peak times. So what options does Netflix have in such a scenario?

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One option for Netflix is to use better compression technology that can package the videos into fewer data packets. However, if Netflix chooses to use higher compression levels, it has to sacrifice the quality of the video.

Another option for Netflix is to have different levels of compressions and video quality depending upon the content demand. Netflix has been monitoring its subscribers for a long time and we believe that the company has a good  idea about their viewing habits. Netflix can use this knowledge to predict the demand for its existing content as well as for newer content and adjust the compression level and quality accordingly.

Ultimately, Netflix’s utility for customers comes from having unlimited access to the content and therefore the company will always remain a high user of data streaming. If the cable companies implement usage-based pricing, Netflix is sure to feel the effects; The company needs to focus on growing subscribers to offset the cost increases it may face from this shift.

Our price estimate for Netflix stands at about $110, implying a premium of more than 75% to the market price.

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1. Cable Trouble for Netflix, The Wall Street Journal, June 13 2012 [↩]