Here’s How Broadband Data Caps Can Significantly Impact Netflix

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As the quality of video streaming improves, Netflix (NASDAQ:NFLX) has significant ewxposure to broadband data caps  A 4K (Ultra HD) video can entail the download of up to 7GB data per hour, exhausting the 300GB data cap of a broadband network in around 40 hours of streaming. On an average, Netflix subscribers in the U.S. watch its content for around 2 hours every day. As a result, a limit on monthly broadband usage implies additional internet charges for higher Netflix usage. Recently, Comcast increased its data cap from 300GB to 1 TB, which will enable users to enjoy streaming media for longer periods of time without incurring higher charges. However, in the long term, as internet usage increases across households on multiple devices and for several purposes, this data cap will surely prove to be insufficient.

In order to ensure that users can enjoy its services without paying additional charges for internet usage, Netflix is now pushing for regulatory changes to abolish data caps. A high speed internet connection with no data limits can prove to be a boon to Netflix’s business, as users can stream high quality unlimited videos without incurring additional data costs. This can not only increase Netflix’s consumption but also impact premium subscriptions positively as users look for high quality videos. Data caps can prevent this growth and act as a hurdle for Netflix to promote 4K videos, impacting subscription charges negatively.

See our complete analysis for Netflix

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High Speed Internet With Low Data Costs Crucial For Netflix’s Business

While high quality videos give Netflix a competitive edge, they generate very high broadband data consumption. While a SD quality video on Netflix would consume 0.7 GB of data per hour, consumption is nearly 7 GB per hour for an ultra HD quality video. For users with low data caps, this can be a huge differentiator since they might have to resort to low quality videos to ensure that they don’t exceed the data limits. Reports suggest that Neflix had been capping the quality of its videos for AT&T and Verizon customers who were experiencing interruptions in their video streaming.  Compromising data quality to limit data usage can hamper Netflix’s growth, as users might be reluctant to pay higher subscription charges if quality standards are not maintained. On the other hand, if users incur additional data charges to view high quality videos on Netflix, they might limit their viewership again impacting Netflix’s subscription rates.

According to our estimates, Netflix’s monthly U.S. subscription fees will increase gradually from around $9 in 2016 to $11 by the end of our forecast period.

There can be a 10% downside to our price estimate, if this number remains stagnant at around $9 throughout our forecast period.

Netflix’s growth in emerging market is also challenged by low internet penetration and low broadband speeds. In mobile devices, where consumption of videos is growing, consumers face data challenges and higher data usage costs. If data caps are removed, Netflix can overcome some of these challenges and provide high quality videos at higher subscription costs. This can lead to higher revenue growth and a higher valuation of the company. However, at the same time, Netflix also needs to work on technology initiatives to reduce data consumption for high quality videos. This could be critical for growth especially in emerging markets.

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