Netflix: Is it broadband’s cash cow or data hog?

We’ve recognized that Netflix (s nflx) has become the new face of evil for wireline Internet service providers as they seek to impose caps or tiers on subscribers, as AT&T (s t) recently did in May. But Netflix is also willing to play the part of consumer advocate, as it seeks to point out some of the bigger myths that ISPs perpetrate around broadband scarcity. In an editorial in the Wall Street Journal on Friday, Netflix general counsel David Hyman disabuses people of the scarcity myth:

The analogy is a false one. Wireline bandwidth is an almost unlimited resource due to advances in Internet architecture. Adding more capacity is easy. The marginal cost of providing an extra gigabyte of data — enough to deliver one episode of “30 Rock” from Netflix — is less than one cent, and falling.

That’s a very different sum from what AT&T in May began charging customers of its DSL and U-verse services. AT&T is adding new charges that are 20 times the price of providing the service. Twenty cents a gigabyte is a far cry from the $4 or $5 being charged for the same amount of data by some cable companies in Canada, where consumption-based billing has long been an accepted practice. But it sets a dangerous precedent for much larger charges in the future.

From an ISP’s perspective, Netflix forces them to put out for investment and upgrades many don’t want to do. Hence the caps. But what if, instead of seeing Netflix as a bandwidth hog, ISPs viewed it as a gateway drug to subscribers choosing better and more expensive broadband connections?

As I consume more broadband, I also find it worthwhile to upgrade my broadband service to a higher-speed tier. Granted, not everyone is willing to do this, but as an early adopter I am pretty confident that more folks will join me in upgrading their service as cooler apps proliferate. And since providing broadband has a higher up-front cost for building out the infrastructure, it is a benefit to ISPs when more folks start to subscribe to the services they have built out.

But as Hyman points out, the issue may be less about investment costs for ISPs and more about protecting existing voice and pay TV businesses and keeping margins up as consumers bring more broadband-consuming devices into their homes:

Any such backlash would also likely focus on the anticompetitive aspects of consumption-based billing. With online-content delivery providers like Netflix and voice services like Skype experiencing explosive growth, competitors see consumption-based billing as a convenient way to slow that growth by making the use of online services more expensive.

Netflix is clearly not an impartial observer in this fight. And perhaps there are things it could or should do to make its traffic more ISP-friendly, but caps will hurt both Netflix, consumers and startups. Hyman closes with something we already know, that bandwidth caps stifle innovation and the growth of services such as Netflix, Skype, Google’s new Hangouts service (s goog) and any number of services yet to be introduced. What’s ironic here is that some ISPs already get it, and they have built out the infrastructure for the future. Verizon (s vz) has, in the Bay Area is and municipalities and Google are as well. We don’t have to live in a broadband backwater, but many of our largest ISPs think we should. What’s wrong with that picture?

Image courtesy of Flickr user Scott Feldstein