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Netflix CEO Reed Hastings speaks at the Consumer Electronics Show earlier this month. (GeekWire photo)
Netflix CEO Reed Hastings speaks at the Consumer Electronics Show. (GeekWire photo)

Netflix’s stunning admission that it has a policy of throttling video to subscribers watching via AT&T and Verizon’s wireless networks, seems designed to spark debate about data caps.

The Wall Street Journal reports that Netflix has acknowledged “lowering the quality of its video” for more than five years to customers of Verizon and AT&T, as well as capping the quality of video for customers of most of the world’s wireless carriers. That limit on video streams is 600 kilobits-per-second, much less than what today’s wireless networks can handle, according to the Journal.

The company told the newspaper that the reason for this was: “to protect consumers from exceeding mobile data caps.”

Exactly why Netflix chose now to reveal this information is unclear, but regardless it’s a risky move. Certainly, many consumers’ could feel cheated by Netflix, at least initially. They expect the company to deliver the best possible quality. This could end up being Netflix’s most customer-alienating act since 2012, when management announced it would raise subscription fees and stop renting DVDs. Remember Qwikster?

In response to Netflix’s disclosure, an AT&T spokesman told the Journal that the company was “outraged.”

Netflix says it does not throttle T-Mobile's video streams. (Photo by Jordan Strauss/AP Images for T-Mobile)
Netflix says it does not throttle T-Mobile’s video streams. (Photo by Jordan Strauss/AP Images for T-Mobile)

Whatever criticism Netflix receives, expect the discussion to eventually turn towards data caps. You don’t have to think about it very long to realize that Netflix gains very little by throttling. The company’s business model is based on providing users with a reason to keep paying a monthly subscription fee. Delivering lower-quality video and possibly a less satisfying viewing experience, is inconsistent with that model.

Data caps, however, threaten Netflix. If customers worry that they might exceed their monthly data limit and pay overages, it might discourage them from watching Netflix’s movies and shows. For viewers who watch a lot of Netflix and must stay under data caps, the service becomes more expensive.

Netflix also disclosed that it doesn’t throttle video streams of T-Mobile and Sprint. The reason Netflix gave the Journal is that those companies don’t charge customers more money if they go over their data limits. When they do surpass them, Sprint and T-Mobile typically slow network connections instead. Netflix called this a “consumer-friendly” policy.

This is all part of a massive struggle between Netflix and much of the traditional entertainment sector. Netflix has already disrupted Hollywood’s home-video market. The service is now working on cable TV, providing consumers with one of the best reasons to cut the cord.

According to a study last year by Forrester Research, 18 percent of the U.S. population has never signed up for cable TV and among the all-important 18-to-31 age group, the number of those who aren’t cable subscribers is larger than the viewers who are cutting the cord. That would indicate that not only are cable companies losing customers, they’re also signing up fewer new customers.

Are data caps a means to discourage use of Netflix? The only thing for certain is that eventually Congress or the courts will have to sort out the issue. In the meantime, look for the public relations war between Netflix and the carriers / cable companies to continue.

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