Usage-based pricing encourages Netflix to become better corporate netizen

[Commentary] Netflix announced a revolutionary initiative that should significantly reduce this digital footprint. Like most other streaming video providers, Netflix codes a low, medium, and high-resolution version of each title and streams the appropriate selection to a customer based on his or her available bandwidth. But each movie is coded in substantially the same fashion. Netflix coders realized that this one-size-fits-all model is inefficient. So the company will embark on an expensive project to recode its entire collection, giving each title its own set of rules. If all goes according to plan, the project will result in improved video streams while using up to 20 percent less data.

One could argue that broadband providers are encouraging Netflix to be a more responsible netizen. Netflix’s existing coding practices are inefficient, consuming more bandwidth than necessary to deliver the product to the consumer. Given Netflix’s scale and business model, this inefficiency translates to significant wasted network capacity, especially at peak times when congestion is most likely to occur. Before usage-based pricing, Netflix had little incentive to change its inefficient behavior. Usage-based pricing forced Netflix to be more mindful of the size of its digital footprint. One lesson of the Netflix recoding vignette is that price signals are important. The paid prioritization ban has prevented price signals from helping broadband providers route network packets efficiently. Now, with its inquiry into usage-based pricing practices, the Federal Communications Commission may potentially make the same mistake again. The agency should appreciate the role that usage-based pricing played in encouraging Netflix to incur a cost that will improve the efficiency of its operations and that of the network as a whole.

[Lyons is an associate professor at Boston College Law School]