Is the Other Shoe About to Drop at Netflix?

It's been a bad week for Netflix (NAS: NFLX) , even though this time the company itself hasn't had anything directly to do with it.

Shares of the digital video giant hit a fresh 52-week low yesterday -- bucking the buoyant market rally -- after a Wedbush analyst downgraded the investment, slapping it with an embarrassing $45 price target. Standard & Poor's knocked down Netflix's credit rating earlier this week.

If things for Netflix look bad now, they may be about to get worse.

Sanford C. Bernstein analyst Craig Moffett is predicting that at least one cable provider -- among Time Warner Cable (NYS: TWC) , Charter Communications (Nasadq: CHTR), and Cox -- will switch to metered bandwidth pricing next year.

In other words, that $7.99 a month unlimited streaming plan from Netflix may be about to get a bit more expensive.

Bandwidth on the run
Tollbooths aren't new. Some access providers have been penalizing heavy data sippers if not outright booting them for a couple of years now.

Moffett's also been forecasting that this will happen since AT&T (NYS: T) stuck its DSL customers with overage charges earlier this year if they go through more than 150 gigabytes of data a month.

AT&T argued at the time that the move to charge $10 for every 50 additional gigabytes of bandwidth a month would only hit 2% of its users. AT&T's average DSL customer was going through just 18 gigs of data a month.

No one's raised a stink about this problematic pricing trend in the past, largely because the assumption has been that data hogs are typically freeloader teens downloading a bunch of pirated BitTorrent files. Well, today's data-slurping couch potatoes look a lot like you.

As video streaming and Wi-Fi tablets grow in popularity, we're going through a lot of chunky data files these days. Netflix has been leading the charge. A recent Sandvine report on dot-com consumption reveals that Netflix is accounting for nearly a third of the peak downstream traffic in this country.

Consumers probably don't realize the kind of data that they're going through, perhaps because they are streaming content through their television. The convergence of streams and home theaters has become so seamless that viewers may not be able to tell the difference until there's a buffering issue or a connectivity outage.

However, all of those Netflix, Hulu Plus, and YouTube viewings add up -- and soon your cable provider may be adding it up for you.

Calling hypocrisy's bluff
Costlier streams that redefine the value proposition of Netflix's all-you-can-eat model clearly won't help Netflix. The former dot-com darling had nearly 23 million streaming subscribers at the end of September, and it's clearly vulnerable enough already these days.

Wedbush's downgrade yesterday notes that Netflix will likely spend about $800 million on streaming content this year, more than doubling to at least $1.7 billion next year. The projected DVD and postage savings of $200 million will only nibble on the difference. Things can get ugly if Netflix can't begin growing its audience next year.

More tollbooths will also nip the smart television dreams of Google (NAS: GOOG) and Apple (NAS: AAPL) in the bud, unless Google scales quickly beyond its plans to offer lightning-quick connectivity in Kansas City next year. Unless a national provider steps up and publicly commits to maintaining unlimited data plans -- the way that Sprint Nextel (NYS: S) has done in wireless -- this home theater revolution is about to be sent to its room.

Shouldn't there be a little more outrage here? Regional cable providers doubling as Internet companies are in a position to kill the streaming revolution that's triggering the cord-cutting trend that's hurting their business. It's all too convenient. You don't need tinfoil hats to figure this out. It's not a conspiracy theory. It's a conspiracy fact.

The counterargument here is that costs really are going up as users clog up provider networks. Why can't they pass these costs on to the ones incurring them? Then again, aren't these the same companies sticking you with cable programming bundles filled with channels that you'll never watch? Why can't accountability cut both ways?

No one is forcing the public to choose one ISP over another. Netflix also already tackled this problem in Canada, where metered bandwidth is the norm, by giving subscribers the option to stream smaller files that only sacrifice some of the resolution. The practice will likely make its way here if this becomes a growing problem. It helps, but it still doesn't help the implosion of the "unlimited" model that Netflix was championing.

Cable companies are on the verge of killing rival Netflix -- and we're just sitting there, watching it happen as if we're not on a bigger clock.

If you want to follow this saga, track the latest news by addingNetflixto My Watchlist.

At the time thisarticle was published The Motley Fool owns shares of Apple and Google.Motley Fool newsletter serviceshave recommended buying shares of Apple, Google, and Netflix.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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