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Internet Service Providers May Start Usage-Based Charging

The free lunch may be over for Netflix and Hulu Plus users.

If you ditched your cable television subscription figuring your wallet would be happier with a subscription to Netflix, you may be in for a surprise. At least one major cable operator is expected to start charging usage rates for its Internet service, starting next year, according to analyst Craig Moffett.

In short, the more data you consume through your Internet connection at home--the more you may end up paying.

The move toward charging usage fees has been directly linked to content delivery services such as Netflix and Hulu, which the cable companies see as freeloaders on their networks. Freeloaders who are diverting traffic away from the cable companies' paid TV content, that is.

One of the first companies to adopt a charge-by-usage model may be Cox Communications, Charter Communications, or Time Warner Cable, Sanford C. Bernstein & Co. analyst Craig Moffett told Bloomberg today.

In the current entertainment environment, cable companies are facing some daunting numbers. It's estimated that Netflix now consumes nearly a third (32.7 percent) of all peak downstream traffic in the United States. And although it's predicted that Netflix usage may be leveling off, demands will be increasing from other players, such as Amazon Prime.

What's more, cable companies make a lot more money from your broadband connection than they do from their TV services. Gross margins on broadband are 95 percent, according to Bloomberg, compared to 60 percent for video--an amount that keeps shrinking as programming costs keep rising at a rate of 10 percent annually.

While cable companies used to debate whether or not to charge by usage, they're now talking about when they should start doing it.

"Such a shift is bad news for consumers and threatens to slow down the innovation powering today's Internet economy," Netflix General Counsel David Hymen wrote in a Wall Street Journal editorial over the summer.

Creating toll booths on their networks for data usage may slow down the shift to online TV viewing, but many experts believe the tide is against the cable companies. By 2015, it's forecasted that 12.5 million U.S. households will receive TV shows and movies from Internet services rather than from a pay TV provider. That's a fivefold increase over last year, when only 2.5 million Americans viewed their entertainment via the Net.

Losing all their TV viewers, though, probably wouldn't be such a bad thing for the cable companies that also provide broadband services, Moffett told Bloomberg. Reductions in programming costs and set-top box spending would more than offset the lost TV revenues.

Follow freelance technology writer John P. Mello Jr. and Today@PCWorld on Twitter.

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