Netflix last week declared that the future of video entertainment is online, saying the DVD market has "peaked."
But as the company and its rivals press further into streaming their videos over the Web, they face a game-changing threat: internet service providers who are moving to charge consumers for every bit of data they consume.
AT&T and Verizon have already installed such plans on cellphones. Comcast has started to do the same for the Internet service it provides over cable lines.
In the face of such data caps, consumers could think twice before watching a streaming video over their smartphone or computer, worried that they would blow past data caps and trigger penalty fees on their monthly bills, industry analysts said.
"Users hate it, and the burden of watching the bandwidth meter deters them from trying innovative new services," said Kevin Werback of the Wharton School of the University of Pennsylvania.
Internet service providers say the new billing approach is needed because video watchers are hogging their networks. In New York, San Francisco and other cities, smartphone users have complained that they cannot get online during peak hours because networks are congested.
The problem is only expected to worsen as the popularity of online videos outpaces the ability of Internet service providers to build more-robust networks. Sandvine, a broadband equipment provider and analytics firm, estimates that 55 percent to 60 percent of all broadband Internet traffic will be made up of videos by the end of the year, compared with 30 percent at the end of 2009.
"Streaming online is on fire, but bandwidth is not infinite," said Dave Caputo, chief executive of Sandvine.
"Service providers have to buy equipment, put in lines to make bandwidth bigger, which has to be factored into business models," he added.
Charging consumers by the amount of data they use would enable Internet service providers to make more money and reinvest in expanding capacity on their networks, these companies say.
But the new billing method could have broad consequences for companies that are reorienting themselves around video streaming.
Netflix, one of the Internet's biggest bandwidth hogs, could be among the companies hardest hit.
In its second-quarter conference call last Monday evening, chief executive Reed Hastings said 75 percent of all new customers are getting only streaming video. That's what prompted its unpopular decision to raise prices for customers who want to add a DVD subscription to their streaming service.
"We hate making our subscribers upset with us, but we feel like we provide a fantastic service, and we're working hard to further improve the quality and range of our streaming content," Netflix said in a letter to its investors.
In the past, Netflix has told investors and U.S. regulators that it fears usage-based bills could hurt its business. In Canada, the Silicon Valley firm has even degraded the quality of its streaming videos so users don't go over their broadband caps.
Some policy experts say it is not as costly to manage traffic as Internet service providers claim.
"It's a black box to how companies are investing in their networks and how they come up with prices for data caps," said Harold Feld, a policy expert at the public-interest group Public Knowledge.
For now, the data caps have not been unreasonable for most families, some consumer groups say. It would take more than an hour of streaming high-definition video every day to blow past Comcast's 250 gigabytes cap, for instance.
But wireless data caps on smartphones are easier to exceed, analysts say. And Internet users are increasingly using their mobile devices more than their home computers to go online.
Nearly two-thirds of all Web traffic is generated by computers, but that is expected to fall to 46 percent by 2015, according to Cisco, the Internet network equipment maker. By 2015, the number of mobile Internet users will jump 56-fold, to nearly 800 million, Cisco said.
Data caps will push people "to curb their behavior on the Internet," said Parul Desai, policy counsel at Consumers Union. "The problem is that they don't have an alternative with monopoly and duopoly Internet service providers who, oftentimes, are trying to sell their own video products."