Yesterday's big headlines - that Netflix now accounts for almost 30% of all downstream Internet traffic - is further evidence of the popularity of the company's streaming service, and also a preview of the significant structural changes that lie ahead in the over-the-top (OTT), broadband ISP, and pay-TV industries. Specifically, as Netflix and other OTT providers' surging traffic compels broadband ISPs to administer strict bandwidth usage caps and adopt usage based pricing ("UBP"), the stage will be set for a new era in how tens of millions of consumers decide which in-home entertainment services they subscribe to. If you thought that would be very bad news for cable operators specifically, it might be time to think again.

Cable operators and programming networks are the focal point of upcoming change. Operators in particular, because they are both the largest providers of both subscription video services and broadband Internet services, are really at center stage. Much of the hype around "cord-cutting" over the last year has implied they are on the losing end of this potential activity. Often overlooked however, is the fact that as consumption shifts to OTT sources, consumers' bandwidth needs escalate. As such, the door opens for them to institute UBP, as AT&T has recently done.

UBP is enormously important to cable operators because it in effect allows them to begin offsetting potential video subscriber losses due to cord-cutting by generating incremental revenue from heavy broadband users. As Craig Moffett of Sanford Bernstein artfully put it, "UBP would essentially indemnify them (cable operators) against all potential outcomes." In fact, while there might be some initial top line revenue contraction for operators as UBP doesn't initially fully offset video losses, since broadband has much higher margins than video (no pesky monthly programming fees to pay), UBP has the potential to make cable operators more profitable down the road.

Of course if you're Netflix or another OTT provider, UBP carries new and uncertain risks. To date, in the U.S., virtually none of Netflix's users have been impacted by broadband caps, which has surely been an important contributor to the company adding over 12 million subscribers in the past 6 quarters. However, low caps in Canada point suggest how much more challenging this type of environment could be.

Or does it? Since Netflix has been positioning itself in a politically correct way as an augment, not a substitute, for pay-TV, it's imperative that it be perceived as low-cost to create the "I can afford to have both pay-TV and Netflix" consumer mindset. If it were perceived as no longer that, then consumers would have second thoughts about subscribing to or retaining Netflix, especially as pay-TV VOD and TV Everywhere offerings strengthen. So even while Netflix has lately been making its case in Washington, DC about ISP overcharges, a more robust strategy might be for Netflix to turn the corner and in fact position itself as a substitute for pay-TV.

By doing so it could change its marketing message to: "Why pay more? Now you can save $60-$70 per month by dropping your pay-TV service and joining Netflix for a fraction of the price." (And by the way, just ask satellite operators and telcos about the upside of painting the cable operator as the bad guy.)While it's true that Netflix isn't a pure substitute for pay-TV, the reality is that for entertainment-oriented consumers, it's already pretty darn close, and getting closer all the time. Plus, it could bolster its message by partnering with other low-cost providers like Hulu Plus, YouTube, and even HBO (more on that in a subsequent post), and others to create bundled offers that still save the consumer lots of money while providing better matched services.

The entertainment-oriented and budget-minded "cord-never" consumers in particular are key targets, because as I've pointed out, they're paying a multi-billion dollar per year subsidy to sports-focused cable TV networks, even though they don't watch these networks. Thus, in a world where broadband and OTT allow consumers to streamline their spending and only pay for what they value, this multi-billion dollar inefficiency is eliminated. But while sports networks are the most vulnerable because of their extraordinarily high monthly licensing costs, the whole traditional programming bundling approach of pay-TV would be challenged by this scenario. This is just one of the reasons why it's so strategically important for cable networks to bias toward working with operators as they roll out TV Everywhere services, rather than fighting them, as recently occurred in Time Warner Cable's iPad app flap.

Net, net, with Netflix and OTT providers soaking up more bandwidth, the days of de facto unlimited broadband for heavy users are eventually going to wind down. This will in turn make broadband even more profitable for cable operator/broadband ISPs (though note, regulators will step in if it's deemed too profitable).

As consumers' broadband costs rise they'll be inclined to think of OTT services more as substitutes than as augments to pay-TV. This in turn means more fragmentation as consumers sort themselves into their proper service buckets which is OK for Netflix if it's positioned itself properly. For cable networks used to the gravy train of ever-higher monthly fees this will be an unsettling new world. But for cable operators blessed with robust broadband infrastructure, satisfying bandwidth-hungry consumers with a high willingness to pay, cord-cutting may actually turn out to be a good news story after all.