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Reed Hastings, CEO of Netflix, announces Netflix's expansion to Canada in Toronto, on Wednesday, September 22, 2010. Netflix says Canadian Internet providers are using data caps to inflate their profits, not provide better service.Adrien Veczan

Netflix is reducing the default audio and video quality settings on its Canadian streaming service, part of a move to reassure consumers worried about going over their Internet data caps.

Netflix announced Monday the default quality of movies and TV shows streamed in Canada will be set to a lower quality, effectively meaning that content, on average, will use up two-thirds less data to stream. The move is a direct response to the data caps that major Canadian Internet service providers impose on their users - caps that tend to involve lower limits and higher prices than the ISP's American counterparts.

According to Netflix, the lower-quality default setting means users can, on average, watch about 30 hours of content while only using about nine gigabytes of data. On the highest-quality setting, the same amount of content could use up 40 gigabytes or more. Customers can still change the default setting back to a higher quality in their account settings page.

The move comes as Netflix joins an increasingly vocal opposition to data caps and overage charges in Canada - only the second market Netflix has targeted after launching in the U.S.

"We've been on the edge of the controversy around usage-based billing," Netflix CEO Reed Hastings said in an interview with The Globe and Mail Tuesday during a visit to Toronto. "We're trying to make it clear that the costs of Internet are extremely low for ISPs. Of course they debate that ... but we believe the costs are extremely low."

Since launching in Canada last fall, Netflix has built up a subscriber base of more than 500,000, and expects to hit the 1-million user mark - what Mr. Hastings said will be the company's break-even point - in the third quarter of this year. Netflix has roughly 20 million subscribers in the U.S.

The company is also expanding its potential customer base by introducing French language support. Mr. Hastings said Netflix will begin to roll out French dubbing and subtitles in the summer.

As Netflix prepares to launch in a third country during the second half of 2011 - Mr. Hastings won't say which country yet - the biggest challenge facing Netflix in Canada is the extent to which customers are willing to consume an often limited amount of monthly Internet data. That's why the company is joining the likes of Google and other Web-based firms to call on higher data limits.

Usage-based-billing has become a very high-profile issue in Canada in recent months, as consumers, advocacy groups and businesses have become more vocal about it.

On Monday, Bell backtracked on a proposal to charge small Internet service providers, which lease space on its network, by the amount of data each of their customers downloads. The initial proposal was met with significant consumer outrage.

Instead, Bell now suggests an aggregated volume pricing scheme, whereby smaller ISPs are charged for the data used by all their customers, instead of being charged for each customer who goes over set limits.

Also on Monday, in a joint submission to the Canadian Radio-television and Telecommunications Commission, several Canadian cable providers conceded that usage-based billing had no correlation to the cost of providing the data - an argument often advanced in the past by large providers - but was related to conditioning how customers use their Internet connections.

In their regulatory filing, Cogeco Cable, Rogers Communications and Quebecor argued that usage-based pricing should be expensive enough to "discourage use above the set limit" in order to effectively manage traffic on the network. "It follows that the price does not necessarily reflect the cost of supplying the network capacity," the companies wrote.

For his part, Mr. Hastings said he believes data caps have little impact on traffic management because the real problem points for ISPs are peak usage times, and monthly data caps do little to alter the times at which customers use the Internet.

"This idea of capped Internet really makes no sense from a network management or policy sense," he said. "Really, the costs on the Internet are driven by wherever the peaks are ... So it's really inefficient to use caps to manage network bandwidth. All you care about is peak bandwidth."