Why the ‘Net Neutrality’ Decision Won’t Affect Netflix and YouTube

/ Jan 15, 2014

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The District’s US Court of Appeals’ decision to strike down “net neutrality” rules in favor of giving more control to broadband providers has many concerned about how this will affect the biggest hogger of web traffic — Netflix. So much so that Netflix’s stock price dipped 4.5% in early trading this morning. It makes sense: If broadband providers are now able to charge online companies extra for preferred treatment (for greater bandwidth and faster delivery of content), Netflix, which relies on the cable-dominated broadband ecosystem in the US, will have to pony up more cash in order to even maintain the current quality of their user experience.

Netflix could either eat these extra costs (which would obviously hurt the bottom line), or transfer them over to its customers (which isn’t a PR scenario it wants to get into). Hence the small slide in the company’s share price this morning.

According to BTIG analyst Rich Greenfield, Netflix — as well as other bandwidth-hogging companies like Google/YouTube and Amazon — has nothing to worry about. “In theory, ISPs (such as Time Warner Cable, Charter, Verizon, etc.) can now legally discriminate, creating paid fast-lanes and non-paying slow-lanes on the Internet,” writes Greenfield. “Yet, from an economic sense that behavior appears irrational.”

As Greenfield explains it, the relationship between online services like Netflix and ISPs like Verizon and Time Warner Cable isn’t a one-way street. Cable providers rely on broadband for a huge chunk of their revenue (especially as TV content costs continue to rise). If subscribers sign up for higher tiers of broadband service, with the expectation that they will have access to higher speeds, it would not look well if they have difficulty watching content on Netflix or YouTube, which is, again, something a lot of broadband users really like to do (Netflix and YouTube account for more than half of peak downstream traffic).

“If all of a sudden, an ISP said to Netflix ‘pay us for access to our broadband customers or we will slow you down,’ and Netflix refuses to pay, the ISP ends up hurting its own customers and discouraging those subscribers from using the service that is driving them to pay for faster broadband speed tiers in the first place,” says Greenfield.

What’s more, Greenfield notes how the DC Court of Appeals did not strike down disclosure requirements, which means that broadband providers would have to publicly report which services they were “discriminating against.” “With this knowledge, we suspect consumers might shift to other ISPs and/or complain to Congress,” says Greenfield. “In the end, discriminatory behavior appears self-defeating and is likely to lead to harsh government regulation.”

As for YouTube — the other big traffic hog on the web — Greenfield predicts that if ISPs don’t play fair, the video site’s parent company Google could get even more serious about Google Fiber, its upstart broadband and pay-TV service that offers speeds 100 times faster than most broadband services in the market today.

In other words: Everybody chill out.

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  • Michael

    The premise of this article ignores what we are seeing in the real world. Just last week, AT&T announced its “sponsored data” offer. It is straightforward – “pay us for access to our broadband customers or your data will count against the cap.” A cap, I might add, that they now have an incentive to keep low enough to make this offer attractive to content producers. Although this does not directly involve speed throttling, it is functionally the same offer. And without network neutrality rules it is no doubt the first of many.

    Without net neutrality, a company like netflix essentially has three choices: pay the fee (and pass it on to consumers), don’t pay the fee (and watch its performance take a hit compared to competitors who are willing to pay the fee), or import the kind of program access fight that is about to black out The Weather Channel for DirecTV subscribers. None of this is a win.

    Finally, while google fiber is all well and good, it isn’t really a sustainable solution. It is not economically rational (or ultimately physically possible) to require everyone who wants to launch an online video service to build their own nationwide broadband network. That’s a recipe for reducing the pace of innovation to a trickle.

  • “we suspect consumers might shift to other ISPs and/or complain to Congress”

    What planet does this guy live on? In many — perhaps most — places in the US, one corp holds a monopoly on ISP services, so there’s no way to shift ISPs even if you wanted to.

    And complain to Congress? Has Greenfield ever complained to his congressperson? They do not listen to you unless you’re a major corporation with lots of money to donate.

    We’re screwed.

  • Ran

    Videoink better get its act together. This is pure soft headed folly. Since when has greed been dominated by rationality. Get some better writers…

  • @ThatNickGuy

    The premise assumes consumers have viable options in broadband providers. There is no true regional competition among ISPs.

  • SonoranSnoozer

    The big cable companies have a corporate culture based on having a monopoly, more or less, and behave accordingly. As revenue shrinks on the content side as people use more streaming services and cut-back on the grossly inflated cable bundles, they will definitely try to make up the revenue shortfall through their Internet subscriptions services. The monopoly they now enjoy with Internet service, thanks to this ruling, far surpasses what they have with cable TV. The only real competitor is DSL, and the phone companies are limited by the fact that phone wires were never meant for broadband. Consumers are $crewed. Unless the FCC appeals or congress acts, the cable companies hold far too much power over a key resource that is becoming ever more important.

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