Unfortunately, Verizon successfully challenged the U.S. net neutrality rules. In principle, a domestic ISP
now can legally impede the video streams that members request from Netflix, degrading the experience
we jointly provide. The motivation could be to get Netflix to pay fees to stop this degradation. Were this
draconian scenario to unfold with some ISP, we would vigorously protest and encourage our members
to demand the open Internet they are paying their ISP to deliver.
The most likely case, however, is that ISPs will avoid this consumer-unfriendly path of discrimination.
ISPs are generally aware of the broad public support for net neutrality and don’t want to galvanize
Moreover, ISPs have very profitable broadband businesses they want to expand. Consumers purchase
higher bandwidth packages mostly for one reason: high-quality streaming video. ISPs appear to
recognize this and many of them are working closely with us and other streaming video services to
enable the ISPs subscribers to more consistently get the high-quality streaming video consumers desire.
In the long-term, we think Netflix and consumers are best served by strong network neutrality across all
networks, including wireless. To the degree that ISPs adhere to a meaningful voluntary code of conduct,
less regulation is warranted. To the degree that some aggressive ISPs start impeding specific data flows,
more regulation would clearly be needed.
Acknowledge the danger, vow a vigorous response if the threat materializes, but downplay the likelihood of it happening. Right out of the investor relations textbook.
In the followup interview streamed live on YouTube, Hastings stressed the ultimately symbiotic relationship between Netflix and ISPs, likening it to the virtuous circle that developed between PC makers and application developers. “As computers got better, applications became richer, which drove demand for more powerful computers, which allowed for even richer applications,” he said. By the same token, the popularity of Netflix drives demand for higher-speed broadband, benefiting Netflix and ISPs alike.
The jawboning seems to put investors’ minds at ease, at least for now. After knocking Netflix’s shares down a bit immediately following the federal appeals court ruling vacating most of the FCC’s net neutrality rules, investors seemed to have shrugged off concerns about the ruling’s impact in the light of yesterday’s stellar earnings report, sending the shares up more than 15 percent. But is Hastings’ portrayal an accurate characterization of the real risk to Netflix in a post-neutrality world?
On balance I think it is. The regulations may be gone (at least for now), the real-world market dynamics still favor Netflix. Netflix adds far-more value to high-speed broadband at this point than the other way around, so screwing around with Netflix streams would almost certainly backfire financially on ISPs. Any blatant attempt to hold up Netflix for payment, moreover, is now more likely to draw antitrust or deceptive practices scrutiny, at least for cable ISPs. Even a boiling-the-frog strategy of degrading Netflix streams little by little until it agrees to pay for prioritized treatment is unlikely to go undetected with so many eyes now certain to be watching for any such nefariousness by ISPs.
A bigger danger for Netflix, however, lurks in wireless networks. Netflix and its customers may be best served “by strong network neutrality across all networks, including wireless,” as Hastings put it, but even when the FCC’s regulations were on the books they didn’t cover wireless networks.
Right now, wireless streaming is a relatively small part of Netflix’s business, but that will obviously change with time. Even if some net neutrality regulations come back into play at some point, there is no certainty that wireless networks would be covered, and the market dynamics in the wireless world aren’t nearly as favorable to Netflix as they are in the fixed-broadband world. Wireless networks are already becoming pay-to-play channels for video streaming services and Netflix could face the same tolls as everyone else.
Finally, Hastings might also want to be a bit more careful with his analogies. PCs and applications may have turned in a virtuous cycle for a while, but ultimately, PCs got commoditized (at least in Wintel World) while applications retained value. Given ISPs’ abiding fear of being turned into dumb pipes, Hastings might not want to remind them of that dynamic. If anything could tempt an ISP to pick a fight with Netflix, it would be that.