Netflix and Neutrality

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When the D.C. Circuit Court of Appeals struck down the Federal Communications Commission’s network neutrality rules, many commentators cited Netflix as the poster child for the horrors that await. Left free to discriminate, internet service providers would either throttle Netflix streaming traffic to favor their own cable content, or would charge Netflix extortionate fees.

Funny thing is Netflix doesn’t seem particularly concerned, and thereby hangs a tale. After saying nothing for a week, discussed the issue in a letter to shareholders that shows it has a much clearer understanding of how markets really work than do the net neutrality advocates. The complete section is worth reading:

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 government action.

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.

What Netflix knows is that the ISPs, who are monopolists or duopolists in most markets, do not operate in a vacuum. Yes, in theory a monopolist can do anything it wants, but in practice it is constrained by its customers, who have their own ways of dealing with unconscionable actions. (The exception would be a monopolist who has total control of an essential good for which there is no substitute, say water. Governments either prevent such monopolies from forming or regulate them closely. Governments, too, have to worry about their customers, i.e., voters.)[pullquote]Mess with us, says Netflix, and face the righteous wrath of our customers, who like us a lot more than they like you.[/pullquote]

Netflix, while avoiding the panicky reactions of some of its erstwhile supporters, is putting down a marker: Mess with us and face the righteous wrath of our customers, who like us a lot more than they like you. And if the customers going get riled up on their own, we’ll see to it they they are riled. And these angry customers can cause a lot of trouble. Ask a cable operator that faced a choice a revolt by customers if it kept a big football game off its service in a dispute over retransmission fees. They always cave.

A slightly more realistic fear on the part of neutrality regulation advocates is that monopolistic carriers could crush innovative startups by providing discriminatory rates that protect incumbents. Never mind that this is the exact opposite of their first fear, but it is not at all clear why such an action would ever be in an ISP’s interest. And if an ISP were to collude with a Netflix against a challenger, they would quickly find themselves in antitrust trouble (see U.S. v Apple.)

What Netflix is saying is that some sort of reasonable neutrality is in everyone’s interest, even in the absence of regulatory requirement. If the ISPs act irrationally (or of we are misreading what is in their best interest), there is plenty of time for a regulatory response. The course favored by the strongest net neutrality advocates, common carrier regulation of ISPs, might have  solid legal basis, but would be far more intrusive than the relatively modest rules the court struck down. Let’s wait and see before we urge drastic action.

 

 

Published by

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.

14 thoughts on “Netflix and Neutrality”

  1. I agree, even as I have expressed this concern myself, what you describe is only the most simplistic of outcomes. It is also only one out of many possibilities. Negotiations are usually far more complex, especially as other factors contribute to the complexity:

    http://homes.yahoo.com/news/mobile-tv-apps-confront-cable-companies-with-new-challenges-172344476.html

    Recently ABC greatly limited free viewing through there app:

    http://tvline.com/2014/01/02/abc-limits-next-day-streaming-of-episodes/

    There are many ways this can play out and the more complex the easier the obfuscation. The end result will be pretty much life will suck as a consumer. My mind cannot even begin to grok the implication of wireless ISPs vs cable ISPs in this whole discussion, never mind that content providers are already mucking around with Netflix (checked out their movie listings lately?). At least one ISP IS a content provider. Maybe you could write some about how you think that affects the perception of net neutrality.

    Joe

    1. Joe, you are talking primarily about issues of content distribution, not net neutrality. With the exception of some retransmission rules covering broadcast TV, content owners in general are free to distribute or not distribute their programming through whatever channels they want. No broadcaster is obligated to put any content on the web. No movie or TV show owner is required to make it available for streaming through any online or VoD channel. This would continue to be true under any conceivable schedule of net neutrality, including Title II common carrier regulation.

      Things like the yearend appearance and disappearance of movies on Netflix, or TV shows that are viewable on Hulu today and gone tomorrow are extremely annoying for consumers, but they don;t concern net neutrality.

      It’s true that the largest ISP. Comcast, owns a major content provider, NBC Universal. Cablevision also has significant content holdings, including MSG. (Time Warner Cable is now fully separate from Time Warner and its media properties such as CNN and HBO.) For the time being, Comcast is operating under a consent agreement it accepted to win permission for the deal to go forward. It restricts interference and imposes a number of network neutrality conditions. It will be very interesting to see what happens when the agreement expires.

      1. Sure, except that we have already seen when a network and a TV provider clash over delivering that content. Netflix’s comforting words not-withstanding, there is already precedence for exactly such a scenario. This is not a far reach to see ISPs become the new battle ground especially as those ISPs already have a model they want to preserve for entertainment delivery. As those ISPs continue to get more intertwined with content creation and delivery (including Netflix who currently is at the mercy of all their competitors for delivery) this battle is not over.

        I think there is still time for things to work out. If 4G wireless can actually hit what it originally promised in bandwidth at least the cable internet providers may actually forced into competition and this can turn out pretty decent. I don’t think anyone wants to return to the model back in the day when Columbia pictures were only seen at Columbia theaters. But this is all about power and who gets to use it. The entertainment industry has always been this way. Just look at Apple’s struggles with music, movies, and TV. I don’t think the rest of the tech world will be much affected one way or another. The entertainment industry is where this battle is going to rage even as it already rages just because of the digital age. Everyone thinks they have the key and no one wants to be at the mercy of someone else for their destiny.

        But my fractured memory of all those discussions on the NN policy in the beginning, it was not going to accomplish what everyone thought it would, IIRC (one of the problems being wireless ISPs were operating under a different set of rules from hardline ISPs). It only changed what the issues would be. But I honestly don’t know what the answer is. My arts colleagues petitioned hard for the Net Neutrality policy under the FCC. I have the email in-box to prove it. I don’t think… Eh, I just don’t know.

        Joe

        1. The battles over distribution are tremendously important and I’m hoping to address them in a post next week. But it is important, in terms of making policy decisions, to be clear on what is and what is a network neutrality issue. Regulatory/legal issues raised by entities controlling both content and distribution have been around at least since the late 1940s, when US v. Paramount forced the studios to divest their theaters. It was at the heart of the long-running dispute over FCC rules on financial interest in syndication.

          The only place where distribution and neutrality issues come together is in the case of Comcast due to its ownership of NBC-U. But the settlement of the antitrust case should keep these to the side for some time to come.

  2. I continually fail to understand why companies that are facing disruption prefer to remain in denial long after there are viable means of getting ahead of the curve.

    If HBO, Showtime, ABC or another similar organization were one of my clients, I would push them hard toward first run, exclusive content that would be available for reasonable charges directly from organizations like Netflix, Amazon and Hulu.

    Netflix is correct about the net neutrality issue. Don’t cave in to the ISP’s demands. If your programming has fanatical fanatics (ha!), they will swap ISP’s, use mobile ISP’s and complain to Congress vehemently until they can get Breaking Bad, Mad Men or Game of Thrones without having to scrounge around.

    The die is cast on traditional media distribution. Broadcast and cable television will follow the same path as broadcast and satellite radio.

    Cable ISP’s should embrace becoming “dumb pipes” and begin adding value (and revenue) by caching and negotiating advance releases. They should be partnering (possibly merging) with Netflix, not competing with them at this level.

    So much short term thought when they should be considering “where the puck will inevitably be.”

    The good news is that my firm will never be in want for clients with this much ignorance permeating business.

    1. Part of the problem is in a lot of locations people don’t get to swap ISPs. In my area of Atlanta I get Comcast, that’s it. I could go wireless, but it is also spotty in my neighbourhood. As it is I have to use AT&Ts Microcell to help with cell phone reception. That works over my internet connection, which is… Comcast.

      In the world of apps for content delivery why should HBO, ABC, or Showtime even bother with Amazon, Netflix, or Hulu, or even iTunes? Cut out the middle man and release your own app. Isn’t this what HBO is about to do? What possible value could Netflix or Amazon offer?

      Cable ISPs becoming dumb pipes would sure make a lot of people’s lives easier, especially the end user. It would also require them surrendering their ability to make anywhere close to the revenue they enjoy now. I’m not saying that’s wrong. I’m saying I don’t think they will agree that it is in their best interest. They would have a point.

      Another part of the problem is, this isn’t really a short term issue. Many contracts last several years, so they are already thinking about the impact 5 or more years down the road. And I believe, with the speed technology travels, this is what is scarring all of them. There is a lot of jockeying for position now hoping they are making the right decisions for 5+ years from now.

      I’m less convinced righteous wrath would be on anyone’s side if much of the recent wrangling between networks and pay TV companies are any indication. Who won customer mind share when it was CBS vs TWC in New York?

      Joe

      1. Netflix and Amazon bring content development funding and leverage to smaller content providers and those who don’t have adequate resources to do their own apps well.

        It may suck by comparison, but I’m betting that there’s a DSL, FiOS or satellite-based ISP where you are. I do agree that someone in the “sticks” of North Dakota may have limited options, but Atlanta?

        Although I don’t have confirmation of viability (because we don’t have any cable ISP’s as clients), a study we did theorizes that charging for premium caching could be quite lucrative. Riding atop the business model of Netflix, Amazon or Hulu, end users would be quite willing to pay tens of dollars per month for near instant delivery of video content with no buffering issues, and there are lots of advantages to being a CDN if cable will end up becoming a “dumb pipe” anyhow. What’s better than collecting a monthly fee for a DVR that you have to provide support for? Getting money for delivering the same data from your centralized store and being able to optimize it for simultaneous distribution so that you have more effective bandwidth on your pipes.

        Again, the “cable channel” model is going to die. Listening to terrestrial radio stations rather than a channel you designed seems archaic now; how long have we complained about there being 57 channels with nothing on? Do you think binge-watching is going to go away? Bill & Joe CableCasting will give you high-speed Internet plus on-demand across a huge selection of streamables for $75. An extra $25 will get you premium content from HBO and ESPN. Wanna sign up? I think I can get my average sales per household up to a happy place with that kind of a deal, and my margins would be good.

        I confess ignorance on what happened between CBS and Time-Warner. I’ll have to go do my research.

        By the way, thanks for contributing your thoughts. I always look forward to reading your posts.

        1. I’ll just say to both of you, first and foremost, I agree with you. I agree that a multitude of apps, from the consumer perspective is lousy. I agree that none of the players are really thinking clearly.

          Technology and the internet is making a lot of people superfluous in a lot of ways. Musicians can now record their own music with equipment that rivals many recording studios at a fraction of the cost. They can now distribute their music without big studio help. That same opportunity is also available to networks, content creators, and content providers. I’m thinking Hulu wasn’t just about TV networks hedging against iTunes. I think it was also about learning the ropes for themselves to not need iTunes, Amazon, or Netflix, giving them a stronger negotiating position AND giving them an out, the ability to walk away and say “Fine, we’ll do it ourselves”.

          But that’s the point. Each piece of the puzzle that is the entertainment industry is currently fighting for their livelihood and lives. No one wants to admit they need the other. That is ceding power and control. And they all know, power and control is money, at least in their minds. Especially as each arrangement—artist to producer to content provider to content distributer—exists via contract. And if any of you have ever been a part of contract negotiations it is about who has the better hand to get what they want. And everyone is going to leverage what they have to get the upper hand. And for ISPs, their leverage is the gateway. Especially ISPs who are losing one business model at the expense of another. I have a hard time believing for a second they won’t use that leverage, as much as I rather they see reason and not. But all the players have already shown they are willing to go to the mat to protect their business, including blacking out.

          Things are going to get worse for the consumer before it gets better. We are the collateral damage.

          Joe

        2. “It may suck by comparison, but I’m betting that there’s a DSL, FiOS or satellite-based ISP where you are. I do agree that someone in the “sticks” of North Dakota may have limited options, but Atlanta?”

          You would think that, wouldn’t you? Yet here I am. About two years ago (maybe things are different now, but I doubt it) Comcast really chapped my hide and I tried to find someone else. No other cable company services my area. FiOS in Atlanta is restricted to some northern suburb, still experimental, ATT DSL does not service my neighbourhood, and any other local ISP I could find was essentially rebranded Comcast or ATT simply adding another layer of complexity to the equation. I admit I did not look into a satellite ISP. I even looked into my own T1 line.

          Joe

          1. Try http://broadbandmap.gov . You may find unexpected options. You may want to consider going for a faster connection than you personally need, and farming it out to your neighbors who have similar issues.

            If that doesn’t work, I think I have a 110bps acoustic coupler modem somewhere… *tease*

      2. Netflix and Amazon perform valuable services for content owners. They have very good engineering both provide the right video format to the right device–this is still far from trivial–and to provide streaming at adaptive bitrates to offer the best possible experience given the variability of the network.

        The other thing is I really don;t think consumers want a different app for each video offering. I use Netflix, Amazon, HBO to Go, FiOS Anywhere, ESPN, and Big Ten Network, and each has its own, different UI that I have to learn. I hate the UI on my FiOS cable box, but at least it is consistent from channel to channel.

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