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.