The Net Neutrality Ruling Won't Hurt Netflix as Much as Skeptics Think

Netflix's (NASDAQ: NFLX  ) move to create its own content delivery network a year and a half ago looks brilliant in the wake of changes to the net neutrality guidelines, Fool contributor Tim Beyers says in the following video.

Netflix's Open Connect Network allows service providers to directly access its content at any of eight independent facilities operated at Internet peering points. A governing "appliance" hosts as much as 100 terabytes of content, including its most popular movies and shows. The result? Customers get the programming they want even as participating ISPs use less bandwidth hauling Netflix's streams.

The biggest names in Internet delivery have yet to sign on so the ruling could still cost Netflix $75 million to $100 million annually, especially if, as analysts expect, the likes of Comcast and Verizon penalize the streaming sensation via higher bandwidth charges or throttled pipes.

Yet doing so could also prove costly to ISPs. Why? Google (NASDAQ: GOOGL  ) , itself a huge consumer of bandwidth via YouTube, uses Open Connect with Google Fiber. Cablevision, too, is a Netflix partner. As more of these types of deals get signed, it'll become common for consumers to expect high-speed, high-quality delivery of Web television -- and they'll drop the ISPs that don't measure up.

Do you agree? Where do you stand in the net neutrality debate? Please watch the video to get Tim's full take and then leave a comment to let us know whether you would buy, sell, or short Netflix stock at current prices.

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On January 21, 2014, at 2:24 PM, duuude1 wrote:

    Hey Tim,

    Take a look at individual broadband provider coverage maps here:

    http://www.fcc.gov/maps/connect-compete-home-broadband-cover...

    In any particular area, it appears rare to have more than one provider. How much coverage does Cablevision have? And Google Fiber? Not much huh? So for most of the US, the ISPs will be able to decline the Open Connect partnership with Netflix (as they have so far in the US), and jack up consumer prices while also charging carrier fees to Netflix - and not fear from competitors with better service and products.

    And then at the next earnings call, you'll hear Comcast et al crow about increased revenues and earnings - and not a penny invested into developing better technologies in order to deliver better values to their customers. Easy!

    Just watch, you can be guaranteed that ISPs like Comcast and TWC will do just that.

    Gloomily,

    Duuude1

  • Report this Comment On January 21, 2014, at 2:35 PM, AceInMySleeve wrote:

    Will ISPs attempt to make the argument that they are covering their costs across long haul or internet, or on their private networks? If they argue for long haul yet have an openconnect architecture they deliberately pass on they are headed for a PR nightmare. I'm not familiar enough to know if the local network argument makes any sense.

  • Report this Comment On January 21, 2014, at 3:31 PM, defigio wrote:

    >As more of these types of deals get signed, it'll become common for consumers to expect high-speed, high-quality delivery of Web television -- and they'll drop the ISPs that don't measure up.

    Tim, doesn't this assume a free marketplace in which consumers can easily switch to another ISP based on concerns about quality or price? The reality is, many consumers have little or no real choice of ISP, and are held hostage in coercive monopolies.

    I'm still holding my Netflix stock and generally have faith in the company's forward-thinking strategies — but in this unfolding environment of dissolving net neutrality, and given the impending acceptance of a closed internet controlled by a handful of ISPs, I'm concerned that Netflix, smaller innovative companies, and ultimately the consumer will all lose.

  • Report this Comment On January 21, 2014, at 3:52 PM, TMFMileHigh wrote:

    @Duuude1,

    Good articulation of the nightmare scenario. What's missing is the downside for ISPs.

    Say you're right and CMCSA and TWX take the new lighter limits on net neutrality to the extreme and jam both consumers and Netflix.

    How long will it be before Google, Amazon, Netflix, Apple, and every other provider with a determined loathing of latency invests billions to increase broadband options?

    I'm not just referring to Google Fiber, though I fairly think we can expect that service to expand.

    Rather, I'm referring to an explosion of ultra high-speed wireless. Or Netflix developing an OpenConnect drive that attaches to a Chromecast, Apple TV, etc. and caches elements of favorite streams locally, updating only in the wee hours of the morning when bandwidth costs are low, low, low, thereby muting the intended impact of throttling. You get the idea.

    Don't expect Hollywood to help, either. Studios (other than Comcast) care about distribution only insofar as cable and satellite providers (i.e., the major ISPs) pay retransmission fees, and the relationships seems get more contentious with each passing year.

    My point? The ruling makes it appear as though ISPs have *far* more power than they actually do.

    Thanks for writing and Foolish best,

    Tim

    --

    TMFMileHigh in CAPS and on the boards

    @milehighfool on Twitter

    http://about.me/timbeyers

    http://timbeyers.me

  • Report this Comment On January 21, 2014, at 4:00 PM, duuude1 wrote:

    Hey Ace, ISPs don't give a crap about PR nightmares. For the majors like Comcast, the first pressure is the loss of cable TV subs, so they are looking for any long-term replacement for those revenue losses. I know Comcast can't take advantage of this net neutering for a few years - but they will at the first opportunity.

    I'm also long (very long) NFLX, and will definitely hold long term through this. I anticipate a lot of volatility (much more than we're seeing now), and a lot of uncertainties as NFLX deploys whatever contingencies they've had planned for this latest court ruling.

    Actually, my "secret" wish is that the stock crashes like after the Qwikster fiasco so I can load up more again.

    Duuude1

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