Netflix Just Put Cable Companies on Notice

Netflix is playing hardball in the net neutrality debate. Image source: Netflix.

It wasn't very long ago that Netflix (NASDAQ: NFLX  ) was just a $2 billion business with roughly zero sway in national media debates. Sure, the upstart chimed in on the "cord cutting" phenomenon a few years back -- but only to stress that cable providers like Comcast (NASDAQ: CMCSA  ) and Time Warner had no reason to fear online video delivery.

Going so far as to embrace the "rerun TV" nickname, Netflix's management went out of its way in 2011 to explain how the streaming service was "complementary to, rather than competitive with" cable TV. "Don't worry about us," Netflix seemed to be saying, "We're no threat."

"We are a threat"
What a difference an extra $20 billion in market cap and another 20 million subscribers can make. Netflix is sounding a much different tone around the current net neutrality debate, choosing the stick over the carrot this time.

Here's what the company had to say in its latest quarterly letter (link opens PDF file), about the prospect of broadband providers like Verizon (NYSE: VZ  )  charging Netflix more for unimpeded delivery of video content to its customers:

Were this draconian scenario to unfold with some [Internet service provider], we would vigorously protest and encourage our members to demand the open Internet they are paying their [provider] to deliver.

There's no question that Netflix is talking about a real threat to its business here. As the company states in its 10-K, any new limits on net neutrality could hurt demand for the streaming service and raise costs, perhaps even putting its business model in jeopardy.

Why it won't happen
But Netflix knows of at least 36 million reasons that broadband providers won't choose to go down that road: That's the total number of paying members that the streamer had on its books at the end of 2013.

In addition to that massive subscriber base in the U.S., Netflix also has a strong global presence on social media, which it could marshal against any broadband provider that ventures across the net neutrality line. The company's Twitter account has more than 500,000 followers, and the "Netflix" hashtag routinely trends nationally during peak TV-watching hours.

Still, despite all the bluster, Netflix doesn't see it coming to fisticuffs like that. Here's what the company thinks will happen instead:

The most likely case, however, is that [Internet service providers] will avoid this consumer-unfriendly path of discrimination. [Providers] are generally aware of the broad public support for net neutrality and don't want to galvanize government action.

Netflix also has economics on its side, as broadband is a key growth driver for cable companies that they won't want to put at risk. Comcast, for example, saw its video subscriber base shrink by 300,000 in 2013 -- but that dip was more than offset by an increase of 1.3 million high-speed Internet customers.

Yet Netflix isn't leaving the argument up to just dollars and cents. The reference to "government action" in the above quote could be seen as another warning to providers. Remember that Netflix has ramped up its lobbying spending over the last few years, to a pace of about $1 million a year.

Foolish bottom line
Overall, Netflix seems to be telling broadband providers that any attempt to charge the company extra fees for handling its data will be met with a very public campaign against them and eventually more government regulation to boot.

That's a long way from the "everybody wins" tack that Netflix has taken in prior debates. But the company has a lot at stake here, and it seems ready to use every bit of its considerable leverage, if it needs to.

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Read/Post Comments (14) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 28, 2014, at 10:02 PM, blimey1 wrote:

    Sorry, but your argument only makes sense if NFLX passes on the higher costs to its customers.

    And we have seen how price sensitive they can be.

    Thus, if the broadband providers increase their fees NFLX's profitability will suffer.

    Why would their customers waste their time campaigning for something that does not directly benefit them?

  • Report this Comment On January 28, 2014, at 11:49 PM, hlasagna wrote:

    I would think that most people have a choice of one or possibly two ISPs that can provide high speed internet to their home.

    If an ISP decided to throttle Netflix or make users pay more, I don't think there's, they anything most customers could do about it,

  • Report this Comment On January 29, 2014, at 12:59 AM, sliderw wrote:

    @blimey1

    Netflix can refuse to pay those ISPs, let their mutual customers get lower-quality video resolutions, and blame it on the ISPs. This invalidates your argument.

  • Report this Comment On January 29, 2014, at 1:07 AM, blimey1 wrote:

    Blaming the ISP's achieves what?

    NFLX will not let quality suffer so they will be forced to increase prices or lower profits.

  • Report this Comment On January 29, 2014, at 8:36 AM, Fo45 wrote:

    Why my comments ae not published? Hope you are not biased toward the stock.

    Thank you

  • Report this Comment On January 29, 2014, at 1:50 PM, whoohah84 wrote:

    Spend millions lobbying, trying to control the little lemmings, How about companies start putting out a better product instead of trying to control me.

  • Report this Comment On January 29, 2014, at 2:09 PM, dogjudge wrote:

    Any and all entertainment providers should be joining Netflix.

    More and more people are cutting the cord. Add to that the number of people who don't subscribe to things such as HBO because they don't want to add to their cable/dish bill.

    Finally, it's going to be in the best interest to the entertainment providers to severe their dependency on the cable/dish companies. CBS's experience with Time Warner cable over the summer should be a huge wake up call to any entertainment providers.

    Now the only question to be asked. Would anyone actually PAY to get the Home Shopping Network?

  • Report this Comment On January 30, 2014, at 12:55 AM, charliewilliams8 wrote:

    I feel ripped off with comcast, I pay $100 a month and don't even get TCM. Also comcast started charging $2 a month for the little adapter boxes so I am not paying to protect someone else from getting free cable, eventhough I was told I would never have to pay for the boxes. I have Netflix too. I am going to quit cable at the very next rate increase. I plan to keep netflix and add amazon prime, and get an antenna for the local network channels.

  • Report this Comment On January 30, 2014, at 6:50 AM, Fo45 wrote:

    I would be careful cutting cord because, with Net neutrality gone you will find yourself paying the same amount or close to cable for a few good shows and couple of original content with shrinking library due to loss of license, increasing content cost and soon to pay for delivery of content . Let see how much Netflix costs $ 8.99 /11.99 + $ 80 Internet connection $88.99-91.99 ( no sports no on demand )

  • Report this Comment On January 30, 2014, at 10:43 AM, brike2001 wrote:

    The Internet is only as good as the contents it can deliver. It only makes sense to pay higher prices for super fast broadband if you can see movies, download/stream media. If that is not possible or just too expensive, we might as well go back to dial-up and use only text emails.

  • Report this Comment On January 30, 2014, at 4:30 PM, tom2727 wrote:

    Congress can do the net neutrality thing in a heartbeat if it becomes a problem. They are just waiting for an excuse to go there. The FCC already went there without any excuse.

    Netflix knows it. The internet providers know it. If people get PO'd about their slow Netflix, their Congressional reps will also get PO'd. And they can call hearings and put the Cable Company CEOs in the hot seat even if they don't have the votes to pass anything.

    I don't think the cable execs want Congress asking hard questions. Once that happens, the door opens for other types of new regulations which would be bad for cable company business.

    I don't see this as a big worry for Netflix. If the ISPs do any nibbling at net neutrality it will be something very subtle under the covers.

  • Report this Comment On February 01, 2014, at 8:19 PM, SamJ wrote:

    Our cable here was installed in the late 70's - early 80's. And we have gone through 3 companies since, With Time-Warner being the fourth. So as you can imagine T.W. Inherited a basket case, We no longer have T.W. Video as the signal would fluctuate so greatly that screen freeze and pixelation were common. And when you call in you get someone in a foreign call center, Who only knows how to push a button... No what is needed here is for netflix to have their very own distribution system. And since it's a one way feed, lag time is not an issue. So satellite makes the most sense. Yes there's going to be some minor issues, But looking at the dish companies now you can see what mistakes to avoid, And they have a better track record with satisfied customers over the cable companies. Please tell me what you think about this. Sam I am.

  • Report this Comment On February 03, 2014, at 6:01 AM, ashleyjames389 wrote:

    Netflix is going strong. but a subscription price increase will hurt them

    http://bit.ly/ReelingProfits

  • Report this Comment On February 03, 2014, at 10:26 AM, gskinner75006 wrote:

    All you are doing is moving the "cord" from Comcast to Netflix (and the like).

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