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Is Verizon Evil, or Is Netflix Too Good?

Ever since Verizon (NYSE: VZ  ) emerged victorious in the legal tussle over net neutrality, everyone's been waiting for the battle to end all battles. Will Verizon throttle its bandwidth, lowering connectivity speeds to Netflix (NASDAQ: NFLX  ) and other data-heavy sites? 

It hasn't happened yet, but it's certainly starting to seem that way.

Netflix has spent the past few months trying to get ahead of the situation by sharing information on access. Every month, it updates its list of connection speeds of the country's 17 largest Internet service providers, or ISPs. The method to Netflix's madness is clear: By peeling back the curtain, Netflix could potentially expose any providers that are cheating their subscribers out of optimal access to the world's leading streaming video service. Let's call it ISP shaming.

Verizon's traditional DSL service -- not its faster FiOS platform -- was dead last in January. However, this isn't about trailing the 16 other leading ISPs. Someone has to be last, of course. The problem is that the quality is deteriorating. Ever since September, the average speed that Netflix viewers are experiencing through Verizon has diminished with every passing month according to Netflix's report.

Win-win has become lose-lose
Netflix's stance has always been that, even though access providers can now throttle Netflix, they are unlikely to do so. It's just bad business. As Netflix CEO Reed Hastings explained in last month's earnings call:

ISPs have a very profitable business and they want to expand that business. Part of delivering and expanding for consumers is having a good Netflix experience, a good YouTube experience, things like that. That's why people get higher speed broadband. And so I think actually our economic interests are pretty co-aligned which is how it's worked so far.

Netflix has gone as far as rolling out its Open Connect content delivery platform, so ISPs aren't as bogged down by the gargantuan chunks of data going out every night to Netflix customers. Some have embraced Netflix's offer for direct access to its growing digital vault at its eight independent facilities operated at Internet peering points. Verizon has been one of the holdouts, and that may be costing it now that Netflix is not only growing in popularity but starting to serve up enhanced viewing options that can be real data hogs. After all, it's probably not a coincidence that streaming has started to slow down -- and not just on Verizon's pipes -- since Netflix started making "Super HD" and 3-D video available from any ISP in September. That's when Verizon DSL speeds started to head south... and it's not alone.

The streams and the stream-nots
Comcast (NASDAQ: CMCSK  ) is another ISP giant that has not embraced Open Connect, and Netflix customers on Comcast's Xfinity are paying the price. According to Netflix, Comcast's average speed has gone from 2.11 Mbps in September to 1.51 Mbps last month.

The three fastest ISPs on Netflix's report -- Google Fiber, Cablevision Optimum, and Cox -- have all seen their speeds increase in that time, so clearly there's a divide.

Netflix is now serving 2 billion hours of content a month. It has more than 44 million domestic subscribers to its market-leading streaming service. As it becomes a more critical part of bandwidth consumption, it wouldn't be a surprise to see more members switch ISPs to those that are living up to their end of the bargain. However, this doesn't mean that Verizon, or even Comcast, is evil. Netflix is serving up more traffic through its growing popularity and the fatter files that it's pushing out. 

Nobody's innocent here and, unfortunately, some customers are paying the price.

Look for spare ammo between your sofa's seat cushions
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

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  • Report this Comment On February 13, 2014, at 12:10 PM, CMFJambo wrote:

    Thanks for this Rick. It clears things up a bit.

    I am a Verizon (VZ) stockholder and have their FiOS service. I am a Netflix customer (not stockholder) and have been happy until this phenomenon.

    Note my post on Dan Caplinger's Jan 16th article on Verizon copied here:

    <i>Go Big Red!

    As if on cue, my Netflix movie was interrupted last night by hiccups in my Verizon Wireless connection (4 times) - not like. And in the mail was an offer for an upgrade to Quantum and free movies from Redbox for a month.


    Disclosure - no Netflix stock - happy but concerned customer

    1/3 position VZ with a couple $47 LEAPS calls</i>

    An interesting article linked on the Netflix scoresheet page is

    In reviewing VZ's 2012 10K and their recent 4Q13 report I found a statement in the 2012 saying we are paring our ~16B capital expenditures in 2013. Well they spent 16.6 in 2013. My take: VZ is being squeezed on the top line by increased competition; by interest expense on the bottom line and spending to make Netflix customers happy isn't high enough on the priority list.


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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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