Netflix (NASDAQ:NFLX) CEO Reed Hastings posted a strong message on the company's blog in favor of net neutrality.
The company recently completed a deal with Comcast (NASDAQ:CMCSA) where it pays for Netflix subscribers to have a better experience on the Internet service provider. Netflix made the deal but Hastings clearly did it as stop-gap measure and he is now speaking out against the need for more similar agreements with other ISPs.
"Netflix believes strong net neutrality is critical, but in the near term we will in cases pay the toll to the powerful ISPs to protect our consumer experience," he wrote. "When we do so, we don't pay for priority access against competitors, just for interconnection. A few weeks ago, we agreed to pay Comcast and our members are now getting a good experience again. Comcast has been an industry leader in supporting weak net neutrality, and we hope they'll support strong net neutrality as well."
What is net neutrality
Often called open Internet, net neutrality is the idea that Internet service providers are not allowed to discriminate against certain types of Internet traffic by intentionally slowing it down.
"Companies that provide Internet services should treat all lawful Internet content in a neutral manner. It is the founding principle of the Internet and what allows the Internet to be the largest and most diverse platform for expression in recent history," according to InternetSociety.org.
Why net neutrality matters to Netflix
Netflix uses a lot of data. The company accounts for nearly 30% of all Internet traffic in North America, according to Sandvine. That's far more than closest rival YouTube, which accounts for over 16% of all traffic.
If ISPs have the legal right to decide that Netflix (and other bandwidth hogs) account for too much of the traffic on their networks they could decide to limit access. The ISPs have the ability to make Netflix a bad user experience for its customers, clearly something Netflix wants to avoid -- even if it means making deals like it did with Comcast, which Hastings clearly finds distasteful.
Some major ISPs, like Cablevision, already practice strong net neutrality and for their broadband subscribers, the quality of Netflix and other streaming services is outstanding. But on other big ISPs, due to a lack of sufficient interconnectivity, Netflix performance has been constrained, subjecting consumers who pay a lot of money for high-speed Internet to high buffering rates, long wait times, and poor video quality. A recent Wall Street Journal article chronicled this degradation using our public data.
Once Netflix agrees to pay the ISP interconnection fees, however, sufficient capacity is made available and high-quality service for consumers is restored. If this kind of leverage is effective against Netflix, which is pretty large, imagine the plight of smaller services today and in the future. Roughly the same arbitrary tax is demanded from the intermediaries such as Cogent and Level 3, who supply millions of websites with connectivity, leading to a poor consumer experience.
Comcast does not agree
Comcast, as you might imagine, does not agree with Hastings on the subject of net neutrality. The company took issue with Hastings in a statement. According to USA Today, the nation's largest ISP said Thursday it "supported the FCC's Open Internet rules because they struck the appropriate balance between consumer protection and reasonable network management rights for ISPs."
Some net neutrality must be protected
While Hastings has some obvious self-interest in maintaining net neutrality, he does have a point. If ISPs have the arbitrary ability to charge content providers for access they could use that power to impact what content their subscribers can see. Maybe they will charge video providers that hog bandwidth or maybe they will throttle down content they find objectionable.
Comcast and the ISPs also have a point -- if one company is taking up a third of the bandwidth, it's not unreasonable to ask for them to pay for using such a large share of resources. It's similar to how gas taxes and tolls are used to pay for roads. FedEx (NYSE: FDX) and UPS (NYSE: UPS) pay more in taxes and more in gas than you or I do because they use the highways more.
Netflix should not be ransomed nor should ISPs have the right to ransom companies by holding the service level they can provide to their customers hostage. This is the rare case when either the content world and the ISPs need to make a deal -- for standard fees based on percentage of use -- or the FCC needs to get involved to set a standard to make sure there is no discrimination based on content or provider.
Daniel Kline has no position in any stocks mentioned. He has a Netflix account that he rarely remembers to use. The Motley Fool recommends FedEx, Netflix, and United Parcel Service. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.