Netflix Versus Verizon Communications: What Does This All Really Mean?

Verizon Communications  (NYSE: VZ  ) and Netflix  (NASDAQ: NFLX  ) seem to be in a war of words over who's to blame for slow streams. It all started with Netflix displaying a message to users that read, "The Verizon Network is crowded right now" during buffering delays. While the party at fault remains a mystery, the ongoing saga and problem itself further illustrates why companies like Verizon and AT&T (NYSE: T  ) must not only invest in wireless and spectrum, but also broadband.

A game of faults
In response to Netflix's message, Verizon's Vice President of Federal Regulatory Affairs, David Young, issued a statement saying:

The source of the problem is almost certainly not congestion in Verizon's network. Instead, the problem is most likely congestion on the connection that Netflix has chosen to use to reach Verizon's network. It would be more accurate for Netflix's message screen to say: The path that we have chosen to reach Verizon's network is crowded right now. However, that would highlight their responsibility for the problem.

Clearly, this game of faults has turned into a finger-pointing game of two well-respected companies whose growth and current market share rests in the ability to keep users happy with consistent and reliable services. Therefore, the continuous shift of blame may not be so harmless, and could consequently cause unsatisfied users to either unsubscribe from Netflix, or perhaps switch mobile providers to a competitor like AT&T. As a result, Verizon has sent a cease and desist letter to Netflix regarding the error messages.

After sending the letter, Verizon continued to defend itself by saying that there is no basis for Netflix to assert that issues with respect to playback of any particular video session are attributable solely to the Verizon network. While this statement still suggests Netflix is the problem, the language is a bit different from original statements, such as the use of "solely," perhaps implying that Verizon identifies the possibility of some fault on its end. Meanwhile, Netflix asserts that this issue is about consumers not getting what they paid for from their broadband provider.

Verizon may want to take notice
With that said, it's no secret that Verizon has focused most of its resources in the last six months on wireless, evidenced by its $130 billion purchase of the remaining 45% of Verizon Wireless, a business with operating margins close to 30%. Therefore, Verizon hasn't been as aggressive compared to many of its peers in the broadband space, specifically AT&T.

Currently, AT&T's U-verse has 11.3 million subscribers, and in 2013 was the company's fastest-growing segment at 25% year over year. Furthermore, U-verse now accounts for 10% of AT&T's total revenue. Therefore, it's a significant portion of AT&T's business and future plans. Moreover, U-verse's GigaPower has current speeds of 300 megabits per second, or Mbps, which is about 30 times faster than the average broadband service.

Consequently, AT&T has great content delivery services with the likes of Netflix due to these speeds, and recently announced initiatives to boost speeds to 1 gigabit per second, or Gbps, which would be 100 times faster than the average broadband. While this will be a pricey venture, AT&T is showing its emphasis on Internet and TV with this move. Therefore, considering AT&T and Verizon's ongoing attempts to gain a competitive edge over the other, it's simple to understand why Verizon has taken such offense to Netflix's response to slow buffering speeds.

Foolish thoughts
Netflix doesn't have a dog in the AT&T and Verizon fight, as the company providing the service is essentially irrelevant, as long as it's reliable. Therefore, it seems unlikely that these speeds are a problem on the Netflix end.

The bottom line is that such problems must be corrected by Verizon. The company might have an enormous wireless business, but with streaming data becoming more widespread, and consumers using smartphones and tablets for their Internet needs, Verizon must match the performances of its peers. If not, it will be left behind in this fast-growing space, and AT&T will gladly take on its disgruntled subscribers.

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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 June 09, 2014, at 10:21 AM, adamlevy wrote:

    Hey Brian,

    AT&T is just as bad, if not worse, for streaming video (not just Netflix) as Verizon. Just because they offer high speeds, doesn't mean the majority of its customers are subscribing to them.

    Check this out:


  • Report this Comment On June 09, 2014, at 12:09 PM, ekdikeo wrote:

    ... the average broadband rate in the US is still around about 10 megabit, not 100-megabit, as this article claims. ATT may potentially provide 300-megabit, but the places where that is available are likely practically non-existant. Comcast offers speeds pushing 60+mbps, but as far as I'm aware, they are the only provider that is able to move data that "fast" consistently across a sizeable portion of their customer base (other large tier cable providers may also be able to, but i don't live where there are any other large cable providers, so i can't really comment too much about that)

    Amusingly, this whole "debate" is pretty much a non-starter -- technically, it's just a few basic network testing tools away from being settled, and I'm reasonably certain that the Netflix software could easily discover where in the link a network bottleneck is.

    Verizon is well known for having an extremely fault-tolerant, highly reliable, and widespread wireless network. They are not highly respected in the consumer broadband business, for many reasons, and a big one being that their primary delivery method - telephone lines - is still technologically pretty far behind cable. Yes, technologically, the world has made leaps and bounds on what can be transferred via a DSL type connection, over the last many years, but it's just not moving anywhere near as fast as cable providers have, because the tech for delivering much higher speeds via cable just works already, and only their internals have required upgrades.

  • Report this Comment On June 09, 2014, at 11:55 PM, BrianNichols wrote:

    I said 300 Mbps was 30 times faster than average. Therefore, I wasn't implying that average was 100

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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