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

Netflix is blaming Verizon for unreliable streaming service, while Verizon re-shifts the blame. So, what does this battle of faults mean for investors?

Jun 9, 2014 at 10:05AM

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:

Verizon Netflix Message

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.

Att Gigapower Speed

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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Brian Nichols owns shares of Verizon Communications. The Motley Fool recommends Netflix. 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.

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