Why Netflix Won't Back Down in Its War With Verizon

Verizon (NYSE: VZ  ) and Netflix (NASDAQ: NFLX  ) are currently playing a giant game of legal chicken. But if a blog post from Netflix on Monday is any indication, neither company is willing to swerve.

Last Thursday, Verizon threatened Netflix with "legal remedies" if it didn't immediately cease using error messages calling it out for slow network speeds. In addition, Verizon gave Netflix five days to provide not only a list of all customers who received the notices, but also any evidence in its possession substantiating its claims the slow speeds are actually Verizon's fault.

Of course, putting aside the fact Netflix has already violated the cease and desist letter by allowing the error messages continue, its five days to comply with Verizon's other requests are technically up at the end of the day today.

Legal action it is?
But that just isn't going to happen. To be sure, when Netflix posted its latest ISP Speed Index on its official blog yesterday, it seemed crystal clear the company isn't particularly concerned about meeting Verizon's demands -- at least on Verizon's terms, anyway. 

For perspective, Netflix releases its ISP Speed Index each month to "provide transparency and help consumers understand the Internet access they're actually getting from their ISP." In this case, it's focused on the average Netflix stream consumers are able to enjoy, which was around 2 Mbps last month -- or significantly slower than the bandwidth most people actually purchase from their broadband providers.

Here's a look at Netflix's numbers for May:

Source: Netflix

Curiously Verizon and Comcast  (NASDAQ: CMCSA  )  were the only two companies to fall in the major ISP rankings for last month -- and Netflix even mentions the interconnection agreements it recently signed with both companies to deliver Netflix video "right to front door of an ISP." Still, the most recent post states, "Where the problem occurs is at that door [...]." 

To Verizon's credit, it did only sign the deal at the end of April, and recently told The Wall Street Journal it was working to fulfill its terms "over the next few months." Even so, at least Comcast customers saw a significant increase in Netflix performance only one month following their respective deal: Comcast's Netflix speeds jumped on the ISP index from 1.68 Mbps in February to 2.5 Mbps in March.

This time, however, Netflix's blog post contained a few more sentences specifically describing its current situation (emphasis mine):

As part of this transparency campaign, we started a small scale test in early May that lets consumers know, while they're watching Netflix, that their experience is degraded due to a lack of capacity into their broadband provider's network. We are testing this across the U.S. wherever there is significant and persistent network congestion. This test is scheduled to end on June 16. We will evaluate rolling it out more broadly. 

So, what else can we glean from this? First, it's not just Verizon that Netflix is targeting, but rather any broadband provider's network where there's congestion. It appears, then, that Verizon is simply taking its negative publicity harder than most.

It also looks like the June 16 end date of Netflix's "test" was preplanned, so it isn't a direct response to Verizon's legal threat. Finally -- and in contrast to the claims of Verizon's cease and desist letter, which places the onus of performance squarely on Netflix -- Netflix elaborated on the "toll booths" being erected by some US ISPs to provide "sufficient capacity for services requested by subscribers only when those services pay the toll."

Foolish takeaway
Unsurprisingly, Netflix thinks "these tolls are wrong because they raise costs, stifle innovation, and harm consumers." And Verizon, for its part, has little incentive to play nice considering it directly benefits from those increased costs.

As one of those consumers, I'm naturally inclined to applaud Netflix for its efforts. But I'd love to hear what you think. Should ISPs be able to erect toll booths to limit high-traffic services? Or are Netflix's efforts to lower costs more self-serving than anything? Feel free to weigh in using the comments section below.

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Read/Post Comments (6) | Recommend This Article (2)

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 10, 2014, at 3:28 PM, Collett224 wrote:

    Folks tend to forget that the Internet was built with investor money and not by the government. When another private company invents a way to hog the that network ( a high percentage of all internet traffic is Netflix) and make a lot of money doing it - as Netflix has done, something is out of kilter. To use Netflix's logic, Verizon and the other folks who built the internet should go on a huge construction spree solely so Netflix can make a pile of cash without contributing anything to the construction cost. Try that logic out in any other business. Maybe we should pay a flat rate for all the electricity we use.

  • Report this Comment On June 10, 2014, at 4:07 PM, john700 wrote:

    ...and other folks seem to forget that just because you invented the telephone, doesn't mean you get to collect revenue from all that travels over the wires in perpetuity. And when you try to do that, you end up in court where a judge says "monopoly", and then breaks you into smaller, more competitive pieces.

  • Report this Comment On June 10, 2014, at 4:36 PM, Collett224 wrote:

    The companies that own the Internet spend many billions of dollars every year to expand it and a lot of that goes to support one user - Netflix.

    Maybe the court should break up Netflix. Look at how many companies provide Internet access vs. one monster user.

  • Report this Comment On June 10, 2014, at 4:42 PM, 24penny wrote:

    So Al Gore shouldn't be collecting the tolls? urprise! He's not. I thnks there is a difference between inventing and building. Every drive on a turnpike? You pay for how much of the road you use each trip.

  • Report this Comment On June 10, 2014, at 4:47 PM, Mathman6577 wrote:

    I agree with Collett224. Reed Hastings (in the same mold of Jeff Bezos) is so typical of the crony capitalists who thrive in today's America. If you don't get your start whining to the media.

  • Report this Comment On June 11, 2014, at 11:06 AM, Skippy9250 wrote:

    You guys clearly do not understand the internet, nor know it's history.

    First, a major part of both the telecom and cable industry were built (and still are today) with many incentives to the companies that not only lower their cost but does it at the expense of tax payers. In addition to that the cable industry specifically was given exclusive rights (franchises) which not only prevented competitors but also kept rates artificially high. That same trend is in full force today without the exclusive agreements based on the shear fact that the industry has a huge barrier to entry that prevents competitors from entering.

    Second, Netflix is not causing a single bit of traffic on the internet and thus they have absolutely no responsibility to build it out for the ISPs. Netflix simply delivers the bits requested by the subscribers of the ISPs, just as this website does and both pay to be a part of the internet and to have those bits delivered to the people requesting them. Netflix just have a lot more bits to send and have a service (bits) that are in much more demand and they pay a lot more do to so than this website does. Regardless who those bits or from or what they contain is irrelevant to whether or not they should be delivered in the most efficient manner.

    Third, with #2 in mind, it is the ISP's own consumers stressing their networks because of the material on the internet that they want. It is NOT Netflix dumping unrequested traffic on their network. It was those same consumers that stressed the dial-up modems 20+ years ago and it will be those same consumers that stress the network 20 years from now when the next great service comes.As in the past, when an ISP's network can't handle the request that their subscribers, whom are paying them, are putting on it they need to upgrade it.

    Lastly, if ISPs do not want to invest in their networks they have 3 choices. 1.) Do nothing (current path) 2.) Raise rates to reduce subscribers 3.) Reduce the amount of data people can request by either implementing caps or lowering speeds.

    For the record, worldwide Netflix is only having this issue with 6 ISPs and every single one of them have a huge subscriber base which clearly shows they (the ISPs) are trying to use their subscribers as leverage to extort money out of Netflix and to redefine the entire system of how the internet has always worked.

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