Netflix’s Lost Battle Sets up a Nice Victory in the Longer-Term War

Netflix (NASDAQ: NFLX  ) was recently forced into a peering deal with Time Warner (NYSE: TWC  ) , following similar agreements with Comcast, Verizon, and AT&T to pay a fee to these service providers for streaming Netflix's content. Essentially, these deals ensure that Netflix customers won't encounter problems with streaming content by providing the company direct access to a network, which Netflix CEO Reed Hastings believes should be a standard service. Thankfully for Hastings, major industry changes, along with the growth of his company, suggest that Netflix will ultimately win this war.

Four deals to serve common customers
Video streaming requires lots of data, so much that when Netflix customers watch a movie or show, buffering and slow download speeds often occur in the absence of a direct connection from Netflix's servers to the Internet provider's network. As a result, Netflix has agreed to these deals, with undisclosed terms, to gain direct feeds that should enable more consistent downloads and a better viewing experience for subscribers who receive Internet service from these companies.

Source: wikipedia.

First, Netflix signed a peering deal with Comcast, then Verizon and AT&T, and now Time Warner. Clearly, a better viewing experience is a big win for consumers, especially for the millions who have abandoned cable and satellite in favor of the much cheaper Netflix. However, Netflix's CEO is far from enthusiastic.

Reed Hastings not happy, but has no choice
Reportedly, Netflix is responsible for nearly one-third of all Internet traffic. Given this information, it is no surprise that the company's services are putting a major strain on Internet providers, and that those providers would want a little extra incentive. Still, Hastings insists that such deals are complete opposite of net neutrality, arguing in a blog post: "To ensure the Internet remains humanity's most important platform for progress, net neutrality must be defended and strengthened. The essence of net neutrality is that ISPs such as AT&T and Comcast don't restrict, influence or otherwise meddle with the choices consumers make."

Hastings offered a strong case against the reasoning for Netflix having to share the costs it creates through such high Internet activity: "ISPs sometimes point to data showing that Netflix members account for about 30% of peak residential Internet traffic, so the ISPs want us to share in their costs. But they don't also offer for Netflix or similar services to share in the ISPs revenue, so cost-sharing makes no sense."

The CEO concluded the posting with this thought: "Some big ISPs are extracting a toll because they can -- they effectively control access to millions of consumers and are willing to sacrifice the interests of their own customers to press Netflix and others to pay." Essentially, Hastings argued that big Internet providers are forcing Netflix into this position because they can, and because they hold all the leverage, not realizing that their customers also want to enjoy the Netflix experience.

Don't worry Hastings, leverage is coming soon
Netflix has more than 50 million global users, meaning that it has likely hurt growth of cable and satellite, and perhaps suggesting why Internet service providers, who often offer TV packages, are content with its slower download speeds and a less than favorable experience. However, Netflix now has expectations for faster speeds as a result of these deals, and isn't afraid to point the finger when service providers don't meet their end of the deal -- thereby making Hastings' company look superior to the public eye. But its greatest asset, and perhaps the consumer's best friend, is a new business from Google  (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) .


Google Fiber is a transcendent Internet service with download speeds that are up to 100 times faster than the average broadband Internet; it can download 100 photos in just a few seconds, or an HD movie in minutes. Already, the launch of Google Fiber in three cities and rollout into 34 additional areas has created widespread panic and action by Internet service providers, along with incredible consumer demand. In an industry that has refused to upgrade speeds for many years while technology demands more capacity and performance, Google Fiber might be Netflix's greatest advantage against these Internet providers.

Foolish thoughts
With Fiber taking the U.S. by storm, investors and consumers should feel secure that its network is more than capable of handling Netflix's demand, and that Internet providers as an industry will be forced to either upgrade their networks or become irrelevant within this space. So Netflix might appear vulnerable right now, being forced into unnecessary peering deals. But, with all of its macro advantages, its growing base of users, and the rise of Google Fiber, Netflix's lost battle against service providers will only set up a much more rewarding victory in this war.

Your cable company is scared, but you can get rich
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. 



Read/Post Comments (1) | Recommend This Article (4)

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 August 25, 2014, at 12:38 PM, ID10Terror wrote:

    what I see from this is ....I pay a ISP for internet access

    I pay Netflix for access to movies

    Netflix pays the same ISP to deliver movies that I am paying to get movies ..."double dipping"

    and I get hit with data caps for using Netflix even tho the ISP is getting payed twice ?

    example I have ATT with a 150 gig cap , I have Netflix , ATT sends me letters ALL the time that I have gone over my 150 gig a month cap

    well if Netflix is footing the bill for data usage of its service ....why do I still get hit for using the service?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3079828, ~/Articles/ArticleHandler.aspx, 9/4/2015 2:52:26 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

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.

Today's Market

updated Moments ago Sponsored by:
DOW 16,038.34 -336.42 -2.05%
S&P 500 1,913.80 -37.33 -1.91%
NASD 4,661.10 -72.40 -1.53%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 2:36 PM
GOOG $599.10 Down -7.15 -1.18%
Google (C shares) CAPS Rating: ****
GOOGL $628.98 Down -8.07 -1.27%
Google (A shares) CAPS Rating: ****
NFLX $97.73 Down -3.33 -3.29%
Netflix CAPS Rating: ***
TWC $187.08 Down -1.00 -0.53%
Time Warner Cable,… CAPS Rating: **