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Netflix Just Put Cable Companies on Notice

By Demitri Kalogeropoulos – Jan 28, 2014 at 3:30PM

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On the issue of net neutrality, Netflix isn't exactly playing nice.

Netflix is playing hardball in the net neutrality debate. Image source: Netflix.

It wasn't very long ago that Netflix (NFLX -0.22%) was just a $2 billion business with roughly zero sway in national media debates. Sure, the upstart chimed in on the "cord cutting" phenomenon a few years back -- but only to stress that cable providers like Comcast (CMCSA 1.34%) and Time Warner had no reason to fear online video delivery.

Going so far as to embrace the "rerun TV" nickname, Netflix's management went out of its way in 2011 to explain how the streaming service was "complementary to, rather than competitive with" cable TV. "Don't worry about us," Netflix seemed to be saying, "We're no threat."

"We are a threat"
What a difference an extra $20 billion in market cap and another 20 million subscribers can make. Netflix is sounding a much different tone around the current net neutrality debate, choosing the stick over the carrot this time.

Here's what the company had to say in its latest quarterly letter (link opens PDF file), about the prospect of broadband providers like Verizon (VZ 1.04%) charging Netflix more for unimpeded delivery of video content to its customers:

Were this draconian scenario to unfold with some [Internet service provider], we would vigorously protest and encourage our members to demand the open Internet they are paying their [provider] to deliver.

There's no question that Netflix is talking about a real threat to its business here. As the company states in its 10-K, any new limits on net neutrality could hurt demand for the streaming service and raise costs, perhaps even putting its business model in jeopardy.

Why it won't happen
But Netflix knows of at least 36 million reasons that broadband providers won't choose to go down that road: That's the total number of paying members that the streamer had on its books at the end of 2013.

In addition to that massive subscriber base in the U.S., Netflix also has a strong global presence on social media, which it could marshal against any broadband provider that ventures across the net neutrality line. The company's Twitter account has more than 500,000 followers, and the "Netflix" hashtag routinely trends nationally during peak TV-watching hours.

Still, despite all the bluster, Netflix doesn't see it coming to fisticuffs like that. Here's what the company thinks will happen instead:

The most likely case, however, is that [Internet service providers] will avoid this consumer-unfriendly path of discrimination. [Providers] are generally aware of the broad public support for net neutrality and don't want to galvanize government action.

Netflix also has economics on its side, as broadband is a key growth driver for cable companies that they won't want to put at risk. Comcast, for example, saw its video subscriber base shrink by 300,000 in 2013 -- but that dip was more than offset by an increase of 1.3 million high-speed Internet customers.

Yet Netflix isn't leaving the argument up to just dollars and cents. The reference to "government action" in the above quote could be seen as another warning to providers. Remember that Netflix has ramped up its lobbying spending over the last few years, to a pace of about $1 million a year.

Foolish bottom line
Overall, Netflix seems to be telling broadband providers that any attempt to charge the company extra fees for handling its data will be met with a very public campaign against them and eventually more government regulation to boot.

That's a long way from the "everybody wins" tack that Netflix has taken in prior debates. But the company has a lot at stake here, and it seems ready to use every bit of its considerable leverage, if it needs to.

Demitrios Kalogeropoulos owns shares of Netflix. The Motley Fool recommends Netflix and Twitter. The Motley Fool owns shares of Netflix. 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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