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Netflix CEO Turns Up the Heat on Comcast

By Alex Dumortier, CFA - Mar 21, 2014 at 10:15AM

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Netflix CEO Reed Hastings opens fire on Comcast's "arbitrary tax."

On the back of yesterday's rebound, U.S. stocks opened Friday's session in the black, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average ( ^DJI -0.17% ) up 0.36% each as of 10:15 a.m. EDT. Streaming movie and TV provider Netflix ( NFLX -2.33% ) is in the headlines this morning, and it's dragging Comcast ( CMCSA 0.54% ) down slightly.

Less than a month after Netflix signed an agreement with cable provider Comcast that would ensure improved delivery of its streaming content to customers, Netflix CEO Reed Hasting is letting the world know how he really feels in a blog post published yesterday, calling the interconnection fee a "toll" it had paid "reluctantly" and an "arbitrary tax."

Mr. Hastings' high-profile salvo comes at a sensitive time for Comcast, the largest cable-operator in the U.S., which will require regulatory approval in order to complete its $42.5 billion acquisition of the No. 2 operator, Time Warner Cable (NYSE: TWC). The combined company would have roughly a 40% market share among households that subscribe to high-speed broadband access in the U.S., so the notions of dominant position and the potential impact on consumers are front and center (The Wall Street Journal's Digits blog has put together a map of where the major broadband-providers compete.) Hastings certainly doesn't tiptoe around these issues in his post, shining a gigawatt spotlight on them instead:

Without strong net neutrality, big ISPs [Internet Service Providers] can demand potentially escalating fees for the interconnection required to deliver high quality service. The big ISPs can make these demands -- driving up costs and prices for everyone else -- because of their market position. For any given U.S. household, there is often only one or two choices for getting high-speed Internet access and that's unlikely to change. Furthermore, Internet access is often bundled with other services making it challenging to switch ISPs. It is this lack of consumer choice that leads to the need for strong net neutrality.

Net neutrality refers to the principle that ISPs should treat all Internet data equally and refrain from differential pricing based on user, content, site, application, etc. Netflix represents roughly a third of all prime-time downstream Internet traffic in the U.S.

I'm not convinced the fundamental issue in this situation is the interconnection fees for services like Netflix; ultimately, these will presumably be recouped from the consumer anyway, and without them, the cable companies can simply raise prices on their customers. However, Mr. Hastings' broader point regarding net neutrality and broadband providers' oligopolistic position stands. By the way, when was the last time you heard someone say something positive about their broadband provider?

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,580.08 (-0.17%) $-59.71
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$602.13 (-2.33%) $-14.34
Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$51.78 (0.54%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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