These are paying customers, accessing the service from unauthorized locales, using various types of computer networking trickery. Netflix's content providers don't like this, because they'd rather get paid again for each new geographical market's license for the same video content. So, the story goes, Netflix is locking out foreign users of virtual private networks.
Some parts of this story are legit. Netflix does have a significant number of paying customers in markets that don't have access to the service yet. Australia is said to have about 200,000 such VPN-slinging Netflix subscribers, though the company won't officially open its doors there until later this spring. Japan is another hot spot, with no properly licensed Netflix service on the horizon at all. The movie industry would much rather continue pushing DVDs, Blu-rays, and whatever local streaming options might exist in these markets until Netflix starts paying for the correct multinational licenses.
However, most of this supposed VPN crisis is complete baloney and easily debunked. So let's do some myth busting.
Myth No. 1: This is all about VPN users
First, the original report from TorrentFreak about Netflix blocking VPN users actually focused on a DNS change. The latest version of the Neflix app for Android devices will ignore the name server settings on your phone or tablet, with a reference to Google 's (NASDAQ:GOOG) (NASDAQ:GOOGL) free DNS service hard-coded into the app.
Netflix customers Down Under and elsewhere who had simply pointed their systems to an American name server were thus out of luck. The Google DNS service pays attention to where you're connecting from, and the 126.96.36.199 gateway will point you to a nearby DNS server with local results on tap. That means asking for the computer-readable address to www.netflix.com will give you different results when connecting from Florida or Nebraska, not to mention from its foreign markets in Europe and Latin America. And trying it from Tokyo or Sydney won't get you to a usable Netflix service at all.
Instead, you'll see this helpful error message:
But using a different DNS server with nothing but American results is a far cry from VPN services.
TorrentFreak did note that Netflix might have blocked the numerical addresses of a few virtual private networking services. These services work by redirecting your entire online traffic flow through a "tunnel," making the target servers believe you're actually sitting at the other end of the VPN connection. So you could set up a VPN connection from Osaka to Frankfurt, then fire up a Web browser and automatically start surfing the German version of Netflix (or Google, or the Fool, or whatever your heart desires).
For all intents and purposes, your computer just moved to another continent. Localized DNS results will point you to German servers, not Japanese ones. And the German Netflix service will work, albeit with some drawbacks.
For one, introducing more machinery between you and Netflix's servers could result in choppy, low-quality video streams. That's only more true when reaching for content several continents away. In some cases, VPN-connected video streams can be downright unwatchable.
Those intrepid Netflix users abroad also have to pay for a VPN service, since high-quality free services are about as common as chicken teeth. So the low-cost entertainment value of Netflix goes down while the experience becomes worse.
But this type of true VPN networking is extremely difficult to block from Netflix's side of things.
Sure, you can identify the numerical network address ranges used by every available VPN service, and then deny access to users coming through one of these VPN portals. But that's a logistical nightmare and will also block perfectly authorized Netflix members who prefer using VPN networks to protect their online privacy.
Rival video streamer Hulu has been doing something like this for about a year, but is stuck playing a long game of whack-a-mole as VPN providers move their portals around and new services keep starting up. Moreover, privacy-minded users grumble about disconnecting their VPN services before enjoying a Hulu show -- especially over public Wi-Fi networks and other insecure locations.
Myth No. 2: Blocking VPN is a great idea
In practice, it's not a sustainable policy and is more likely to drive frustrated users deeper into nonpaying piracy. The only entities that can get away with these draconian efforts on a large scale tend to be countries such as China and Iran. It's the kind of effort that makes Edward Snowden reach for a second cup of coffee and an encryption tool. A consumer-oriented business with real commitment to the same idea makes no sense at all.
I find it highly unlikely that Netflix would go down that dark path, and the company has indeed said nothing of the sort is happening.
Speaking to The Next Web, a Netflix spokesperson clarified that it is treating VPN connections the same way as before. "Netflix simply uses industry standard methods to prevent illegal VPN use," is the official word. Indiscriminately blocking entire networks on the grounds that some users might be using them to sneak around geographic restrictions is not a standard method.
Myth No. 3: These people are trampling all over Netflix's terms of service
There is some truth to this one, but the situation is not nearly as cut-and-dried as you might think. Netflix has worded its terms of service very carefully. The things you explicitly can and cannot do never mention VPN services, Web proxies, or DNS redirection. The user agreements are actually full of loopholes.
You may view a movie or TV show through the Netflix service primarily within the country in which you have established your account and only in geographic locations where we offer our service and have licensed such movie or TV show. The content that may be available to watch will vary by geographic location. Netflix will use technologies to verify your geographic location.
For example, we may use the information we collect for purposes such as determining your general geographic location, providing localized content, providing recommendations on movies and TV shows we think will be enjoyable, determining your Internet service provider and helping us quickly and efficiently respond to inquiries and requests ... preventing, detecting and investigating potentially prohibited or illegal activities, including fraud, and enforcing our terms (such as determining free trial eligibility).
Then there's the license agreement for Netflix-owned software:
As a condition of the limited license for the Software granted to you in this License Agreement ... you may NOT view any movies & TV shows provided by Netflix or its suppliers anywhere other than within the country or location authorized by Netflix.
Long story short, Netflix cares about your physical location and is taking reasonable steps to figure out where you're connecting from. The company respectfully asks you to abide by its geographically restricted content licenses and might cancel your account if you work around them.
But there's some wiggle room here. You're asked to watch content "primarily within the country in which you have established your account." It would be silly to prohibit using the Irish service from a vacation hotel room in Dublin, right? And as far as Netflix can tell, using the best industry practices available today, a VPN user connecting from New York should be treated as an American. There's simply no way to know whether that user actually slotted into that VPN pipe from a Manhattan coffee shop or from a Korean Internet café.
The strictest limitation in this text comes from the software license agreement. Here, you're told in no uncertain terms that you're not allowed to view Netflix content in the wrong -- meaning "unlicensed" -- location for each particular movie or TV show. You'll note that Netflix keeps its geographic detection notice in a separate agreement. I'm no lawyer, but that hands-off approach seems designed to shift the responsibility for respecting license terms closer to the user.
Responding with reason
All of these issues will remain if and when Netflix blankets the planet in streaming video services. Even then, a show available in Colombia might not be viewable from Dallas, and vice versa. So Netflix will continue fighting the VPN flea-flicker move as long as it's in the streaming business. But in this particular case, Netflix has only disabled a far less potent networking trick that has nothing to do with real VPN tunnels, and I don't see that changing anytime soon.
The best way to defeat VPN-equipped "pirates" is to keep expanding the service and offering a stronger content catalog everywhere. Rest assured that Netflix is working on these essential measures, even if critics also worry about the costs of growing too quickly.
It's not just the right thing to do -- it's the only reasonable way forward.
Anders Bylund owns shares of Google (A shares) and Netflix. The Motley Fool recommends Google (A and C shares), and Netflix. The Motley Fool owns shares of Google (A and C shares), and 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.