Netflix (NASDAQ:NFLX) is a big supporter of net neutrality. As a content publisher, it stands to reason that the company would appreciate anything that shifts the balance of power away from the Internet data pipe operators and closer to the media mavens.
That background is stirring up criticism against Netflix right now. The company's networking policies in Australia don't seem to mesh with Netflix's unblinking net neutrality support in America. Many a headline has called Netflix out for hypocrisy here; The Verge wondered out loud whether the net neutrality commitment was a lie all along.
However, I see a strong pledge for network neutrality in Netflix's actions Down Under. In fact, I believe it's a firm blow against data cap policies that threaten every digital media company on the planet, and it was struck under the convenient global spotlight of a pending Australian expansion.
Here's the thing that Netflix critics complain about.
In preparation for the March 24 launch of its streaming service in Australia and New Zealand, the company has signed a couple networking deals.
In Australia, high-speed Internet plans tend to come with bandwidth caps -- kind of like the data caps on mobile phones here in the U.S., where you pay more for a larger monthly allowance, and then either pay additional fees or have your connection speeds plummet if you exhaust that pool of bits and bytes.
That could put a damper on your average consumer's consumption of digital video streams, since these are just about the heaviest bandwidth drainers available today. So Netflix struck deals with second-largest Australian broadband provider, Optus and third-place rival iiNet, under which they set Netflix streams aside from their cap calculations. In other words, subscribers of those broadband services can watch all the Netflix video they want without running over their data caps.
This is similar to the Facebook Zero and Google Free Zone projects, in which Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG)(NASDAQ:GOOGL) have partnered with mobile operators around the world. Under these agreements, access to services like a text-only version of Facebook or the full Gmail experience is possible without eating into the user's data cap.
It's also something Netflix has been forced to deal with before. Canada was the company's first foreign market, and is another place where landline broadband services tend to come with data caps. Even in the domestic market, Comcast (NASDAQ:CMCSA) has tried its hand at broadband data caps in a handful of test markets.
To deal with these limitations, Netflix has tried a couple of strategies. In Canada, the Netflix service is set to one-third the quality and bandwidth consumption a U.S. customer would expect. The Comcast situation sparked public tirades from Netflix CEO Reed Hastings, who condemned the cable giant for applying data caps to other video services while exempting Comcast's own Xfinity streaming products.
"The same device, the same IP address, the same Wi-Fi, the same Internet connection, but totally different cap treatment," Hastings complained at the time. The Verge zeroed in on this logic, noting that Netflix is now doing exactly the same thing that its CEO recently complained about.
Apples and oranges
Well, it actually isn't the same thing.
In one case, Netflix is most likely paying Optus and iiNet a fee in exchange for a more user-friendly policy. It's the free market doing what it's supposed to do. Netflix might not like paying these fees, but it's the only option on the table for now. Nowhere along this data pipeline do I see one company abusing its strength in one market to gain unfair advantages elsewhere.
In the other, it's Comcast's Internet pipes bestowing unique advantages on the same company's own digital streaming services. Call it nepotism, racketeering, or an antitrust issue, but it all comes down to the same unhealthy thing: Comcast is using its dominant position in the Internet service market to put a stranglehold on competitors to its video services.
The official word
Netflix is forced to play a bit of political poker here, first to stave off a business-killing data cap from its own operations and then to discourage such money-grabbing network policies altogether. On a global scale, Netflix would love to see data caps simply go away -- particularly on the hardwired, landline side where users aren't even competing for scarce radio spectrum resources.
Facebook and Google would agree, and so would every entrepreneur with a bandwidth-hungry business idea. These companies are spearheading a broader change of attitudes against data caps and limited Internet access.
I'm not just making wild guesses here. Netflix responded to The Verge's flip-flopping accusation with this terse statement: "Zero rating isn't great for consumers as it has the potential to distort consumer choice in favor of choices selected by an ISP. We'll push back against such efforts, but we won't put our service or our members at a disadvantage."
Then, at an industry conference on Wednesday, Netflix CFO David Wells weighed in with a fuller explanation.
"There have been some studies showing that consumers are willing to drop many other things -- including buying milk -- before they drop their broadband. That's a pretty strong indicator that you've got something that has become a utility..." Wells said.
He added: "We want there to be a solution where strong net neutrality is protected by the government or protected by industry practice. But in the absence of that, we are not going to put our consumers in a position where they suffer, and so ... that's why we did the [interconnection] deal with Comcast and that's why we did the deals in Australia."
In other words, the long-term goal to achieve fair and efficient networking policies everywhere remains in place. In the long run, broadband access should be as open and freely available as electric power or clean water. It's just that the company must strike a compromise every now and then until that grand ambition has been realized.
If Netflix, Facebook, and Google can avoid the caps, consumers will eventually expect uncapped communications everywhere. Service providers can then set themselves apart from the competition in a new way -- sure, we have low prices and high speeds, but we also don't penny-pinch you with a restrictive data cap like those other guys are doing!
So, no, I don't see Netflix sinking into a sea of hypocrisy and rapid coat-turning. I see a digital media leader doing what it must in order to succeed in the current business world, while also undermining the business case for having data caps at all.
It's going to be a long struggle. Netflix is just using the global spotlight from a high-profile service expansion to spread the word. And I have no problem with any of that.
Whether you agree, disagree, or would just like to clarify what's wrong with this thinking, the comments box below is waiting for your input.
Anders Bylund owns shares of Google (A shares) and Netflix. The Motley Fool recommends Facebook, Google (A and C shares), and Netflix. The Motley Fool owns shares of Facebook, Google (A and C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days.
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