By Sahil Patel
The District’s US Court of Appeals’ decision to strike down “net neutrality” rules in favor of giving more control to broadband providers has many concerned about how this will affect the biggest hogger of web traffic — Netflix. So much so that Netflix’s stock price dipped 4.5% in early trading this morning. It makes sense: If broadband providers are now able to charge online companies extra for preferred treatment (for greater bandwidth and faster delivery of content), Netflix, which relies on the cable-dominated broadband ecosystem in the US, will have to pony up more cash in order to even maintain the current quality of their user experience.
Netflix could either eat these extra costs (which would obviously hurt the bottom line), or transfer them over to its customers (which isn’t a PR scenario it wants to get into). Hence the small slide in the company’s share price this morning.
According to BTIG analyst Rich Greenfield, Netflix — as well as other bandwidth-hogging companies like Google/YouTube and Amazon — has nothing to worry about. “In theory, ISPs (such as Time Warner Cable, Charter, Verizon, etc.) can now legally discriminate, creating paid fast-lanes and non-paying slow-lanes on the Internet,” writes Greenfield. “Yet, from an economic sense that behavior appears irrational.”
As Greenfield explains it, the relationship between online services like Netflix and ISPs like Verizon and Time Warner Cable isn’t a one-way street. Cable providers rely on broadband for a huge chunk of their revenue (especially as TV content costs continue to rise). If subscribers sign up for higher tiers of broadband service, with the expectation that they will have access to higher speeds, it would not look well if they have difficulty watching content on Netflix or YouTube, which is, again, something a lot of broadband users really like to do (Netflix and YouTube account for more than half of peak downstream traffic).
“If all of a sudden, an ISP said to Netflix ‘pay us for access to our broadband customers or we will slow you down,’ and Netflix refuses to pay, the ISP ends up hurting its own customers and discouraging those subscribers from using the service that is driving them to pay for faster broadband speed tiers in the first place,” says Greenfield.
What’s more, Greenfield notes how the DC Court of Appeals did not strike down disclosure requirements, which means that broadband providers would have to publicly report which services they were “discriminating against.” “With this knowledge, we suspect consumers might shift to other ISPs and/or complain to Congress,” says Greenfield. “In the end, discriminatory behavior appears self-defeating and is likely to lead to harsh government regulation.”
As for YouTube — the other big traffic hog on the web — Greenfield predicts that if ISPs don’t play fair, the video site’s parent company Google could get even more serious about Google Fiber, its upstart broadband and pay-TV service that offers speeds 100 times faster than most broadband services in the market today.
In other words: Everybody chill out.