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Netflix Wins on Net Neutrality


Netflix customers will never side with the ISPs.

Netflix (NASDAQ:NFLX) is up huge today following its better-than-expected fourth-quarter earnings report, but the stock price isn't the whole story.

In its letter to shareholders, Netflix fired a shot across the bow at opponents of net neutrality, indicating that the company is ready to take its army of subscribers and go to the mattresses.

Net neutrality simply means that all data traffic is treated equally. However, Internet Service Providers, having spent billions of dollars building their networks, want control over the flow of information to suit their own business interests.

I subscribe to Time Warner Cable (NYSE:TWC). I'm sure the folks there would prefer it if people subscribed to premium channels and used their video-on-demand services instead of streaming movies on Netflix Instant.

In its comments, Netflix said, "The most likely case, however, is that ISPs will avoid this consumer-unfriendly path of discrimination. ISPs are generally aware of the broad public support for net neutrality and don't want to galvanize government action."

However, as confident as that may sound, the company also made a not-so-veiled threat:

In principle, a domestic ISP now can legally impede the video streams that members request from Netflix, degrading the experience we jointly provide. The motivation could be to get Netflix to pay fees to stop this degradation. Were this Draconian scenario to unfold with some ISP, we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver.

So what's the end game?

Well I think the net neutrality fight is vastly overblown, and Netflix has won by default.

Odds are it will never pay an extra penny to an ISP.

Here's the reality of the situation.

Netflix Instant is a very, very cheap service that people love, even more so with its growing array of proprietary content like the hit series House of Cards.

The content Netflix offers is way more valuable to the viewer than the pipe that delivers it. And any company that disrupts the functionality of Netflix Instant is going to face a customer service mess.

While it could be argued that the ISPs have the right to exploit the networks they've built to make as much money as possible, the consumer will always side with Netflix because again, what do they value? The content.

And pay TV companies, well, they already get a bad rap.

I went digging around for data on how people feel about the industry, and the numbers are pretty bad across the board.

According to the American Customer Satisfaction Index, the lowest-rated industry is Internet Service Providers, and the third lowest-rated industry is Subscription Television Service.

In fact, the US Postal Service is ranked far higher than every company in these businesses, including Comcast (NASDAQ:CMCSA), Verizon (NYSE:VZ), and Time Warner Cable.

Separately, market research firm Temken Group used a poll to rank the customer service of 235 companies. As you can see here, TV service companies brought up the rear in both individual company rankings:

And from an industry perspective:

Now let's take a hypothetical situation where we get to season three of House of Cards, and an ISP hits the brakes on the signal to get Netflix to pay up.

What would happen?

Well, I think the ISP gets thrown under the bus.

Netflix would tell its customers that the ISPs are unfairly demanding money to restore network performance, which would, of course, require higher prices for Netflix Instant service.

Does anyone really think people will just smile and say, "Okay, that's fair, I'll pay?" No, they'll blame the big, bullying ISP that is messing everything up.

Netflix will be fine.

Twitter: @MichaelComeau

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No positions in stocks mentioned.
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