This week's "net neutrality" ruling appeared to give Internet providers the right to punish companies like Netflix with extra fees for gobbling up all their bandwidth. Is Netflix doomed?
That's the question many people are asking, but it's really two separate questions. The first question is: Did this court decision kill net neutrality forever? The second, related, question is: If Internet providers like Verizon force Netflix to pay, is Netflix's business model doomed?
Despite the company's sharp stock hit just after this week's decision broke, there's good reason to think the answer to both questions is a hearty no.
First, a definition: "Net neutrality" is the idea that Internet providers like Verizon can't discriminate against certain types of data. They can't make Netflix stream slower than TheAtlantic.com (or Quartz), and they can't make Netflix (or TheAtlantic.com) pay extra to get the same treatment.
Although this week's ruling killed the FCC's current net neutrality rule, it didn't kill net neutrality. In fact, it ruled FCC still has sweeping powers to protect an equal and open Internet, by reaffirming the FCC's broad regulatory authority over broadband providers. In an angry dissenting opinion, DC Circuit Judge Laurence Silberman wrote that the ruling gave "the FCC virtually unlimited power to regulate the Internet" in the future.
There is an even easier solution for net-neutrality fans. The FCC could decide it has the political cover and popular support to declare broadband providers utilities, like landline phones or roads. This would make Internet providers subject to so-called "common carrier" rules, which would keep them from discriminating against certain services, such as Netflix.
For now, however, the ruling seems to give providers like Verizon the right to charge certain content providers based on how much bandwidth they're using. And since video companies are the behemoths of bandwidth (Netflix, alone, takes up about a third of US bandwidth at peak hours), Netflix seems to be first in line for fees. But we're a long way from Internet providers actually threatening to charge Netflix, and even further from those charges actually destroying a service beloved by a consumer population larger than Ohio and New York, combined.
First, providers could ask Netflix to pay extra, and Netflix could say no. What happens then? Maybe Netflix streaming would slow for 30+ million American viewers. But is that worse for Netflix or the carriers? If the company refuses to pay extra for high-quality streaming and their video service declines, millions of people will notice—and blame their Internet providers (who have horrible customers service reputations,) rather than Netflix (whose consumer reputation is sterling). The fact that Time Warner Cable just lost hundreds of thousands of subscribers over a retransmission fee battle with CBS is a looming lesson, here.
But let's say net neutrality is doomed, and the Internet providers are never classified as utilities subject to common carrier laws, and Netflix loses its public-relations war over new charges. What then? If Netflix raises its monthly fee from $8 to $9, it stands to make an extra $330 million—and that's even assuming that 10 percent of its users abandon the streaming service over the price hike. That should be enough to offset even an aggressive new fee. (In fact, some analysts even suggested the ruling was an opportunity for Netflix if the company decided to pay for preferential treatment—i.e.: buy a "fast lane" on the Internet.)
Investors dumped Netflix after the ruling, because overreacting to news is what investors do. But everybody else should chill, for now. Netflix is a cheap, popular, and growing product with enormous good will, and Internet providers are still in line for a knock-down-drag-out fight with the FCC (and, potentially, consumers) over net neutrality.
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