Netflix Inc. (
recently admitted that the absence of "net neutrality" rules will
hurt its business over the long term. In a blog posted on Netflix
website Chief Executive Officer (CEO) Reed Hastings argued for
"strong net neutrality" rules, which will ensure smooth content
transmission to end users at no extra cost.
Netflix CEO lambasted
Comcast Corp. (
and other Internet Service Providers (ISPs) for extracting fees
from content producers as well as intermediate distributors such
and Level 3 for delivering data and services.
legal victory over Federal Communications Commission (FCC) at the
U.S. Court of Appeals on the net neutrality regulation paved the
way for these ISPs to charge extra fees.
In February this year, the company was forced to enter into an
annual fee-based contract with Comcast after subscribers
complained about the streaming quality of its shows. Netflix
blamed excessive traffic for the declining speed on Comcast
Netflix shows consume approximately 30.0% of peak Internet
traffic (particularly during the evenings) in North America.
According to Netflix, post the agreement net speeds increased
significantly, although it did not received any preferential
treatment from Comcast.
Netflix CEO said that the company will continue to pay for
directly accessing broadband network of ISPs in the near term.
This will help it to increase customer engagement and maintain
subscriber base amid intensifying competition from Amazon Prime
We believe that Netflix's change of stance related to net
neutrality suggests growing concern over escalating costs. The
deal with Comcast is a double-edged sword for Netflix, as it will
allow other ISPs to demand a similar kind of monetary
arrangement, which will dent Netflix's cash balances, going
Netflix is already facing significant headwinds related to rising
content costs. The company has $7.25 billion due for content
streaming obligations, out of which $2.97 billion needs to be
paid within the next 12 months. After that period, Netflix needs
to pay $3.27 billion within the next three years.
In such a scenario, Netflix's lobbying of "strong net neutrality"
rules is expected to put pressure on ISPs such as Comcast and
Verizon. Netflix hopes that its large customer base will attract
government attention to form new net neutrality regulations in
favor of content distributors and intermediaries.
However, we believe the whole process will take significant time
and lobbying. Large ISPs such as Comcast and Verizon will not
give up easily, as government intervention is likely to hurt
their business model, going forward.
Currently, Netflix has a Zacks Rank #3 (Hold).
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