Why the Loss of Net Neutrality Won’t Hold Netflix Stock Back

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Thursday was a busy news day for Netflix, Inc. (NASDAQ: NFLX ). And, at first glance, it seemed quite negative for NFLX stock. Regardless, Netflix popped as much as $5 higher on the day, and closed solidly in the green. What happened, and is the market's reaction correct?

As part of his wide-ranging CNBC interview, noted short-seller Jim Chanos suggested that he is considering shorting NFLX stock in the future. His justification: Netflix's recent price hikes won't increase profit margins. Instead, he suggests the price increases merely offset increasing content costs.

On a normal day, that'd be your top NFLXstock news However, given Thursday's developments, there were bigger fish to fry. Next up, Walt Disney Co (NYSE: DIS ) confirmed that it is making a $52 billion bid for a large portion of Twenty-First Century Fox Inc (NASDAQ: FOXA ).

This potentially can cause a lot of trouble for Netflix. It gives Disney a much more dominant position in content. Disney can leverage this in several ways. For one, it will now have majority control of Hulu, and can strengthen that service's competitive position. On top of that, it makes Disney's standalone streaming service even more attractive to potential customers when compared to Netflix.

But no, even that wasn't the top story of the day for NFLX stock. That honor falls to the Federal Communication Commission's decision to override the 2015 net neutrality decision.

What Net Neutrality Means For Netflix

Much popular commentary analyzing the net neutrality debate have framed it as a war between telecom companies and internet giants. A battle of the likes of AT&T Inc. (NYSE: T ) and Comcast Corporation (NASDAQ: CMCSA ) on one side, with Alphabet Inc (NASDAQ: GOOG ,NASDAQ: GOOGL ), Netflix, and other such tech titans on the other.

In theory, broadband providers will now have the ability to favor or penalize certain content by changing the speed. Proponents of the switch argue the internet functioned this way in the United States until 2015 without issue. Bandwidth providers rarely used their power to throttle bandwidth, and when they did, it was often related to legally dubious traffic such as Bittorrent and other piracy networks.

On the other side, net neutrality supporters suggest the rule is necessary to keep the internet fair and open for all. They claim that the likes of Comcast and AT&T will now be able to decide the winners and losers of the internet and potentially even muzzle political commentary. There's a great deal of vitriol on both sides.

Why NFLX Is Pro Net Neutrality

I'm uncertain which side has the better arguments. I've lived in both types of internet markets, and not seen a significant difference in service quality. To be honest, it's a highly technical issue, and both sides are in danger of oversimplifying their arguments to garner support on social media.

That said, if you own NFLX stock, you should probably be rooting for net neutrality to survive as far as your investments go. Netflix came out firing with this statement Thursday following the FCC's decision: "We're disappointed in the decision to gut #NetNeutrality protections that ushered in an unprecedented era of innovation, creativity & civic engagement. This is the beginning of a longer legal battle. Netflix stands w/ innovators, large & small, to oppose this misguided FCC order."

Netflix may oppose the decision fully for those noble reasons stated above. However, there's a more business-centered reason for them to be concerned. In theory, an internet service provider could charge Netflix more to send their bandwidth over the ISP's fiber. This sort of charge could be justified on the basis that Netflix uses a disproportionate portion of an ISP's overall capacity. Therefore, it follows, they should foot part of the bill.

To be clear, this is different from what much of the media has been discussing this week. In many other countries (such as the one where I live), internet and or mobile phone providers offer zero-rated services. This means that if a consumer pays more, they can get some applications to not count against their data cap. Popular examples include Spotify , Uber , and Whatsapp . A consumer, by paying more, can get all-you-can-eat usage of those services while having the standard cap apply to all other websites.

What It All Means for NFLX Stock

This type of zero-rated service, however, is not what the net neutrality debate is really about; and it's a key distinction. Instead, we're talking about the ISP intentionally slowing down traffic for a website or application at its discretion, not exempting services from data caps. And while there is widespread market demand for zero-rated services, the odds of ISPs punishing internet sites such as Netflix are far lower.

Why's that? Paul Gallant of Cowen & Co stated it well : "I'm not sure that Google, Netflix and Facebook need the protection of the open internet order any more … They have a lot more power than they used to."

He elaborated farther on that point: "If Facebook or Netflix or Google or Amazon go pull their content off a particular ISP - that's a problem for the ISP."

It's totally true. Consumers at this point would be outraged if they had to wait for their favorite internet sites to load. Far more people would dump Comcast rather than Netflix if the two got into a stand-off. Comcast and its cable peers have generally fared poorly even in disputes over carriage costs for just one cable TV channel; the outrage if Netflix started loading slowly would be deafening.

If anything, the removal of net neutrality is more likely to hurt small websites. The big sites such as Netflix already have so much established consumer loyalty that the ISPs can't treat them badly. If they did, consumers would hit them with extreme backlash.

I don't own any NFLX stock, as I find its valuation extremely difficult to support. However, if I owned it, I wouldn't give net neutrality too much thought. In all honesty, the Disney/Fox tie-up is a lot more troubling for Netflix's longer-term prospects.

At the time of this writing, the author had no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

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The post Why the Loss of Net Neutrality Won't Hold Netflix Stock Back appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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