"There are no heroes. No villains. Just people with different agendas." This quote from Netflix show Daredevil sums up today's supposed "battle" over the neutrality of the Internet, as fought by giant Internet firms like Netflix and network operators like Comcast.
Take a letter sent by Netflix to shareholders two days before Donald Trump's inauguration as US president. The letter seeks to reassure investors that any reversal of US net neutrality laws that prevent ISPs from blocking or throttling traffic or charging third parties for priority would not affect the business's outlook.
"Weakening of US net neutrality laws, should that occur, is unlikely to materially affect our domestic margins or service quality because we are now popular enough with consumers to keep our relationships with ISPs stable," Netflix states.
I totally agree. There are three very good reasons why operators would be crazy to block, throttle, or demand unreasonable payments from Netflix:
Game of Thrones is no substitute for House of Cards. Many broadband subscribers are going to want Netflix, however badly operators degrade their service. Why? Because content is not fungible. People who want to watch House of Cards want to watch House of Cards. Offering similarly great series like Game of Thrones would provide subscribers with an alternative way to spend their time, but would not answer their fundamental desire.
Great video experiences are essential to broadband satisfaction. Broadband is just a means to an end for most consumers. However much operators invest in marketing higher speeds, subscribers will judge their value on the quality of access they offer to digital services. And video provides the clearest test. An Ovum survey of 15,000 broadband subscribers in 30 countries showed pretty consistently that those who had poor video experiences were twice as likely to consider switching suppliers.
Relations between operators and Netflix have never been better. As Netflix has invested less in buying third-party movies and TV shows in bulk and more in curating a narrower selection of its own original content, so it has become less of a "Spotify for TV"-like threat to operators and more like a TV channel they can partner with. Whatever's been said in the past, many operators now talk glowingly about the positive impact that co-marketing deals and taking part in Netflix's Open Connect content delivery network (CDN) initiative have had on their brands, quality of service, and subscriber numbers.
So, what's next?
Netflix's letter implies continued backing for net neutrality rules: "Strong net neutrality is important to support innovation and smaller firms. No one wants ISPs to decide what new and potentially disruptive services can operate over their networks, or to favor one service over another."
And the company's executives may well be personally committed to this ideology. But as a business, Netflix no longer needs to fight that battle.
Netflix's next salvo will be a charm offensive launched at MWC
Netflix will more likely devote its energies to getting similarly favorable treatment from mobile operators, with CEO Reed Hastings setting out his stall during his keynote at next month's Mobile World Congress (MWC). Here's what we think he's after:
To make mobile Netflix more technically viable. Delivering high-quality video services over cellular networks is even more challenging than over fixed broadband, as capacity is scarce and performance variable. A number of possible solutions are emerging, such as deploying caches and computing power (both physical or virtual) deeper within mobile networks, employing multicast technologies at various levels, and using systems to preload popular content on users' devices during off-peak hours. But each will require closer collaboration between Internet firms and operators than Netflix's Open Connect initiative involves.
To piggyback on the power of the mobile bundle. Spotify and other music streaming services have achieved significant growth in paying customers by partnering with operators to offer discounted or "free" subscriptions as part of mobile phone bundles. It's a perfect meeting of needs: operators in saturated mobile markets need to keep subscribers and grow their spending, while the music streamers need to attract paying subscribers in the first place. Such deals will have an additional lure for Netflix – that consumers might start to think about TV as a personal, rather than a household, service and so lead to more subscriptions overall.
To turn millions of "unbanked" people into paying customers. While Netflix is available in about 200 countries, billions of consumers couldn't subscribe even if they wanted to. Why? Because they don't have credit or debit cards. Mobile operators can help solve this problem by allowing subscribers to charge payments via their mobile phone bills or prepaid credit, an arrangement known as carrier billing. To put this in perspective, Ovum estimates that only about 258 million of India's 1.3 billion population hold credit or debit cards. About 571 million have access to carrier billing. Plus, that number is set to grow faster there – and elsewhere – than for credit and debit card holders, reaching 892 million in India at the end of 2021.
To address the opportunity – and threat – of zero-rating. One of the biggest challenges facing mobile video is that mobile broadband is incredibly expensive. Most (affordable) tariffs would allow only a few hours of Netflix viewing before their data caps kick in. One solution is zero-rating, whereby the operator doesn't count traffic from certain apps against the user's monthly allowance. Some types of these schemes will directly benefit Netflix, such as T-Mobile's Binge On, which purports to zero-rate all mobile video usage. Others, such AT&T's decision to zero-rate only traffic generated by its DirecTV Now video service, will put it at a disadvantage. Netflix would probably favor operators adopting Binge On-like schemes in order to avoid the kind of tricky questions AT&T has faced from the US regulator and the public about DirecTV Now. But would it say "no" to its service being included in a similarly selective zero-rated bundle? I don't think it's out of the question.
Clearly, some of these topics will have a greater bearing on net neutrality than others, some not at all. But it's hard to deny that Netflix's growing coziness with network operators will give it a competitive advantage over smaller players that don't have the brands, scale, and infrastructure to strike such partnerships.
Does that make Netflix a hero or a villain? Certainly, it's a very smart business with a clear agenda.
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