In January, everyone and their brother predicted that a court ruling for Verizon (VZ) against the FCC that effectively ended “net neutrality” could have a serious effect on Netflix (NFLX). As a video streaming service that competes against cable companies by encouraging customers to “unplug” while taking advantage of those same providers’ broadband networks to deliver cheap content, NFLX had a massive target on its back.
Well, everyone and their brother was right.
While the broadband providers deny throttling Netflix traffic, the numbers say something different. Between October and January 2014, average Netflix speed has been dropping on many of the major networks. For example, Comcast (CMCSA) dropped from 2.07 Mbps to 1.51 Mbps* while Verizon’s FiOS went from 2.22 Mbps to 1.82 Mbps. There’s no report of those decreases being universal — affecting all of Comcast’s or Verizon’s web Internet services — just NFLX.
Those numbers might not mean much on their own, but compare them to Netflix’s published Internet connection speed recommendations: 1.5 Mbps minimum recommended, 3 Mbps for DVD quality, 5 Mbps for HD quality, 7 Mbps for Super HD and 12 Mbps for 3D (not that anyone’s watching 3D).
There’s clearly a correlation, and it’s hard not to see a connection. This appears to be a clear-cut case of net neutrality falling by the wayside, with Netflix and its customers suffering the fallout.
Add in the specter of bandwidth caps with penalties for using too much data, and cord cutters might just throw up their hands and go back to cable TV.
Canadians have been dealing with the dual problems of Internet throttling and bandwidth caps for years, and the solution Netflix rolled out was a highly compressed, default “Good” setting that requires only 0.63 Mbps. That means customers get their NFLX fix without constant pauses for buffering or generating bandwidth overage penalties. The video quality is OK on a 5-inch smartphone display, but it’s pretty brutal on a 50-inch TV screen.
In short, this is all bad news for Netflix. But it might not be alone for long.
Net Neutrality: More Fallout?
Today’s net neutrality nightmare for NFLX could quickly turn into a big problem for other services. The repercussions could slam some industries and make life miserable (and more expensive) for consumers. For instance …
- TV Manufacturers: Companies like Sony (SNE) are trying to turn around struggling television divisions, and they’re betting on Ultra HD 4K TV sets to do that. These TVs are priced as premium offerings because their ultra-high-definition pictures are stunning. The problem is, everyone’s relying on streaming to get Ultra HD content to those 4K TVs. There’s currently no disc-based media for distributing movies, and cable companies don’t broadcast in Ultra HD. Netflix stepped up with Ultra HD streaming, but it requires a 15 Mbps connection (10 times the current Comcast average for NFLX customers). Plus, those huge files will add up if a bandwidth cap comes into play.
- Gaming: Got a new Microsoft (MSFT) Xbox One or a PlayStation 4? Awesome! Looking forward to online gaming? Too bad. Canadian ISPs have been busted in the past for throttling Xbox Live traffic, and the same thing could happen in the U.S. under loosened net neutrality rules. If you think taking on a bunch of 13-year-olds in Call of Duty online multiplayer is tough now, imagine throwing lag into the mix because your ISP charges a premium for full-speed game access.
- Have you installed one of those cool Nest Learning Thermostats? Its big thing is being connected to the Internet. That means an ISP could conceivably throttle its communications, potentially impacting its effectiveness. Why would they do that? Maybe because Google (GOOG) — which now owns Nest — is getting aggressive with Google Fiber rollouts.
The Nest is just the beginning of an “Internet everywhere” movement that’s increasingly seeing everything from TVs to refrigerators connected. Some of those connections are speed- and latency-sensitive — think Internet radio, video streaming and online gaming — and some of it can quickly add up in terms of bandwidth. It’s not uncommon for a home to have multiple computers, tablets, smartphones, game consoles and maybe VoIP telephone service or a web-enabled security system — all using that Internet connection.
And that connection is controlled by your broadband provider, so without net neutrality protection, suddenly the cable company is in the driver’s seat once again.
Could anyone besides the cable/broadband providers benefit from the looming combo of Internet throttling and caps?
Companies that will sell you a digital copy of a video that you can download locally might see an uptick in business.
As a Canadian who’s less than impressed with the “Good” Netflix experience, I buy movies and TV shows from Apple’s (AAPL) iTunes. Sure, it costs more, but I store the content locally for easy access at any time, watch on our TVs with an inexpensive Apple TV streamer, and data throttling doesn’t impact viewing. So long as I don’t treat a movie as video-on-demand and instead give it an hour to download, from then on it streams throughout the house at the speed of my Wi-Fi network.
Of course, Google is looking pretty good too, with its Google Fiber broadband which is lightning fast compared to any other ISP.
The icing on the cake is the proposed merger between Comcast and Time Warner Cable (TWC). When you essentially remove net neutrality, that’s one thing, but consolidation is really going to exacerbate the situation.
Under the scenario playing by out the end of the year, the broadband providers control how much Internet data a home gets and what quality they will receive with streaming and connected services, and consolidation means consumers will have few alternatives.
For consumers, things are looking rather dire at the moment, and it could get even worse.
*Note: Comcast is contractually bound to follow net neutrality laws until 2018, which means it can’t actively throttle NFLX — but it can allow Netflix performance to degrade by not upgrading its network specifically to keep up with NFLX traffic (for example, by not implementing Netflix Open Connect video caching).
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.