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Netflix Changes Stance on Net Neutrality

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Netflix Inc. (NFLX - Free Report) 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. (CMCSA - Free Report) and other Internet Service Providers (ISPs) for extracting fees from content producers as well as intermediate distributors such as Cogent, Akamai (AKAM - Free Report) and Level 3 for delivering data and services.

Per Netflix, Verizon’s (VZ - Free Report) 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 network.

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 and HBO.

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 forward.

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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