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Will Netflix Benefit from FCC Probe?

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Reportedly, the Federal Communications Commission (FCC) plans to conduct investigations into the slowdown of Internet traffic, which in turn is affecting the streaming quality of shows from the likes of Netflix Inc. (NFLX - Free Report) .

The investigation aims at searching the probable cause of bandwidth congestion at the interconnection point of content networks and Internet service providers (ISPs). FCC’s move has received support from all concerned parties as it is expected to enhance transparency over key issues like net neutrality and peering.  

Customers of streaming services like Netflix often complain about the inferior quality of videos. Netflix has primarily blamed ISPs for the choppy video qualities, which have been challenged by the likes of Verizon (VZ - Free Report) .

Per Netflix’s latest ISP speed index (May 2014), Verizon’s FIOS service was at the #10 position among 16 ISPs. Comcast’s speed also declined at a couple of places, as the company’s service occupied the #5 position.

Although Netflix has peering agreements with both Comcast and Verizon, the latest index measurement was disheartening. This was the primary reason behind Netflix-Verizon’s recent spat over Internet service.

Netflix shows consume approximately 30.0% of peak Internet traffic (particularly during the evenings) in North America. The company is paying millions of dollars to Comcast and Verizon for faster and smoother delivery of its content.

Netflix has been vocal against these ISPs for extracting fees from content producers as well as intermediate distributors for faster delivery of data and services. However, Verizon and Comcast have unanimously stated that video delivery companies like Netflix should bear the cost of a faster Internet service.

Netflix, on the other hand, holds a different view on this issue. The company asserted that the cost should be borne by ISPs as consumers using a broadband connection for viewing online videos are not being provided with the service that they have been promised.

Nonetheless, Netflix plans to continue its policy of paying ISPs for directly accessing the broadband network at least in the near term. This will help it to increase customer engagement and maintain subscriber base amid intensifying competition from Amazon (AMZN - Free Report) Prime and HBO. However, the fees will further escalate costs, which is a major headwind.

In such a scenario, FCC’s move to investigate the issue is a positive for Netflix. The company has been trying to attract regulatory attention toward net neutrality and peering issues, which are denting its cash balances. The inquiry will give Netflix a chance to prove its allegations against ISPs.

However, this kind of investigations take a long time to complete and many a times fail to bear any conclusive result. Further, FCC’s new proposed net neutrality rules that will allow ISPs to charge fees for faster connections remains a headwind for the company.

Currently, Netflix has a Zacks Rank # 3 (Hold).

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