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  (Source: Universal Pictures)
He says that he doesn't believe it will happen, but that there's a small chance an ISP could embrace such tactics

In its quarterly earnings report, Netflix, Inc. (NFLX) CEO Reed Hastings paints a cautionary tale of what could happen if Congress does not clarify and strongly protect net neutrality
I. The Warning
He writes:

Unfortunately, Verizon successfully challenged the U.S. net neutrality rules. In principle, a domestic ISP now can legally impede the video streams that members request from Netflix, degrading the experience we jointly provide. The motivation could be to get Netflix to pay fees to stop this degradation. Were this draconian scenario to unfold with some ISP, we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver.

The most likely case, however, is that ISPs will avoid this consumer-unfriendly path of discrimination.  ISPs are generally aware of the broad public support for net neutrality and don’t want to galvanize government action.  Moreover, ISPs have very profitable broadband businesses they want to expand. Consumers purchase higher bandwidth packages mostly for one reason: high-quality streaming video. ISPs appear to recognize this and many of them are working closely with us and other streaming video services to enable the ISPs subscribers to more consistently get the high-quality streaming video consumers desire.

In the long-term, we think Netflix and consumers are best served by strong network neutrality across all networks, including wireless. To the degree that ISPs adhere to a meaningful voluntary code of conduct, less regulation is warranted. To the degree that some aggressive ISPs start impeding specific data flows, more regulation would clearly be needed.
Reed Hastings
Netflix CEO Reed Hastings is fearful of what the death of net neutrality could bring.
[Image Source: Social News Daily]

In other words, Verizon, Inc. (VZ) and AT&T, Inc. (T) -- the two largest wireless operators in the U.S. market -- plus Time Warner Cable Inc. (TWC) and Comcast Corp. (CMCSA), have all pledged to not discriminate against "legal" content to some extent.
But Mr. Hastings is aptly pointing out that such promises are nebulously defined at best, and there's a lack of momentum to commit to a single industry-wide standard that would prevent abuse without government intervention.
The problem is somewhat of a catch-22 as unequal taxation and other government handouts have helped to consolidate the U.S. wired and wireless industry into just a handful of dominant powers.
The issue extends all the way down to the states, where cable internet operators like TWC and Comcast pay large sums of cash to state officials to hinder efforts by potential competitors to enter "their turf" and to stymie public-private partnerships, another alternative.  As a result, in many regions a single provider retains a monopoly on high-speed service in a region, or at best two large powers control local service. 
Given the at times collusive behavior of these top players, "two can be as bad as one" as the band Three Dog Night once sang.
Friendly bribe
Lots of bribes -- or as the Supreme Court defines it "free speech" -- has winnowed the cable and wireless markets down to just a few dominant entities. [Image Source: Haberrus]

In other words, in a healthy, competitive market, service providers might be forced to bow to customers and not stymie popular content providers (or even small newer content providers).  But in the U.S.'s artificially controlled market where the government has doted on a few favored companies, growing them to monstrous proportions, there may not be enough competition to rely solely on competition to enforce net neutrality in the absence of regulation.
II. Will Service Providers Throttle More Than Just Filesharing?
So far, throttling efforts have largely been focused on populist file-sharing movement -- whether it be of the legal or illegal kind.  But some fear similar tactics could be applied to high bandwidth content such as internet video or radio.  Such a move could help promote a service provider's rival offering (which streams at full speed), be aimed at squeezing at "toll" out of the content providers, or simply be aimed at reducing network usage to increase profit.
The internet is inherently an interstate affair, hence it might seem to fall clearly under the commerce cause of the Constitution.  Yet Congress has done a very poor job of giving the U.S. Federal Communications Commission (FCC) direction and the power to enforce its rules.  As a result, the FCC tends to put forth policies such as net neutrality, only to have them later killed in embarrassing court defeats.

Net neutrality cutting the wires
Cutting the wires could kill innovations on the net, as well as popular services like Netflix.
[Image Source: CFC Oklahoma]

While Verizon was the latest to kill that policy (which was installed "officially" in Dec. 2012), Comcast had previously successfully shot down a FCC complaint on de facto net neutrality rules.  In the Comcast case the justices seemed to feel it was doubtful that the FCC had authority under laws passed by Congress to enforce such a provision.
With the more codified Dec. 2012 implementation and with the FCC's formal justification of how it believed net neutrality was within the powers granted it by Congress, the same court (U.S. Court of Appeals for the D.C. Circuit) rethought the April 2010 Comcast ruling, when Verizon sued to block the rules.  But ultimately the FCC still lost under the new rules, as the court ruled that the FCC could not enforce the policy given how it classified large carriers (a classification that it used to unofficially try to give benefits to smaller competitors).


Part of the blame in that latest loss rests on the shoulders of FCC officials, but part of it also rests on Congress for failing to simply pass a law clearly defining the extent of net neutrality, a clear Constitutional justification, and the endowment of strong enough regulatory power for enforcement purposes.

Fiber optic cable
The FCC lacks clear guidelines when it comes to net neutrality, and also lacks the power to carry out significant enforcement. [Image Source: Guardian UK]

As a result, companies like Google Inc. (GOOG) (whose YouTube service could be in the crosshairs of throttling), Pandora Media Inc. (P), and Netflix have to adopt a wary wait-and-see attitude, hoping service providers live up to their nonbinding promises, and that any would-be throttling schemes are stayed for fear of angering customers.  As Mr. Reed suggests, we may arrive a decade from now and be relieved that no major clashes between service providers and content providers occurred.  But sooner or later, it might happen, and that's a big threat to Netflix.
(Older estimates indicate Netflix may use as much of a third of cable internet bandwidth in the U.S.  Competitors such as, Inc. (AMZN) and Hulu may have cut into that total, though.)
III. For Now Netflix Can Smile at Steady Growth
Otherwise, Netflix posted a strong quarter, with 2.33 million new subscriptions in the U.S. and 1.6 million abroad.  Netflix now has 33.42 million subscribers in the U.S. and 10.93 million abroad.  Of these 31.71 million in the U.S. (95%) and 9.72 million abroad (89%) are paid subscribers.  Netflix pulled in a cool $1.175B USD in subscription revenue, and saw a net profit of $48M USD ($0.79 USD/share), a figure that was sunk somewhat by a net loss of $57M USD.
The customer growth was in the high end of analyst predictions, and was met with much enthusiasm.  The earnings per share beat the average expectation among analysts surveyed by Thomson Reuters I/B/E/S.  Analysts, on average expected only $0.66 USD/share ($40M USD) earnings.
Netflix has faced its fair share of controversies over the years.
While it may now cry foul on data discrimination, it had no problem discriminating against others content less than a decade ago.  Back in 2006 it tried to kill Blockbuster's internet rental service -- an anticompetitive effort that would arguably help to kill Blockbuster in the process, dealing a fatal blow to the video rental service's recovery and attempt at transitioning to a more modern online business model.  Following a 2008 court battle, Blockbuster did eventually beat back Netflix, winning the rights to launch digital services and cut its late fees, but that wasn't enough to save it -- by 2010 it was bankrupt.

While many didn't care for Blockbuster, some disliked how Netflix used legal actions to freeze Blockbuster's online efforts, helping to eventually kill the rival firm.

Some customers remain bitter about that.

Netflix also weathered a storm of controversy when it split its DVD rental and streaming services, knocking two dollars (from $9.99 USD/month for the bundled rate to $7.99 USD/month) for streaming only service, but increasing the overall price for customers who want both.  As might be expected the new terms led to some shrinkage in both new subscriptions and overall DVD subscriptions.

Netflix family
Netflix survived controversy over its pricing and legal campaign against Blockbuster.

But Netflix won customers back with a recent price cut down to $6.99 USD/month for single-user streaming video, and grew profits steadily throughout late 2012 through 2013.

Netflix has also is still struggling to get premium content from some sources.  But overall it is growing fast and customers are generally happier with it today than they were during the rocky periods of the Blockbuster wars and the restructuring from DVD-focused with a side of streaming to streaming focused business.

Sources: Netflix [PDF], Reuters

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The benefits of small ISPs...
By Spuke on 1/23/2014 6:27:15 PM , Rating: 2 that stuff like this won't happen.

RE: The benefits of small ISPs...
By Motoman on 1/23/2014 7:07:45 PM , Rating: 3
The problem being that ISPs virtually always operate in an artificial monopoly or oligopoly. And the big one effectively own the whole market...there's not much left once you get past the first 4 or 5 ISPs.

He says that he doesn't believe it will happen, but that there's a small chance an ISP could embrace such tactics

The first part is him being nice, trying not to piss off the ISPs just yet. The second part is therefore wildly understated - you're an abject moron if you don't think the ISPs are going to use this to their advantage.

In point of fact, they have to - because it means more revenue. If you're at the helm of a publicly-traded company, it is your duty to the shareholders to make as much profit as you possibly can. Not doing so can get you fired, if not sued and put in jail.

RE: The benefits of small ISPs...
By michael67 on 1/23/2014 10:11:17 PM , Rating: 3
I really dont get the fuzz about this, this is what the US wants, less regulation, is it not?

If we in the EU wane regulate MS, Intel, Google and others we are socialist money grabbers scum, that should mind our own business, but o dear if someone tries to interfere whit what they can see on the idiot box.

RE: The benefits of small ISPs...
By Solandri on 1/24/2014 6:06:55 AM , Rating: 4
Less regulation in a competitive environment usually arrives at a more effective solution and lower prices.

Less regulation in a government-mandated duopoly just opens the door to collusion and coercion. It's asinine to try to blame failure in this situation on market economics. Like claiming that removing your boots when drowning doesn't help you tread water, while ignoring the anchor tied around your waist.

RE: The benefits of small ISPs...
By Flunk on 1/24/2014 8:48:23 AM , Rating: 5
In a lot of places, without that regulation there would be no internet access at all. Do you realize that providing access to rural areas actually cost providers more than they take in revenue?

In some areas internet access would have to cost $500/month or more to be profitable. I'm not saying there is anything wrong or right about that. It's just something to think about, I find that there is a lot of whining about broadband costs from people in areas like that and also a lot of whining about regulation. You can't have it both ways.

It seems to me that everyone is apposed to regulations that doesn't benefit them and in favor of regulations that do. Saying that all regulation is bad while simultaneously supporting some of them seems to be par for the course.

RE: The benefits of small ISPs...
By BRB29 on 1/24/2014 9:16:03 AM , Rating: 2
ISP providers have monopolies in most areas. In most places I've lived in, you don't get choices. Your choice is either TW or TW. Then you move and your choices are Comcast or Comcast. Right now, my choice is either VZ or Vz. The only other choice you have is some crappy DSL service. There's not a lot of places you can live where you have a healthy options list.

Seriously, the reason why we have such an uncompetitive environment in the cable/ISP arena is because there wasn't enough regulations to keep these large corporations from making unethical business practices. It's been known that TW locks out other businesses trying to get in. It's been known that Comcast and Verizon signs agreement to not compete with each other in many territories.

Let's cut to the chase. We don't need a lot of regulations. We just need enough to discourage greedy unethical business practices. Our biggest problems being we always end up having not enough regulation or too much regulation.

By sgestwicki on 1/24/2014 9:27:08 AM , Rating: 2
The government backed monopolies are the real problem here. We wouldn't need net neutrality if other ISPs were allowed to complete. Everyone would just drop the provider that is being an idiot and not listening to what their customers want. Instead of that system, we have reports of the government's of small towns with no Internet access trying to set up an ISP with the local government's money and the ISP that is not providing any service blocks it with the courts.

RE: The benefits of small ISPs...
By NellyFromMA on 1/24/2014 9:02:38 AM , Rating: 2
Here we go with general umbrella statements where someone who feels burnt by another's opinion and feels a one-size-fits-all approach to EVERYTHING is the answer.

Its all about the reality of a given situation. No, America doesn't SENSLESSLY and FOOLISHLY want less regulation on EVERYTHING.

That would be stupid. Calm it down EU rep. You do realize the US isn't a single mind, right?

RE: The benefits of small ISPs...
By Argon18 on 1/24/2014 10:34:26 AM , Rating: 4
"You do realize the US isn't a single mind, right? "

I don't think B.O. got that memo.

RE: The benefits of small ISPs...
By KFZ on 1/24/2014 2:00:48 PM , Rating: 2
Doesn't that put you in the boat with the ruling that forced MS to provide a menu on what web browser users install? Provide some examples, because gov't intervention in the private sector is not a black and white issue.

Oh and wake us when you enlightened folk decide that most PC games, the *only* reason I still need to pay for an OS, shouldn't require a Windows box or any sort of emulation to play.

Sue Google. I don't care. I half-expect Google to spit out its own services in search results ahead of competitors; I'm using a GOOGLE SERVICE to search!

By Reclaimer77 on 1/24/2014 2:49:10 PM , Rating: 1
I really dont get the fuzz about this, this is what the US wants, less regulation, is it not?

When you cut through all the BS and biased talking points, this is what really took place: An illegal expansion of Government power was struck down by the courts. The idea of Net Neutrality is fine, their implementation was not.

Now in the EU it seems okay to shit all over businesses with arbitrary and poorly-defined rules presided over by a Kangaroo Court.

RE: The benefits of small ISPs...
By ritualm on 1/23/2014 7:35:14 PM , Rating: 2
stuff like this won't happen.

Small ISPs lease lines/bandwidth from bigger ones to resell. When the latter increases prices and/or does anti-consumer stuff to their lines, the former is immediately affected by the changes.

Therefore, your premise is false.

RE: The benefits of small ISPs...
By zerocks on 1/23/2014 9:07:16 PM , Rating: 2
In Australia we have small Cell providers who lease equipment from the big cell providers and charge less for the service, some how they survive.. hopefully the same can be done over there if this situation arises

RE: The benefits of small ISPs...
By Solandri on 1/24/2014 6:24:28 AM , Rating: 3
Usually in that sort of situation, the big company is treated as a utility and their prices are subject to government review to make sure they're giving the leasees the same price as they give themselves. We used to have that in the U.S. for DSL service, until a court decision ruled it was illegal.*

Predictably, after that court decision the small DSL companies who leased from the local phone company pretty much dried up. You can still find a few, but their prices are typically higher than the phone company's, not lower like before the court decision.

* (This stems back to the FCC trying to treat ISPs as both an information service and common carriers. The FCC has been trying to have its cake and eat it too when regulating ISPs, and the courts have been (properly) saying they can't do that. The FCC has been reluctant to grant ISPs common carrier status because that would indemnify the ISPs from responsibility for what's transmitted on their network, meaning the FCC can't lean on ISPs to block stuff like child porn and copyright infringement. They'd have to, horror of horrors, go after the actual responsible parties who are transmitting this material. So right now ISPs are classified as information services instead of common carriers. Yet they want to require the ISPs to act as if they're common carriers with net neutrality and leasing phone lines to other DSL providers. The courts have now twice told the FCC that it can't have it both ways. Pick one or the other.)

RE: The benefits of small ISPs...
By Jeffk464 on 1/23/2014 9:01:29 PM , Rating: 1
I guess its time to ditch my cable company and go for DSL. By the way shocking another pro corporation anti consumer ruling.

RE: The benefits of small ISPs...
By Motoman on 1/24/2014 12:53:50 PM , Rating: 2
For what possible reason do you think the DSL company won't do the same thing?

All ISPs, on any technology, can (and by their shareholders, should) do the same thing.

RE: The benefits of small ISPs...
By Reclaimer77 on 1/24/2014 10:21:20 AM , Rating: 2
Stuff like this has never happened. We had how many years of a free and open Internet without this Net Neutrality? All of a sudden we're doomed if we don't hand the internet over to the Government.

Fact is the Internet has only Gotten worst since Government involvement. Site takedowns and DMCA. We even have FCC style censorship going down online. This was unthinkable a few years ago. Without a free and Independent Internet, free from Government, we're going to lose the largest free exchange of ideas and information that's ever existed between people of the world.

I'm saddened people are willing to sacrifice all that because of some Doomsday scenario that's never even come close to happening, much less been attempted on any scale.

RE: The benefits of small ISPs...
By gixser on 1/24/2014 4:10:29 PM , Rating: 2
Doesn't happen? According to Cogent it is happening. Not sure if its worth believing them or not but the finger pointing is happening right now. Luckily enough I have the ability to route through a different provider that doesn't have the same peering limitations as Comcast/Cogent but that isn't true for all customers. This is affecting businesses and home consumers right now. Not sure what the solution is though.

Dear Cogent Customer,

The latency and/or packet loss that you are experiencing to this destination is due to occasional high traffic with Comcast. We have repeatedly requested augments to these congestion points and hope Comcast will comply soon. While this has been escalated internally to the CEO level, we encourage you to also contact Comcast customer support with your concerns and complaints. Their delay is a major impediment to internet traffic overall and contrary to net neutrality requirements. Our peering engineers will continue to address this on a daily basis until resolved.

If you have any further questions please feel free to contact us by e-mail at or by phone at 877-7COGENT (877-726-4368).

"We can't expect users to use common sense. That would eliminate the need for all sorts of legislation, committees, oversight and lawyers." -- Christopher Jennings

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