Netflix says it's not worried about a potential net neutrality rewrite

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Netflix appears to think it is "too big to throttle," even if net neutrality protections go away.

Netflix may have been one of net neutrality’s staunchest supporters, but the online video company said it is not concerned about the new FCC leadership's intentions to overturn the rules.

Ajit Pai, a Republican, was formally named as the new FCC chairman following the recent departure of Tom Wheeler.

Pai, who has advocated for a lighter touch regulatory approach, has set his key issue around finding a way to overturn the net neutrality rules.

Following its recent quarterly results, Netflix said in a recent letter to shareholders (PDF) that its well established relationships with all of the major ISPs means a change in net neutrality won't likely impact their earnings or the user experience. 

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“Weakening of U.S. 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 said.

Under the FCC’s current net neutrality rules, ISPs are barred from blocking or throttling traffic from other websites or letting certain web application providers pay for priority treatment. These rules not only had benefited

Still, Netflix said that it will continue to support net neutrality as it will help foster innovation by emerging players in the online video and broader internet application space.

“On a public policy basis, however, strong net neutrality is important to support innovation and smaller firms,” Netflix said. “No one wants ISPs to decide what new and potentially disruptive services can operate over their networks, or to favor one service over another. We hope the new U.S. administration and Congress will recognize that keeping the network neutral drives job growth and innovation.”

Matter of size

One thing that Netflix may have going for it as it wades through a new regulatory regime at the FCC is its sheer size and its customer base.

As of the end of 2016, Netflix had 47.9 million paid memberships in the United States and another 41.2 million outside the US.

North America is Netflix’s biggest market. According to Sandvine's Internet Phenomena report, Netflix makes up nearly 35% of downstream internet traffic during peak viewing periods.

Analysts said that even though Netflix may be saying they are not worried about a potential overturn in net neutrality, their customers could see issues in bandwidth allocation as they migrate to 4K quality video.

“Basically, Netflix is saying they are 'too big to throttle,'" said Joel Espelien, senior analyst for TDG Research, in an e-mail to FierceOnlineVideo. “I’m not sure that's the case, particularly as more consumers move to 4K. ISPs could still go to Netflix and say, ‘we'll carry you because you are popular, but we're not going to let you consume all the bandwidth on our network.’”

Brett Sappington, senior director of research for Parks Associates, agreed.

“I am not surprised that they say that they are not worried, even if they are worried,” Sappington said. “Why spread concern among investors when Netflix doesn’t yet know what the new FCC leadership will look like in the near future? Also, Netflix’s popularity provides it with notably more protection than a smaller OTT service would have.”

Sappington added that if large broadband providers like AT&T or Comcast slowed down Netflix traffic, the video streaming giant would tell its customers to look elsewhere for their broadband service.

“If broadband providers noticeably throttled Netflix data and produced a bad experience, you can be certain that Netflix will be quick to point out the broadband providers that are doing so, encouraging their millions of subscribers to switch to cooperative broadband companies,” Sappington said.

Established interconnection agreements

While it is hard to gauge the effect of the new FCC, which just came into focus, another factor protecting Netflix are its interconnection agreements with large ISPs.

The fights between Netflix and its internet transit providers Cogent Communications and Level 3 with the likes of CenturyLink, Comcast, AT&T, Verizon, Charter/TWC were a daily news item in 2014.

Netflix wanted to get free interconnection so it could deliver streaming video traffic to the ISPs’ network instead of having to work with a transit provider to carry their traffic to each last mile network. Although the FCC did not bar interconnection payments, the regulator developed a process (PDF) under the net neutrality rules that allows OTT video providers to question whether an ISP’s payment request is "unjust" or "unreasonable."

At the same time, internet transit suppliers to Netflix like Level 3 and Cogent Communications have made strident progress with the interconnection agreement issue.

Cogent told investors in December that it won’t see any impact on the interconnection agreements it has with its ISP partners like AT&T and Comcast if the net neutrality rules are overturned by the new administration. 

Under the terms of the agreements Cogent has, each interconnection partner is required to make upgrades to alleviate port congestion.  

David Schaeffer, CEO of Cogent, said that “we have our agreements in place that are multiyear and their commercial agreements.”