President Obama recently announced his plan to regulate the Internet under Title II of the 1934 Communications Act. This law nurtured America’s telephone monopoly for 50 years. Under the president’s plan, Internet service would be treated like a public utility, subject to rate regulation and state utilities commission oversight. The plan Obama proposes to prevent Internet service providers (ISP) from playing favorites with content ironically reveals him to be playing favorites with content providers such as Netflix.
Indeed, Obama’s plan includes a goodie that Netflix has been lobbying for: Federal Communications Commission (FCC) oversight of Internet transit and interconnection, an efficient market that has never been regulated since the advent of the Internet.
To create the impression that it is being oppressed by ISPs, Netflix employs a tactic that it might have borrowed from its popular show Orange Is the New Black. In that series’ second season, prison guards were given “shot quotas” — they had to record five inmate infractions per week. Both guards and inmates know that the writing of shots is not an accurate reflection of inmate behavior, but quotas give the appearance that the prison system is doing its job.
The Netflix version of shot quotas is its ISP Speed Index, a pseudo-transparent ranking of speeds that it uses to shake down ISPs that are reluctant to adopt its proprietary content delivery network, Open Connect, rather than alternatives. In truth, speed and quality of streaming video are based on a complex set of factors that have little to do with the broadband package that people buy.
Even more egregious is Netflix’s waging of a global campaign under the guise of Net neutrality. It has hijacked the concept’s language, using the terms “freedom of speech” and “digital commons” in an attempt to win regulated price controls. What Netflix paid its transit providers for in the past it now wants to get for free. Yet, even as it praises the virtues of the open Internet, it shows a low regard for transparency as it applies to itself. Its covert political spending put it dead last in the 2014 CPA-Zicklin Index of Corporate Political Disclosure and Accountability.
Networks generally exchange traffic on a settlement-free basis, meaning that there are no capacity fees if the amounts exchanged are equal. In rare cases, such as with Netflix (which accounts for 35% of all US Internet traffic), the parties negotiate an agreement so operators can provision extra capacity to manage the load. But here’s the rub: by regulating interconnection at the price of zero, instead of Netflix bearing some of the cost of interconnection, all of an ISP’s customers, whether or not they watch Netflix, foot the bill. Incidentally the upgraded network is largely idle during the day, since Netflix traffic spikes from 8 p.m. to midnight.
When pressed, billionaire Netflix CEO Reed Hastings admitted that the amount of money at stake for Netflix was “trivial,” probably 0.4% of the company’s $5 billion in annual revenue. Nevertheless, Netflix persists in its campaign, even holding its own customers hostage during negotiations with ISPs. A number of independent sources cite evidence that Netflix deliberately slowed its own traffic in an attempt to gain attention from the FCC, which subsequently opened an investigation on the backbone market. Separately, an MIT/University of California-San Diego study of congestion on American backbone networks shows it is not widespread, but when congestion does occur, it frequently involves Netflix. In any case, regulators have found no evidence of abuse by ISPs on Internet transit markets.
The president’s plan for supposedly ensuring a free and open Internet has different rules for different players, and Netflix would be a clear winner. But it’s ludicrous to think that the company needs any sort of assistance. The broadband networks that Netflix so maligns have allowed Netflix to transform itself from a DVD-by-mail company (mail carriers are delivering a lot fewer of those iconic red envelopes than they once did) to the world’s leading on-demand streaming video service with more customers than any cable provider. As Netflix boasts of doubling its operating income and a 40% contribution margin, it is hardly in need of regulatory favors, and it’s certainly not being subjected to anticompetitive practices from ISPs. The explosion of Internet content proves the success of limited regulation and shows why the FCC should reject government overreach and Netflix’s self-serving crusade.
Netflix, with its exclusive offerings and growing customer base, could withhold content from ISPs’ networks as a bargaining chip. And being one of the president’s darlings, it could get away with it. Perhaps red is the new blackmail.
Roslyn Layton is an American Ph.D. fellow at the Center for Communication, Media and Information Studies at Aalborg University in Copenhagen, Denmark.