Netflix neutrality: Court ruling won't boost your Netflix bill. Yet

When a court quashed the FCC's Net neutrality rules, Netflix became the bull's-eye for fears of higher fees from broadband providers, but it doesn't have to be that way.

Netflix

This week's Net neutrality ruling made for dense reading, but it left millions of Netflix customers with one clear worry: Would they need to pay more to stream the service?

Like most elements of the court's decision to scrap Internet openness rules set by the Federal Communications Commission in 2010 -- how it affects Netflix, and your bill, is complicated.

The short answer is that your bill won't go up this month. It probably won't go up next month either. It may go up eventually, but in all likelihood, Net neutrality won't be the reason, or at least not the primary reason. Netflix's $7.99-a-month price will have to rise eventually, but content costs, expansion plans, and add-on features are more likely to be the culprits than this week's legal decision.

The ruling's Netflix relevance
On Tuesday, the US Court of Appeals for the District of Columbia Circuit called into question a key tenet of the FCC's authority over broadband providers and how they manage traffic on their networks, even as it upheld the FCC's jurisdiction to regulate broadband access.

The 2-to-1 decision paved the way for changes in Internet service business models. One such change could result in Internet providers charging Internet content companies, like Netflix, Amazon, YouTube, and Hulu, fees to access their networks. Or they could charge fees for priority status, so that your Netflix stream doesn't buffer when you sit down to watch at at peak viewing times.

See also: Why you should care about Net neutrality (FAQ)

Wireless providers like AT&T have proposed a plan in which app developers and Internet services could themselves pay for the data that consumers use to access their services, on the consumers' behalf. It's somewhat akin to Amazon offering built-in wireless service for its Kindle e-reader, first with Sprint and then with AT&T: The ongoing cost of the access is handled by Amazon on your behalf -- or rather, Amazon passes along the cost by bundling it into the purchase price of the Kindle.

The fears
That's what some fear will happen with Netflix -- that network providers will come knocking on Netflix's door with their hands outstretched, and the company will pass along additional costs by ratcheting up your bill.

Netflix should be their main target, too, because the streaming-video service is responsible for an eye-popping amount of peak Internet traffic. It accounts for nearly one-third of North American downstream traffic during the peak part of the day, the most of any company, according to Sandvine, which runs fixed and mobile data networks worldwide and reports on what is taking place on them. Together with Google's YouTube, the two sites represent more than half of all downstream traffic.

Sandvine

If Internet service providers decide to charge content companies a fee per gigabyte of data transmitted or a fee to ensure content is delivered smoothly, Netflix would be the company suffering the most.

Netflix declined to comment on the Net neutrality ruling, other than to refer to the Internet Association's statement.

Such worries pushed Netflix stock down more than 5 percent at one point the day after the ruling.

The relief, for now
However, Netflix shares recouped much of their loss the same day, as investors and others came to realize that a chain of events leading from the court's ruling to higher Netflix bills isn't so simple.

For one thing, ISPs would be venturing into territory their subscribers would decry. Netflix is likely to doggedly resist setting any precedent of paying for access to networks. When an ISP gives Netflix the option of paying up or dealing with slower speeds, and Netflix refuses, the ISP will be penalizing its own customers with poorer service for the very thing that got so many of them to sign up for broadband in the first place.

BTIG analyst Rich Greenfield noted that because the court didn't throw out disclosure requirements in the FCC's 2010 rules, ISPs would need to be transparent about which sites and services are getting throttled. That's a perfect recipe for discouraging customers from signing up for higher-price tiers of broadband service and, ultimately, driving them into the arms of competitors that don't discriminate against Netflix.

FCC commissioners
The FCC commissioners: Ajit Pai, Mignon Clyburn, Chairman Tom Wheeler, Jessica Rosenworcel, and Michael O'Rielly. FCC

In addition, the ruling may be seen as a loss for the FCC, but it also afforded the regulator more power -- and nobody really knows how the agency is going to exert that power yet. FCC Chairman Tom Wheeler has said the agency is committed to protecting the development of innovative services and products ensuring that the Internet preserves free speech. He also said the FCC will consider all options, including an appeal, to ensure that networks remain free and open.

While some of the 2010 rules may be gone, more rules are sure to come -- be they from the FCC, Congress or the Federal Trade Commission. Internet service providers may try to take advantage of their newfound freedom in the meantime, but they would be reckless to go after the one service that more people in America hinge their broadband choices upon than any other.

"A plea from the likes of the Internet companies (among the most beloved companies in America) to restrain the big bad cable and telephone companies (among the most reviled), in the process demonizing them as monopolists, would likely find a receptive audience," said MoffettNathanson analyst Craig Moffett in a note.

Finally, the option of offering content providers preferential service guarantees for a price isn't even feasible. That goes double for Netflix.

"It would be easy to make it bad. It's hard to guarantee it being good," said Don Bowman, the chief technology officer of Sandvine.

Network cost relies on peak bandwidth, and the problem with Netflix is it's primetime popularity. There's no cheap technical way to provide a quality guarantee, he said, which means the options that networks are able to offer boil down to: Would you like your service to be poor or would you like to pay me to make your service less poor?

Netflix's pricing past
Perhaps one of the surest reasons Netflix won't be raising your bill outright anytime soon is that the fiasco of its last attempt to hike prices is still fresh in its memory.

In 2011, Netflix said it would cleave its DVD-by-mail service from its streaming one. The DVD spinoff would be call Qwikster, and rather than a combined $9.99 bill for both, customers would pay $7.99 for each, thus pumping up the price by 60 percent. The move enraged Netflix customers . The company subsequently aborted the spinoff idea, but Netflix lost 800,000 subscribers and its stock price dropped 77 percent in four months.

Netflix CEO Reed Hastings
Netflix CEO Reed Hastings

This summer, Chief Executive Reed Hastings reassured members and investors that the $7.99 price is here to stay, at least for the next year . "Once you've picked a price, there's an incredible value in consumer stability," he said.

The 2011 trainwreck turned price increases into the third rail for Netflix. The company can't touch it.

Upward pull
But Netflix can tap its prices higher in roundabout ways, and it will need to do so eventually.

Netflix is investing deeply to grow abroad, adopting the strategy of essentially taking all its profits from the US and pouring them into international expansion.

Such heavy investment comes as the price to acquire content is set to rise, as online competitors put more investment into vying for the same shows and movies as Netflix is. Hulu's owners last year committed to infuse the site with $750 million rather than sell it, and Amazon is committing hundreds of millions to content development and acquisition.

The rising costs of licensing content, and the limited flexibility that rights holders grant Netflix with the licenses, are a major factor in Netflix's campaign to create and fund its own original programming, like "House of Cards" and, more recently, films such as the documentary "The Square."

House of Cards
Get original: Netflix's House of Cards. Netflix

But with content prices getting more competitive and profits being diverted to new markets, Netflix choices to cope are trimming costs elsewhere (such as the originals strategy), increasing its membership rolls (which it's largely turning to foreign markets to do) and upping the revenue it gets from existing customers every month.

Minor across-the-board price increases are possible, though it's doubtful Netflix will ever commit to such a drastic jump as it did a couple years ago. Recently, when it raised prices in Brazil, Netflix raised the introductory price for new members while keeping existing members on the same level for a number of months.

What's more likely than widespread increases for all customers is Netflix charging for new features that add value. The company is testing pricing tiers that charge more to have more devices streaming Netflix simultaneously -- and cost less if you have fewer. (Right now, the company includes two simultaneous streams with its basic $7.99 price, and offers four streams for $4 more. Notably, when Netflix rolled out the higher price, it predicted that fewer than 1 percent of members would take it up.) The company already has a "Just for Kids" area of its site, it could offer greater parental controls or enhanced viewing features like offline accessibility for an additional cost.

Netflix is reporting its business results for the last quarter of the year Wednesday, which could bring with it more clarity about its position on the Net neutrality ruling and its pricing philosophy this year in general.

But if you had to bet, put your money on your Netflix bill holding steady for the time being. At least when a price increase does come around, you'll have doubled your money.

 

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