Netflix Video ‘Throttling’ May Be Annoying But Is Totally Legal
Telecommunication companies and cable providers are up in arms after finding out that for the past five years (NFLX) Netflix has been lowering the quality of its video for customers watching its service on wireless networks, including those of AT&T and (VZ) Verizon. However, Netflix did this in order to “protect consumers from exceeding mobile data caps,” which may discourage future viewing. While AT&T and Verizon failed to admit that reducing the quality of the movies would not have happened if they had not imposed download caps to begin with. And clearly, reducing the quality of its videos was not in the best interest of Netflix.
As telecommunication companies urge the Federal Communications Commission (FCC) to investigate Netflix for not adhering to net neutrality rules, I can’t help but think this looks a lot like the pot calling the kettle black. The direct commercial relationship between Netflix (or any upstream company, such as (GOOGL) Google, (MSFT) Microsoft or (AMZN) Amazon) with its customers is not the subject addressed by the FCC’s net neutrality rules. That is, Netflix, Amazon, etc., can have direct relationship with their customers, charge whatever price the market will bear, and provide their content or other services at any feasible speed. This is correctly beyond the jurisdiction of the FCC.
Instead, the FCC’s net neutrality rules apply to telecommunication and cable companies and assure a level playing field among upstream providers, for example between Google and Bing in search, or between Netflix and Amazon in streaming video. These rules ensure that competition between Bing and Google or between Amazon and Netflix will be on their respective merits and will not be tainted and tilted with a possible commercial relationship with telecommunication or cable companies. Without net neutrality rules, cable companies would be able to use their market power to prioritize the content of whichever provider paid them and tilt the playing field in the favor of the paying party. So, if Netflix was paying Verizon to show its videos first, it would be a violation of net neutrality. If Verizon was slowing down Netflix videos, presumably paid by Amazon or someone else, it would again be a violation of net neutrality. But if, instead Netflix changes the quality of its own video it has nothing to do with net neutrality, and the idea that the FCC should investigate it is no more than a publicity stunt.
Here’s what people should be focused on instead. Netflix will now allow customers to choose high definition video in their Netflix wireless downloads, even if the customers exceed their data caps and end up paying more to telecommunication companies. Should telecommunication companies really complain when they will be making more money? It seems that the telecommunication and cable companies are whining because they finally realize they lost a major battle. For 10 years they pushed against net neutrality and now, it’s imposed by law. With net neutrality ensuring that telecommunications and cable companies will not determine the winner in streaming video, it is now time to experience competition among Netflix, Amazon, Hulu and others, based on their merits, content availability, quality of picture, etc. It is a pity that download caps make video more expensive in wireless competition.
Nicholas Economides is a professor of economics at the NYU Stern School of Business.