Everyone keeps waiting for HBO to “pull a Netflix,” where the channel would decouple itself from traditional television service providers and go online only. Given the nonsense that’s going on with net neutrality and regulators in the United States, at this point it’s more likely the reverse will happen. It wouldn’t be surprising to see Netflix give up on online and “pull an HBO,” whereby it becomes just another channel in an overpriced monthly TV package.
On Wednesday, news broke that the Federal Communications Commission is planning to introduce “pay-to-play” rules for internet companies, whereby cable and phone companies will be allowed to charge them extra for better connectivity. This would essentially enshrine the recent controversial Netflix-Comcast deal within actual rules. It was controversial because Comcast degraded Netflix’s quality to the point where the streaming company was forced to pony up. Comcast and other big ISPs have long complained about such services supposedly getting a “free ride” on their networks.
The news set the internet alight, with various voices proclaiming that FCC head Tom Wheeler – a former cable industry lobbyist who was recently appointed to the job by President Barack Obama – had just driven a stake through the heart of net neutrality. It is, of course, that ephemeral principle that all internet traffic should be treated more or less equally so that the guy sitting in his basement with an idea for a startup has the same chance at succeeding as a giant company like Netflix or Google does.
Netflix itself made news just the other day by announcing price hikes of $1 or $2 thanks to its increasing costs, such as the Comcast blackmail job. If the FCC goes ahead with its proposed rules, every major ISP in the U.S. will be lining up with its figurative cap in hand. Moreover, ISPs in other countries will certainly jump on the opportunity too. Here in Canada, we have net neutrality laws that theoretically prevent such things, but our big network owners – all of whom resent Netflix just as much as Comcast – will waste no time in trying to re-open that discussion, or to circumvent the rules as well.
All told, that means the increasing costs Netflix has been seeing on the network side of its business might be chicken scratch compared to what’s coming. And who’s going to shoulder those inevitable extra costs? Yup: subscribers.
Consumers are already getting a pretty raw deal by paying three times to get a service like Netflix: once for an internet subscription, twice for the service itself and a third time for their monthly usage. Extra fast-lane privileges like the FCC is proposing will effectively add a fourth layer of cost onto that.
At what point does this stop becoming worth it for the consumer, or perhaps more pointedly, for Netflix? HBO generally gets to keep about half of the $16 that cable providers charge consumers for the channel, according to the Wall Street Journal, which means it earns the same revenue – $8 per subscriber – as Netflix currently does. However, cable companies handle all of HBO’s billing, which takes one cost away from the channel that Netflix still has to shoulder.
HBO also has none of the network costs or (growing) headaches that the streaming company does, all of which contributes to it being immensely more profitable. HBO is a much more mature business, but still, it pulled in $1.8 billion in operating profit in 2013, compared to just $228 million for Netflix despite both companies having roughly the same revenue of $4-billion or so. How long do Netflix investors or management have the stomach for such under-performance, and for the prospect of never-ending nickel-and-diming by ISPs?
The first casualty in the death of net neutrality may in fact be Netflix, or at least the online version of it that most of its subscribers have come to love. The company is quickly learning that when regulators are not interested in doing their jobs to protect the interests of the people and therefore innovative new efforts, there’s only one option left: if you can’t beat ’em, join ’em.
And if (or when) that does happen, will it even make sense to call the company – or channel – Netflix anymore?
UPDATE (APR. 29): In the week since I wrote this post, Netflix has signed a similar interconnection deal with Verizon and announced that it will be included on the cable boxes of three smaller U.S. TV providers, effectively as another “channel.” Yup. It isn’t surprising that it’s happening, but rather how fast it’s happening.