Why Netflix Might Be in Trouble

The stock market is currently on a high which we have not seen since the dot-com days of the 1990’s.  Dow 20,000 is no longer out of the realm of possibility – currently at 19,664 – and the exuberance on Wall Street is palpable.

However, Netflix may end up left out in the cold. The company, which killed blockbuster and is doing its best to kill cable TV, seems like an odd candidate to be the ugly duckling.  But if the Federal Communications Commission (FCC) changes its stance on net neutrality, it is could end up having a profound impact on the company’s financial position.

Federal Communications Commission (FCC)
Stock Photo: WASHINGTON, DC – FEBRUARY 15: U.S. Federal Communications Commission Headquarters in Washington, DC on February 15, 2015. (Mark Van Scyoc / Shutterstock.com)

Net Neutrality is a concept where internet service providers (ISP) must treat all the information on their networks equality. In this case, neutrality means impartiality. Per the findings of Global Internet Phenomena Report, content providers like Netflix, YouTube, and Amazon Prime Video account for more than half of all internet traffic in the U.S.

This is a big deal to companies such as AT&T, Comcast, and Time Warner who are the nation’s largest ISPs. These companies view video streaming sites as a burden on their networks and they openly complain about the fact that Netflix and others do very little to pay for network upgrades, which help to make their content available to millions of users.

This brings us back to the FCC, which ruled in early-2015 that the internet will remain open for the time being. The decision was hailed by a coalition of technology companies (Netflix, Google, Amazon, Facebook) and consumer advocates. But then came the Election of 2016, which according to industry analysts means Net Neutrality could once again come up for review.

This is especially true as the presumptive President-Elect’s picks to the FCC come from the telecoms industry. In previous comments on the issue, Jeff Eisenach and Mark Jamison have voiced their opposition to net neutrality. In fact, Mr. Eisenach even went so far to label the concept a form of ‘crony capitalism’.

Netflix Comic-Con
Stock Photo: SAO PAULO – DECEMBER 1, 2016: Netflix booth in Sao Paulo Comic Con Experience, the annual pop culture and fandom convention in Brazil. (Beto Chagas / Shutterstock.com)

While the U.S. remains the largest market for Netflix, a reversal on Net Neutrality would impact the company in four ways.  First, it would have an almost immediate impact on the quality of service users enjoy. Second, this could lead to higher monthly subscription rates, which could drive an exodus of subscribers. Third, higher costs would lead to lower profits. Four, many countries may take the FCC’s lead and adopt similar rules regarding Net Neutrality. If this were to happen then companies like Netflix would be facing a dramatically altered landscape, one which may threaten the growth of their industry.

Whether one believe the debate over Net Neutrality is a question of consumer rights or crony capitalism, the reality is that the fight is really between two multi-billion dollar industries (technology and communications) over who will control the profits in this space.

Shares of Netflix were trading down .64% on Friday morning at $122.57.