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Analyst: Netflix Fooled Investors

By Chris Tribbey

When Netflix and Comcast announced Sunday that they had signed a multi-year interconnection agreement, the two companies said in a joint statement that Netflix would not receive any preferential network treatment, and that the partnership would allow “for future growth in Netflix traffic.”

While terms of the agreement were not disclosed, the companies did reveal that they had been in negotiations for months, leading one analyst to call Netflix “quite disingenuous,” considering the companies talk of standing up for Net Neutrality.

In the company’s fourth quarter letter to investors, Netflix argued that it would “vigorously protest and encourage [its] members to demand the open Internet they are paying their ISP to deliver,” and that it would fight the idea of paying fees to ISPs to better deliver Netflix content, calling that a “draconian scenario.”

“We think that this comment was quite disingenuous, as Netflix was reportedly in talks with Comcast about paying for access to its broadband network at the time it issued its letter,” said Michael Pachter, analyst with Wedbush Securities. “We think that the agreement reinforces the leverage that broadband providers have over Netflix, leaving the latter no recourse other than to open its checkbook (albeit for an undisclosed amount), as service degradation is a real threat now that the Net Neutrality rules have been eliminated.”

In its latest ISP speed rankings, Netflix had Comcast ranked No. 14 out of 17 ISP providers, with a constant decline in delivery of Netflix streaming via Comcast through the end of 2013. The agreement should help bring that up, according to Pachter.

“Throttling has become a more high-profile issue for Netflix in the last couple of months due to the recent U.S. Court of Appeals ruling on Net Neutrality and reports of Verizon slowing down Netflix streaming for its FiOS subscribers,” he said. “While we believe that the amount to be paid by Netflix to Comcast is likely relatively small, we believe that in the aggregate, payments to ISPs will be quite large in the next several years.”

Pachter said more ISPs will seek similar agreements with Netflix, with Verizon the most likely to go after a big concession. He also said that it was in Comcast’s best interest to seek the deal before public hearings on the proposed Time Warner Cable acquisition.

“We think Netflix may see its users throttled by ISPs unless users or Netflix itself pay for unrestricted delivery, as it appears to have done so with Comcast,” he said. “The Comcast-Netflix agreement reinforces our belief that ISPs are reluctant to charge users more, but are unconcerned about charging Netflix a nominal amount.

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