Netflix and Net Neutrality

On January 22, 2014, Netflix’s Reed Hastings (CEO) and David Wells (CFO) wrote a letter to shareholders on the 2013 results; Netflix ended up with 44 million members, and expects 48 million members by end of Q1. As of 2/1/14 the price per share is $409, market cap is $24.4 Billion, and expected revenue around $4B. The comparable estimated results for Verizon and & AT&T are below.

2013 Financial Highlights

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Netflix is in a nasty fight with Verizon over Net Neutrality. In Verizon’s camp is AT&T and CenturyLink. In Netflix camp is everyone else. Verizon, AT&T & Centurylink are the three largest RBOC’s (local telephone companies) in the US owning the lion’s share of the last mile. The Verizon camp is upset that Netflix gets a free ride on the networks they built for billions of dollars. Ultimately, they want to charge Netflix for bandwidth used. Netflix doesn’t want to pay for the bandwidth it uses that consumes 40% of US Internet bandwidth; it wants to continue as if they never existed.

Meet in the Middle

Both groups have to meet in the middle. Netflix has to pay something. It can’t get a free ride when it consumes almost half of Internet bandwidth available in the US. It’s not fair to the 315M folks in the US, that one company is clogging up the Internet pipes. Netflix is awesome, but so is Youtube and a bunch of other video sites.

In Jan 2013, Netflix stock was about $100 per share; one year later its $400 per share. Netflix has added billions of dollars to its market cap. It can easily afford to pay $140M per year in bandwidth fees.

Netflix needs to set aside $140M per year, and pay Akamai and EdgeCast $70M/year each for CDN services. Netflix is already and Akamai customer, no work needed on that end. Next up is EdgeCast; if Netflix and EdgeCast are not in conversations, they should be, with Netflix ready to sign on the dotted line. Netflix doesn’t really have any leverage against Akamai & EdgeCast, since they are the only two CDNs that have direct access to the last mile.

Akamai is in a strategic partnership with AT&T, and EdgeCast is Verizon, by partnering with the two, Netflix now has access to 100M+ last mile customers of AT&T and Verizon. Problem solved. The Netflix open source CDN experiment was awesome, but it’s not going to solve it’s Net Neutrality problem. Based on my calculations, the $140M per year, pays for about 9Tbps of bandwidth, give or take a few Tbps. Once this problem is set aside, Netflix may now invest the time and resources in acquiring more current blockbuster titles.