Exposing Netflix’ Biggest Net Neutrality Deceptions – Part 16 Netflix Research Series

Exposing Netflix’ Biggest Net Neutrality Deceptions – Part 16 Netflix Research Series
June 6, 2014

Scott Cleland

Scott Cleland is a precursor: a proven thought leader with a long track record of industry firsts.... (read full bio)

If Netflix’ position on net neutrality was justified on the merits, why does Netflix need to say so many deceptive things that are demonstrably untrue, in order to justify its case for its version of net neutrality?

Netflix knows that it is spreading falsehoods when it says that: 1) broadband is a “natural monopoly;” 2) Comcast is a “monopoly;” 3) Comcast wants to charge “the whole Internet;” and 3) “the Verizon network is crowded now.” Netflix knows that the truth and facts are not on their side, so apparently they are resorting to deception.

Before we expose Netflix’ biggest public deceptions, it is instructive to learn and spotlight what Netflix actually wants from the FCC’s net neutrality proceeding in the words of their own CEO, on their own corporate blog post, because when one understands what they actually are asking for it is much more understandable why Netflix would want and need to deceive the public to advance its cause.

  • Strong net neutrality additionally prevents ISPs from charging a toll for interconnection to services like Netflix, YouTube, or Skype, or intermediaries such as Cogent, Akamai or Level 3, to deliver the services and data requested by ISP residential subscribers. Instead, they must provide sufficient access to their network without charge.” [Bold emphasis added.]

Simply, Netflix’s position is that the Internet’s heaviest users and biggest beneficiaries of the Internet, i.e. Netflix, Google-YouTube, Amazon, and other large Internet companies, should not have to pay for any usage-based Internet interconnection, because consumers alone should shoulder the total cost of maintaining and upgrading the Internet’s infrastructure.

It is also important to appreciate how extraordinarily out-of-the-norm Netflix’s Internet streaming usage is, given that they are demanding that the FCC mandate that they pay nothing for their highest usage and consumers must subsidize Netflix’s business model.

Netflix consumes 34.2% of America’s downstream Internet bandwidth daily per Sandvine; in comparison, Google-YouTube consumes 13.2%, Apple-iTunes 3.6%, Facebook 2.0% Amazon 1.9% and Hulu 1.7%.

Netflix is in about a third of homes and it says its average-streaming-hours-per-user is roughly an hour a day. Since the average American household watches ~8 hours of traditional TV a day and ~15 minutes of online video per day excluding Netflix, that means Netflix consumes 34.2 % of the Internet’s downstream bandwidth to deliver just ~4% of U.S overall TV-video consumption. Not the most efficient video distribution to say the least.

Any way one slices it, Netflix gorges on more absolute and relative Internet bandwidth consumption than any other entity -- by far.

Now we can better understand why Netflix is also the most outspoken proponent of defining “strong net neutrality” as FCC price regulation that ensures Netflix does not have to pay anything for its exceptionally outsized use of the Internet delivery system.

While Netflix opposes a pay-for-priority or use delivery model for the Internet, Netflix wants people to forget that Netflix became the leading video subscription service in the U.S. via a pay-for priority and use delivery model, which involved paying the U.S. Postal Service several hundred millions of dollars a year to deliver their DVDs directly to its customers’ mailboxes. Interesting how one’s position can change when hundreds of millions of dollars in potential FCC zero-price subsidies are on the table.

Simply, Netflix’ net neutrality position is that the company that consumes the most Internet bandwidth, and which most benefits and profits from that bandwidth, should pay nothing for it, because it should be consumers responsibility, not Netflix’ responsibility, to pay for Netflix’ Internet inefficient streams to consumers.

Exposing Netflix’ Net Neutrality Deceptions

First, Netflix knows broadband is not a “natural monopoly.”

A “natural monopoly” exists where economies of scale and scope preclude the possibility of competitive facilities or services. Netflix knows that the U.S. broadband industry could not have successfully invested $1.2 trillion in private risk capital over the last decade in competitive broadband facilities over copper, coaxial cable, fiber optic cable, WiFi, WiMax, mobile 4G LTE, fixed wireless, and satellite, if broadband was in fact a “natural monopoly” of one technology and one provider.

“Natural monopoly” facilities, like electricity, water and gas, are based on the monopoly economics of a single-use and uniform-delivery. Netflix knows that broadband is competitive because all of the broadband facilities discussed above are digital and hencemulti-use (voice, video, high-speed, HD video, etc.), and all broadband services inherently can be variably provided at different speeds, capacities, capabilities, and prices to satisfy consumers’ different needs, wants and means.

Second, Netflix knows Comcast is not a “monopoly.”

Netflix knows the U.S. is the only country in the world with two ubiquitous wireline broadband infrastructures (cable and telco) and that the latest FCC report says that 91% of the U.S. population enjoys a competitive choice of at least three wireless broadband providers and 82% at least four, all because of America’s successful facilities-based competition policy.

And Netflix also knows that the White House said that: “In 2012, North America’s average mobile data connection speed was 2.6 Mbps, the fastest in the world, nearly twice that available in Western Europe and over five times the global average.” Moreover, Netflix knows those four national wireless broadband networks using LTE have only gotten much faster and more available since the White House’s 2012 assessment of broadband competition

Furthermore, Netflix knows that their customers routinely watch Netflix on tablets and smart phones over Verizon, AT&T, Sprint and T-Mobile’s wireless broadband networks, many WiFi hotspots, and satellite broadband networks as well. Simply, Netflix knows full well Comcast is not the only entity that can stream its service to customers. Comcast is obviously no monopoly.

Third, Netflix knows Comcast does not want to charge “the whole Internet.”

Netflix knows that Para 97 of the FCC’s Open Internet Remand NPRM indicates the FCC would not allow ISP’s to charge “the whole Internet:” “Consistent with the court’s ruling, we tentatively conclude that the revived no-blocking rule should be interpreted as requiring broadband providers to furnish providers with a minimum level of access to their end-user subscribers.” In plain English, the FCC’s proposed rules indicate that ISPs will not have the ability to charge anyone, whether they are a lone citizen, a start-up, an entrepreneur, or an Internet company for a basic “minimum level of access” to the Internet.

Most all of the net neutrality debate and fight over the Open Internet rules is whether or not the largest Internet companies (probably a couple of dozen companies or less, like Netflix, Google-YouTube, Amazon, etc., that could generate massive volumes of Internet traffic) have to pay more for the extraordinary high volumes of bandwidth their businesses require.

Netflix knows that it needs to deceive users and the media by telling them that the FCC proposed rules allowing “commercially reasonable” negotiations for large-volume interconnection to the Internet backbone would capture average users and start-ups, when Netflix knows the proposed rules plainly do not propose that scenario.

Netflix knows if users knew the truth -- that the issue is largely just about corporate welfare for the richest, least-taxed, least-regulated, least diverse, most-immunized-from-liability, Internet companies -- users would not support Netflix’s deceptive and self-serving net neutrality position.

Simply, Netflix knows Comcast and other ISPs only want to negotiate “commercially reasonable” interconnection arrangements with the largest cost causers on the Internet.

Lastly, Netflix knows it is not true that “the Verizon network is crowded now.”

As the Verizon Blog “Shifting Blame” explained, Netflix’ screen message to its streaming customers when they encounter buffering, “the Verizon network is crowded now,” is deceptive and untrue.

  • Per Verizon: “The source of the problem is almost certainly NOT congestion in Verizon’s network. Instead, the problem is most likely congestion on the connection that Netflix has chosen to use to reach Verizon’s network. Of course, Netflix is solely responsible for choosing how their traffic is routed into any ISP’s network. … It would be more accurate for Netflix's message screen to say: “The path that we have chosen to reach Verizon’s network is crowded right now.”However, that would highlight their responsibility for the problem.”

Deceptively, Netflix banks on the fact that most people do not know that the U.S. Internet has long exchanged traffic in an unregulated manner among the literally thousands of networks based on the volume of traffic one brings to an interconnection or peering point. They also don’t want people to know that there have long been three tiers of Internet backbone services based on traffic volume.

In addition, Netflix knows most people do not appreciate that Netflix is bringing hugely asymmetric downstream traffic to peering arrangements that have long been based on much more symmetric downstream/upstream traffic profiles.

Netflix is deceptively hiding the fact that it is Netflix’ extraordinarily asymmetric traffic flow that gobbles up one third of the U.S. Internet’s downstream traffic that is the new issue here, and that is changing and threatening sound economics of the Internet backbone infrastructure going forward.

What Netflix, Google-YouTube and the Internet Association members seek is a proverbial free-lunch subsidized and paid for by consumers. In addition, they don’t want to admit that is what they are asking the FCC for because they know how crass, self-serving and off-putting it would be if they were honest and transparent with consumers and the media.

Conclusion

In sum, Netflix has to deceive people with demonstrable falsehoods to distract them from what Netflix wants from the FCC and to convince them to support their policy position.

Why? Netflix has long deceived its investors that net neutrality regulations protect their core business model and guarantee no-financial-cost-downside for Netflix shareholders.

Now Netflix is doubling down on their deceptive approach by trying to deceive the public, media, Congress and the FCC that broadband is a “natural monopoly” and Comcast is a “monopoly” when they know they are not, and also that Comcast and Verizon are degrading Netflix streams to consumers when it actually is Netflix that is manufacturing the congestion problem for PR benefit in order to advance its net neutrality gambit.

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Netflix Research Series

Part 1:  Level 3 & Net Neutrality - Ignorance Unleashed! [11-30-10]

Part 2:  Level 3-Netflix Expose their Hidden Agenda [12-3-10]

Part 3:  Sinking Level 3 Seeking FCC Internet Regulation Bailout [12-8-10]

Part 4:  Netflix' Open Internet Entitlement Hubris [2-1-11]

Part 5:  Fact-Checking Netflix' Net Neutrality WSJ Op-ed [7-8-11]

Part 6:  Netflix' Glass House Temper Tantrum Over Broadband Usage Fees [7-26-11]

Part 7:  Netflix Crushes its Own Momentum [9-20-11]

Part 8:  Netflix the Unpredictable [10-10-11]

Part 9:  Is Netflix the AOL of Web Streaming? [3-9-12]

Part 10: Netflix' Net Neutrality Corporate Welfare Plan [5-9-12]

Part 11: 5 BIG Implications from Court Signals on Net Neutrality - A Special Report [9-13-13]

Part 12: Video: Why FCC Title II Reclassification of Broadband is a Legal Non-Starter [9-22-13]

Part 13:  Is Net Neutrality Trying to Mutate into an Economic Entitlement? [1-12-14]

Part 14:  Exposing Netflix' Extraordinary Net Neutrality Arbitrage [1-24-14]

Part 15: Net Neutrality is about Consumer Benefit Not Corporate Welfare for Netflix [3-21-14]

[Originally published at Precursor Blog]

Scott Cleland

Scott Cleland is a precursor: a proven thought leader with a long track record of industry firsts.... (read full bio)