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Analyst: Netflix Could Face Higher ISP Fees Following Court Ruling

15 Jan, 2014 By: Erik Gruenwedel

SVOD leader had lobbied extensively for net neutrality, which was struck down Jan. 14 by an appeals court

Netflix could see higher fees imposed by third-party Internet service providers such as cable after an appeals court struck down the Federal Communication Commission’s Open Internet Order, also known as net neutrality, according to Wedbush Securities analyst Michael Pachter.

The analyst — a longtime bear on Netflix’s stock — said the Jan. 14 decision by U.S. Court of Appeals for the D.C. Circuit paves the way for ISPs to charge Netflix (and other SVOD services) fees based on the amount of data transmitted through their pipes. Netflix enables subscribers unlimited streaming, which means websites that transmit the most data, or stream video content (particularly in high definition), could potentially see a significant increase in related fees.

Prior to the ruling, ISPs could charge end users fees based upon data consumption, but were limited in their ability to charge the websites (such as Netflix) accessed for transmission over their Internet networks. In the U.S., ISPs have long been reluctant to impose bandwidth caps on end users — despite the fact this practice has become increasingly popular for cellular data plans (see AT&T’s new sponsored data plans), according to Pachter.

“It is our view that ISPs fought so hard to eliminate the net neutrality rules because they have always hoped to charge websites, which would in turn pass the costs on to their advertisers or customers,” he wrote in a Jan. 15 note.

While the FCC is expected to appeal the ruling to the Supreme Court, Pachter believes Netflix could up its fees to ISPs in order to obtain preferential treatment for its subscribers compared to the competition. Yet, ISPs would likely look to extract higher fees across the board without playing favorites, according to the analyst.

“We think it is far more likely that Netflix will see its users throttled by ISPs unless it pays for unrestricted delivery,” he wrote. “In our view, it is most likely that ISPs would seek to extract a set fee per gigabyte (GB) of data transmitted; the result would be more costly for Netflix than the status quo, with little or no incremental benefit.”

Netflix shares were down 4% in midmorning trading.


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