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CFO: Netflix Shouldn’t Have to Pay ISPs

3 Mar, 2014 By: Erik Gruenwedel

Netflix CFO David Wells

Netflix’s recent decision to pay Comcast for easier broadband access to its subscribers does not mean the subscription streaming pioneer intends to open its wallet to other ISPs seeking fees, CFO David Wells told an investor group.

Speaking March 3 at the Morgan Stanley Technology, Media & Telecom confab in San Francisco, Wells said the Comcast deal would increase streaming costs an undisclosed amount, but within guidelines previously announced.

“We still believe philosophically that the consumer is still best served in an environment where a content provider like [Netflix] doesn’t pay an ISP. That consumer pays for broadband and they should be able to use that broadband,” Wells said. “But [the Comcast deal] was an opportunity to ensure better service long term for our subscribers.”

The CFO admitted other ISPs could try to invoke broadband fees into subscriber homes, but cautioned that it wouldn’t necessarily mean Netflix would agree to pay. Wells said Netflix has no interest in agreeing to peering arrangements with ISPs that would “meaningfully” change the economics delivering content to subscribers.

Speculation linking the Comcast agreement with net neutrality were incorrect as no ISP throttled Netflix distribution to its subscribers, according to Wells, who added such practices would lead to consumer complaints and regulatory oversight.

“That was not happening,” Wells said. Instead, Netflix’s major concern involves the costs of delivering its content the “last mile” into subscriber homes. Netflix’s Open Connect CDN attempts to remedy that by putting its technology within an ISP’s data center in order to reduce the latter’s transit costs, among other fees.

The Comcast deal brought Netflix closer to Comcast’s ISP network architecture, Wells said.

He said Netflix would only be willing to spend the resources required to ensure a superior streaming experience. Indeed, Comcast is the No. 1 cable operator in the U.S. — a position that could become entrenched should its $45 billion acquisition of Time Warner Cable pass regulatory muster.

Meanwhile, Wells reiterated that Netflix subscriber growth originates from both improved subscriber churn (the percentage of subs discontinuing service), in addition to organic growth. He said the rejoin rate for subscribers is between 30% to 40%. Netflix no longer releases churn rates in its fiscal reports.

The executive said a key driver to improved subscriber churn is original programming. In fact, Wells said programming such as “House of Cards” and “Orange Is the New Black” have been “game changers” regarding how consumers view Netflix. He said it is unlikely Netflix would ever rival HBO, which generates upwards of 50% of its programming from original fare.

Wells said Netflix’s ultimate goal releasing one or two original programs every month or two would underscore its engagement with consumers. He said original programming — not its landmark pay-TV deals with Disney, Marvel, Lucasfilm and DreamWorks Animation — have given Netflix a solid marketing anchor as it expands its brand globally.

“Not everybody watches the same thing. So in order to [achieve balance], you need to release 15 to 20 [original programs] a year. And that’s where we want to get to,” Wells said.

The CFO reiterated that Netflix plans “significant” expansion in the second half of the year — growth that would dwarf efforts most recently in Holland. Notable criteria to expansion include broadband access and content license costs in the country. Wells admitted to speculation that entrenched premium content providers in potential markets can sign license exclusives. While admitting that it could be a negative, Wells said Netflix’s scope and size could be more appealing to content owners — especially smaller ones focusing on niche content.

“The reality is that Netflix has come along and established a value for digital rights,” he said.



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