Netflix Increasing Fees To Stay Competitive
Netflix is raising its prices. So what?
After posting its first quarter earnings this Monday, Netflix’s stock rose by over nine percent. This was also following a hint that Netflix would be increasing their prices by one or two dollars a month; from $7.99 to a possible $9.99. And investors seemed happy about it. The customers don’t seem to be complaining much either. After all, following Netflix’s last year debacle, where they attempted to raise prices by 60 percent and lost over 800,000 subscribers, an increase of a couple of bucks is comparatively underwhelming to existing customers. So who is complaining?
Netflix’s CEO Reed Hastings has plenty to say about the interconnectivity fees Comcast recently demanded from Netflix. Comcast was the first to demand fees for hooking up Netflix directly to its network, thereby increasing streaming speeds to Netflix’s customers. Hastings reluctantly paid the fees after months of negotiations. And indeed, Netflix’s streaming speeds increased by 65 percent in March. Reed immediately began complaining about having to pay the interconnectivity fees, bringing up Net Neutrality arguments as well as the pending Comcast/Time Warner Cable merger.
The Net Neutrality argument centers around a view that ISPs could favor certain online services based on monetary incentives. Time reported that in 2010, the Federal Communications Commission stated that net neutrality rules don’t apply to interconnectivity deals. In other words, if Comcast wants to charge Netflix to hook directly into its network to increase speeds and give customers a better experience, then that’s all well and legal. The merger between Time Warner Cable and Comcast also warranted a warning from Hastings during a webcast:
The fear is that, if the merger goes through, there will be one communications company to rule them all. Comcast would have no reigns to hold its interconnectivity fees at bay. And with 60 percent of Internet traffic coursing through the new entity’s veins, it’s hard to argue that the merger will do anything to spur competition, or help consumers in any way. But Netflix itself is responsible for almost a third of the world’s streaming traffic, making it a behemoth in the industry as well. Although Hastings is throwing around a lot of concepts and conspiracy theories, the Netflix fee hike appears to have nothing to do with the Comcast merger and more to do with the increasing costs of doing business and remaining competitive.
There are other companies that will certainly be affected by the new merger, but none of them are speaking out. They may be afraid of making enemies with a company that will soon be in control of fees and traffic that affect large portions of their business. Other intermediary companies may be completely removed from the picture, like Cogent. Once the Internet Service Providers are linked directly to the content providers, any dependent businesses that used to exist between the two will cease to exist.
As the battle for a new communications infrastructure rages, Netflix isn’t the only one having to increase fees in order to stay competitive. Amazon Prime recently raised their subscription fee from $79 to $99 a year. The battle for up-to-date programming, increasing demands by customers for speed, struggles to create original content, and maintain a variety of choices can only lead to competition. Competition spurs technology and lowers prices.
Even if Comcast had caved and not charged Netflix the interconnectivity fees, Comcast would have absorbed the cost of providing the extra networking and speeds. And that cost is always passed on to the customers. So the argument as far as us consumers are concerned, is whether we pay Netflix the extra $2, or whether we pay Comcast.
It’s a moot point for our wallets.
Image via Wikipedia
