Bye-bye net neutrality – do Netflix and Alphabet need to become ISPs?
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Bye-bye net neutrality – do Netflix and Alphabet need to become ISPs?

This week sees something historic alter the internet landscape: the repeal of the FCC’s net neutrality rules, which stipulate that Internet Service Providers (ISPs) must remain “neutral” in what bandwidth they sell to whom, and for what amount. In other words, an ISP can’t charge one company more for better internet speeds than another.

This ruling has long been seen as one of the great democratisers of online space – designed to ensure that powerhouses don’t get special access to a “premium internet” which locks out small new disrupters. Last week, the repeal of these rules wouldn’t have bothered Alphabet or Netflix – but another case that just went before the district court could change that.

Netflix’s share price has appreciated by 82% so far this year!

graph 1406 netflix

SOURCE: Yahoo Finance

Earlier this week, the district court approved the merger of AT&T (a major ISP) and Time Warner (a major content provider). The resultant company will be one of the biggest content creation and distribution companies in the world, and it could set a precedent for a consolidation of the market. According to online tech magazine TechCrunch, it “is also expected to encourage Comcast to make a similar bid for 21st Century Fox.” In the words of Chip Pickering, CEO of pro-competition advocacy organisation INCOMPASS: “AT&T is getting the merger no one wants, but everyone will pay for.”

The reason Pickering describes this merger as both unwanted and expensive is that it suddenly creates an entity with which pure-play online content platforms (like Netflix, and YouTube) are under incredible competitive pressure. These companies are used to negotiating with ISPs, but that will become much more difficult if they are also in direct competition with those ISPs. The risk is that AT&T could hike prices and, because it has its own content library to sell, players like Netflix would have to pay premium rates to compete – in the streaming world, internet speed is vitally important.

However, investors shouldn’t rush to ditch their shares just yet – there are options available to Netflix and Alphabet. The latter, for example, can redouble its efforts with Google Fiber. If the big ISPs threaten YouTube, Alphabet can make a counter-threat with Google Fiber that could – assuming the company can ramp up its development – literally kill AT&T and Comcast’s business model. And Netflix? Given the size it is now, it’s highly likely that it will get into the connectivity game. Even if it doesn’t, it’s in the best position re: blockbuster, can’t miss, content of anyone in the SVOD (streaming video on demand) space. At least initially, that will give it some leverage, because ISPs will be pressured to deliver the specific content that their customers want – offering them a different show that is “just as good” likely won’t cut it.

However, there is another “interesting dynamic” that TechCrunch sees on the horizon: “Alphabet creating strategic partnerships with companies like Netflix, Twitch and others to negotiate as a collective against ISPs. While all these services are at some level competitors, they also face an existential threat from these new, vertically merged ISPs.”

That could be the best of all worlds: it would maintain the position and power of big players like YouTube, Amazon and Netflix, and it would also provide a route of entry for new, smaller, players to enter the space with a little more leverage than they could manage alone.

Disclosure

Dominion holds Netflix, Alphabet, and Amazon in its Global Trends Ecommerce Fund.


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