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October 20, 2016

The Worm in Netflix's Apple


Netflix, which is quickly becoming the apple of investors’ eyes, has seen its stock price jump this week after it “blew through its forecast for subscriber additions in the September quarter,” according to The Wall Street Journal.

And why not? Who doesn’t love Netflix? The company is providing a service that consumers love. And it successfully navigated the transition from physical media to streaming while other, more established players like Blockbuster failed. And now, with the move toward original programming like the much-acclaimed Stranger Things, Netflix is becoming a powerhouse.

And it’s not as if Netflix has no competition. Amazon is clearly in the streaming video business for the long-haul, and has both tremendous resources and a patient, long-term strategy. And there’s Hulu, HBO Go and other competitors.

As free-market cheerleaders, we celebrate when innovators take risks and succeed in the marketplace. It’s clearly a better world with Netflix in it for only $9.99 a month. But there is a worm in Netflix’s apple, and it’s there precisely because the company chose to lobby for favorable treatment from government regulators instead of succeeding through private, free-market negotiations.

You see, Netflix is dependent on broadband—a lot of broadband. Streaming HD video consumes a lot of bandwidth, and Netflix is “the biggest broadband hog in North America.” Which makes it dependent on broadband providers like AT&T, Verizon, Comcast, Charter and Suddenlink to get its products to consumers.

One strategy would have been for Netflix to realize that its success was tied to continued investment and expansion of broadband, and to enter into constructive partnerships with broadband providers to ensure they have every reason to continue to invest in higher speeds and increased coverage.

But the other, easier strategy was to lobby the federal government to regulate broadband providers. Winning through lobbying rather than winning through negotiated contracts, in other words.

And that’s what Netflix did, acting out of “especially puerile and venal motives,” according to The Wall Street Journal’s Holman Jenkins. Netflix became an aggressive, last-minute champion of the most extreme version of broadband regulation through reclassification under Title II.

Now, predictably, broadband investment is down according to several analyses. At some point that is going to catch up with services like Netflix, as more consumers demand HD and 4K video options, which require even more bandwidth. A now highly regulated broadband industry has less incentive to take risks and invest in new capacity, and Netflix was a prime mover in driving the new regulations.

Longer term, if Netflix succeeds in becoming king of the video streaming hill, the company may be surprised to find itself the target of the very expanded regulatory apparatus it helped create.


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