How the Removal of Net Neutrality Will Impact Streaming Services

In 2017, the momentum to overturn net neutrality continues to build. New FCC Chairman Ajit Pai has made no secret of his desire to get rid of the Obama-era rules governing net neutrality. From his perspective, trying to regulate the big broadband players the same way you would a utility just makes no business sense.

Instead of ironclad rules forcing big broadband players to adhere to net neutrality, the FCC appears to favor some kind of voluntary system, wherein companies like Comcast, Charter and AT&T promise to keep the Internet free and open. However, is a simple “gentleman’s agreement” between the biggest players in the industry enough to preserve net neutrality?

#1: The end of net neutrality could lead to fast and slow lanes for content

One way that the removal of net neutrality might impact streaming services is by creating a fast lane and a slow for streaming content. As the system currently works now, a big Internet Service Provider (ISP) can’t “choke” or “throttle” the content from any content provider. Thus, in practical terms, a company like AT&T currently can’t make video content from Netflix slower than video from other providers.

But what if it did? Once net neutrality disappears, a big broadband provider might reach out to Netflix and basically tell CEO Reed Hastings, “Hey, we’d love to keep your video content on our networks, but it would be really helpful if you pay a little extra to keep the same speed.” In short, the big broadband providers could play hardball. They know that Netflix can only deliver its content to consumers if it has free, unfettered use of the Internet. So, the more that the big broadband providers slow down the content from Netflix, the more it places a real squeeze on Netflix.

In a worst-case scenario, you could view this as a very artful mafia-style shakedown of the big streaming players. You can almost imagine a Robert De Niro character saying something like, “You don’t have to pay protection money, of course. But don’t blame me if your business burns down in the middle of the night.” In short, what’s going to happen to Netflix if all of its video streams become so painfully slow to watch that consumers just give up?

#2: The end of net neutrality could lead to higher costs for consumers

If Netflix video content is not treated the same as other content, there’s the very real possibility that Netflix could be forced to pass on any extra costs to consumers. For example, say that Netflix works out a deal with all the big broadband players, in which it agrees to pay $100 million a year in order to keep its traffic flowing free and fast. Well, someone’s going to have to absorb that $100 million hit, right? Netflix is a business, not a charity.

So far, Netflix has said that any extra fees for fast access wouldn’t affect its business model. The company has tried to put a brave face on things, saying that the service is simply “too popular.” That’s the equivalent of telling the big broadband players, “You want to charge us a fee? OK, we’re going to rat you to our consumers, and they’ll cause a huge problem for you, so watch out…” Right now, Netflix has 50 million U.S. customers, so that’s actually a pretty convincing argument. You don’t want to anger one-sixth of the total population in the U.S., do you?

That being said, there’s already a template for how things might shake out in the future. Think of the difference between SD and HD video content. If you stream a movie from Google Play, for example, you almost always have a choice between SD and HD content. The SD content is cheaper, but doesn’t take up as much bandwidth. The HD content is more expensive, but is higher quality.

That pricing dichotomy seems like something that might happen if we remove net neutrality. You’d pay one price for a streaming movie that’s slow and clunky, and another price for a streaming movie that’s running in the fast lane of Internet content.

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#3: The end of net neutrality will lead to consolidation of streaming players

One amazing feature of the current streaming market has been all the competition. Every month, it seems, a new company begins to offer a new type of streaming service. There are streaming services that are on-demand, and there are streaming services that are “live.” There are streaming services that come into your household via over-the-top boxes, and others that come into your household via videogame consoles. There are services for your TV, and others designed for tablets and phones. The list goes on and on.

With the end of net neutrality, it’s likely that we’ll see some kind of shakeout. The only way to survive will be to become as big as possible. And not just big – but a real behemoth. Take AT&T, for example. That company gobbled up DIRECTV, and then it gobbled up Time Warner.

One company that seems to be ripe for consolidation is T-Mobile. In just about any Wall Street analyst report on the industry, T-Mobile is mentioned as a potential merger and acquisition (M&A) candidate. In one scenario, T-Mobile would merge with Sprint. In another scenario, it would get acquired by a big cable company. And, in yet another, it would acquire Dish Network in order to “bulk up” and ward off potential buyers.

#4: The end of net neutrality might usher in a new golden age of innovation

Of course, the first three scenarios outlined above assume that the end of net neutrality would be bad for the streaming services. Is there any scenario in which it might be good? If you believe in the power of capitalism and the ability for innovation to thrive in a completely deregulated market, then taking the shackles off the big broadband players might usher in a new golden age for consumers.

With the extra “toll money” that they are collecting from the likes of Netflix, the big cable companies would theoretically be able to build a vast new 5G superhighway of streaming goodness. Services not possible today due to network constraints might be possible with 5G. And, of course, the likes of Comcast, Charter and AT&T would roll out new features far superior to any yet proposed by Netflix (or Sling TV or Hulu or Amazon Prime Now).

That’s the hope, at least.

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