ACI in Real Clear Policy: The Netflix Free Lunch

Last month, Netflix announced an agreement whereby it would pay Comcast to boost Internet speed and reliability for the companies’ joint customers. Soon after, Netflix said it would be entering into similar agreements with other Internet Service Providers (ISPs). This comes after years of struggle between Netflix and other content providers and the ISPs, with many net-neutrality proponents arguing that any sort of payment on the part of Netflix would violate the spirit of the open Internet.

This brings up an important point. As more and more people stream their entertainment via the Internet, rather than through traditional cable, the broadband infrastructure will need to be continually upgraded, and costs will continue to rise for ISPs. Who should pay for the cost of delivering content from providers such as Netflix, Hulu, and Amazon?

Netflix alone has 44 million customers, and on an average night, during peak hours, up to 33 percent of all U.S. Internet traffic can be attributed to Netflix streaming. Delivering this content isn’t cheap, yet Netflix — which brought in $1.2 billion in revenue in the fourth quarter of 2013 alone — pays almost nothing.

So who is paying? Mostly, it’s been the ISPs and their customers. ISPs have invested $1.2 trillion in broadband infrastructure since 1996 — $68 billion in 2012 alone. Without the backbone that’s been built out using these billions in investment, Netflix would most likely still be mailing DVDs. 

ISPs’ customers, meanwhile, mostly pay flat fees for their Internet service — meaning they pay the same whether they’re using their Internet to stream movies or just check their e-mail. According to the National Cable and Telecommunications Association, 1 percent of homes consume 40 percent of the bandwidth delivered. So some customers are subsidizing the costs of others.

Isn’t it an acceptable proposition that Netflix should have to pay for the massive amounts of data the company is sending over the networks and the additional costs that result?

Netflix CEO Reed Hastings, in a blog post, says that ISPs should build out the needed backbone, which should then be free for everyone to use, painting Netflix as the underdog fighting for Internet freedom. AT&T senior executive vice president James Cicconi, however, points out that consumers will end up paying for the costs caused by Netflix no matter what. In Netflix’s view, all consumers should bear the cost of increased streaming loads equally. But Cicconi argues that it makes more sense for Netflix customers to pay the added costs, considering they’re the heavier users.

As Cicconi says, there’s no such thing as a free lunch — someone has to pay. The arrangements being made between Netflix and ISPs seem to be a step in the right direction. Non-Netflix customers shouldn’t have to pay someone else’s bill.

Zack Christenson writes on digital tech issues for the American Consumer Institute Center for Citizen Research.  This article was published in Real Clear Policy.

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