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Netflix’s secret weapon in the net neutrality fight

January 23, 2014 By Brian Fung

People generally think of Netflix as a potential loser in the recent court decision overturning the government's network neutrality regulations. But on Wednesday, the company flexed its muscles in an unmistakable show of corporate power meant for Internet providers.

In a letter to investors, Netflix CEO Reed Hastings and CFO David Wells warned that if broadband providers start charging a toll for reaching U.S. Internet subscribers, Netflix and its users would revolt.

"Were this draconian scenario to unfold with some ISP [Internet service provider], we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver," Hastings and Wells wrote.

That doesn't appear to be an empty threat; in the same letter Wednesday, Netflix announced its paying customer base had grown to more than 34 million Americans, a 23-percent increase compared with the same period last year. Netflix currently accounts for nearly a third of all U.S. Internet traffic during peak hours, according to third-party studies.

Having tried the stick, Netflix then offered the carrot, suggesting that Netflix drives business toward broadband providers — and cooperation would be in the ISPs' interest.

"Consumers purchase higher bandwidth packages mostly for one reason: high-quality streaming video," the executives wrote.

While the letter lays out Netflix's position in strong language, it also exposes some of Netflix's vulnerabilities. Despite sharing what might be called a symbiotic relationship with broadband companies, Netflix also lacks the power to guide their behavior before the fact. And that's why the company's only threat of consequence relies on the ire of its members.

It's still a smart move. Netflix clearly has no intention of playing the victim.

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