Netflix Calls for Stronger Rules on Handling of Web Traffic

March 20 (Bloomberg) -- Netflix Inc. called for rules that would prevent Internet service providers from extracting a toll to deliver shows such as “House of Cards” over their networks.

Consumers face poor service if online providers don’t agree to pay companies like Comcast Corp. (CMCSA) and Verizon Communications Inc. (VZ) for priority connections, Netflix Chief Executive Officer Reed Hastings said today in a blog post. His commentary was filed to the Federal Communications Commission, according to Jonathan Friedland, a spokesman for the Los Gatos, California-based company.

With the post, Hastings staked out a position that could save the world’s largest subscription video service millions of dollars a year in fees it recently agreed to pay.

“Without strong net neutrality, big ISPs can demand potentially escalating fees for the interconnection required to deliver high quality service,” Hastings wrote. “The big ISPs can make these demands -- driving up costs and prices for everyone else -- because of their market position.”

So-called net neutrality gained attention after Comcast Corp.’s agreement to buy Time Warner Cable Inc. (TWC), which would concentrate Internet access. While Hastings didn’t mention the deal, which was announced on Feb. 13, he cited Comcast as one of the companies that supports weaker rules.

Internet Traffic

“Comcast has been an industry leader in supporting weak net neutrality, and we hope they’ll support strong net neutrality as well,” Hastings said.

The issue Netflix is highlighting is outside the open access rules that Comcast has openly supported, David Cohen, a Comcast executive vice president, said in response to Hastings’s comments. Instead, the handling of internet traffic is part of the normal business between companies that own broadband networks and companies that want to use them, he said.

“Providers like Netflix have always paid for their interconnection to the Internet and have always had ample options to ensure that their customers receive an optimal performance through all ISPs at a fair price,” Cohen said in an e-mailed statement.

Netflix in February agreed to pay Comcast millions of dollars annually for more-direct connections that ensure improved speed and reliability for its video service.

By doing so, Netflix freed itself to lobby for stronger protections without endangering service to its customers, said Andy Hargreaves, an analyst for Pacific Crest Securities in Portland, Oregon.

Fast Service

“You pay to do the deal so that when you start rattling the cage they can’t screw you even more,” Hargreaves said.

Netflix’s service improves once it agrees to pay ISP fees, Hastings said in his posting. He also said intermediaries such as Cogent Communications Group Inc. (CCOI) and Level 3 Communications Inc. (LVLT) face similar costs.

Consumers already pay for fast Internet service so providers such as Netflix, Google Inc. (GOOG)’s YouTube or Microsoft Corp. (MSFT)’ Skype shouldn’t also have to pay, Hastings said. For a given U.S. home, there are often only one or two choices for high-speed Internet access, which makes it hard to switch, he said.

“While in the short term Netflix will in cases reluctantly pay large ISPs to ensure a high-quality member experience, we will continue to fight for the Internet the world needs and deserves,” Hastings said.

In January, Verizon won an appeals court challenge to U.S. equal-treatment rules for the Internet, a decision that predated Netflix’s deal with Comcast.

‘Public Opinion’

In today’s posting, Hastings didn’t call directly for government intervention. The company is taking its fight directly to the consumer in an attempt to get them to seek change from lawmakers, said Daniel Ernst, an analyst at Hudson Square Research in New York.

“This is a battle for public opinion that’s going to take a very long time to play out,” Ernst said. “Rather than futilely attempting to wage battle in court, they trying to get consumers to push Congress to make reforms to net neutrality.”

Shares of Netflix rose 1 percent to $424.27 at the close in New York today. The stock has gained 15 percent so far this year.

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net Anne Reifenberg, Ben Livesey

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.