Netflix dismantles the telco-film industry foundation on which its House of Cards is built

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

[roslynlayton.com]

Roslyn Layton is a fellow in Internet Economics at Aalborg University in Denmark. [roslynlayton.com]

There is more to Netflix’s success than content and technology.  To expand internationally, Netflix relies both on light and heavy-handed PR tactics.  They take a page from their series “House of Cards” where lead character Frank Underwood observes, “In Gaffney we had our own brand of diplomacy. Shake with your right hand and have a rock in your left.” 

Roslyn Layton is a Ph.D. fellow in Internet economics at the Center for Communication, Media and Information Technologies at Aalborg University in Denmark. She is also vice president at Strand Consult, a telecom consultancy.

As part of his charm tour to grease the wheels of the company’s rollout in across the continent and make nice with regulators, Netflix CEO Reed Hastings visited Brussels, declaring, “Neither side expected that all users would watch Netflix at the same time, and it does generate considerable cost. … Each should think a little bit about the other because we want a mature and thoughtful dialogue so everybody can prosper in serving the consumer with these great new solutions like on-demand television.” 

While Netflix may extend one arm in good faith, in the other it holds a rock: its ISP Speed Index, a pseudo-transparent speed ranking used to shame the operators that won’t participate in its OpenConnect content delivery network (CDN).  It’s interesting that the broadband networks that Netflix maligns as slow were somehow good enough to transform this DVD-by-mail company into the world’s largest online streaming service. Yet those same companies, fast enough to help Netflix win 50 million customers and expand into 40 countries, regularly find themselves threatened with its speed index.

A case in point was Netflix’s Norwegian launch. Norway’s leading ISP, Telenor, which covers the longest country in Europe with next generation networks and a CDN, offered to cache Netflix content for a negotiated, market-based fee.  Netflix proposed instead that Telenor connect to its nearest exchange in Sweden run by competitor Telia.  Both options entailed costs for the parties, but the locally-deployed solution in Norway by Telenor ensured a better customer experience. When Telenor declined, Netflix threatened to expose Telenor as having a slow network with no CDN in place. Telenor called the practice a “PR trick” and refused to comply. Netflix published its speed report, putting Telenor in last place.

Hastings waxes poetically about the digital commons, net neutrality, and Netflix’s glowing experience in the Netherlands.  Yet the Dutch are mixed about the “Netflix effect”. Indeed their net neutrality law, which limits operators’ ability to manage networks and recover costs, was meant to herald a flowering of Dutch internet innovation and content. Instead, it is a red carpet for the American giant whose traffic ballooned from zero to 20 percent of all downstream network capacity almost overnight with just a small percentage of subscribers. As Netflix grows to its stated goal of one-third of all households, literally the entire network will be consumed by its video streams.

The French too may have buyers’ remorse. While consumers love getting Netflix content on the cheap, many see the company getting a free ride on taxpayer-funded networks. Moreover, by setting up European operations in Luxembourg, a practice called fiscal dumping, Netflix avoids the costly local requirements of taxes, contributions to cultural development funds, and French content quotas. 

Netflix’s aggressive strategy to undercut the content industry may ultimately cannibalize the products it needs to stock its growing portfolio. Soon it will release films online on the same day as they appear in theatres, effectively destroying the first pay window on which studios rely to recover their costs of production. Undoubtedly Netflix’s new 4K service will come with a price increase, but meanwhile, the company lobbies the US and EU governments for price controls, naturally under the guise of a “free and open internet”. In this way Netflix minimizes its own expenditures by effectively passing the cost of its upgrade to all consumers, whether they subscribe to Netflix or not.

There is no doubt that one can get ahead with Machiavellian tactics:  Frank Underwood inches ever closer to the Oval Office, and Netflix’s CEO is a newly-minted billionaire. It goes to show that in the cutthroat world of on-demand television, rules are for losers.

But with no foundation left, the house that Hastings built will not stand.

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