Why Comcast vs. Netflix Is Not About Net Neutrality

Whenever I write about net neutrality or some equally complex and controversial issue the inevitable happens: emails, comments, tweets and posts from people who think they’re experts but, with all due respect, have no idea what they’re talking about.

Yes, I know that sounds snarky. It’s nothing personal. Really. It’s just that these vacuous individuals have nothing better to do than accept all the nonsense they consume online as fact without questioning where it originally comes from.

For example, all the misinformation about Comcast (NASDAQ:CMCSA) supposedly extorting Netflix (NASDAQ:NFLX) and throttling its subscribers that’s perpetuated by dozens of content mills and social media wantrepreneurs blogging in their PJs in their parent’s basements comes from none other than Netflix.

Folks eat this stuff up because everyone loves a David and Goliath story and the Netflix-Comcast battle sounds like helpless little David is getting beat up by the big bad giant Goliath. That’s why these corporate soap operas go viral. It’s the drama. Everyone loves the drama.

In reality, David is just a whiny little wimp with a crappy business model who doesn’t want to pay what he should to deliver massive amounts of streaming content to his subscribers who, incidentally, pay very little for the privilege. Maybe he should just raise his rates and quit complaining to the FCC and everyone else about big bad Goliath.

Wait, I forgot. That might help David’s miniscule bottom line profits but it would also dampen his subscriber growth rate and cause his stock to plummet, as it did last month following the last price increase. That’s why spoiled David wanted to have it both ways, but Goliath said, “Uh-uh, not so fast little guy.”

Poor, poor David. Bad, bad Goliath.

While that does make for great online fodder it has absolutely nothing to do with net neutrality, as CNET’s Maggie Reardon correctly explained some months ago in an article that everyone who wants to understand how the Internet really works (instead of demonstrating how clueless and gullible they are) should read.

The simple truth, without the funky analogy, is that Netflix accounts for nearly a third of all Internet traffic in North America. Just as it has always paid to license its video content, it has always paid to deliver that content to subscribers. And its profits have always been a pretty tight squeeze in between. That’s why it’s developing original content like House of Cards.

Likewise, Netflix sought to cut out third-party network providers like Cogent and negotiate directly with ISPs, just as the likes of Google and Facebook have done for years. The only difference is those Internet companies have huge advertising revenue streams and the content they deliver is user-generated, so it’s free. They don’t have the same profit woes Netflix has.

And while Netflix was able to negotiate sweet deals with smaller broadband providers like Cablevision, others with more clout such as Comcast and Verizon weren’t exactly pushovers. That’s life in competitive markets.

Nevertheless, Netflix has managed to put Blockbuster and every other video rental company out of business and become the nation’s dominant provider of DVDs and streaming videos. It was the first to offer DVDs with no strings attached, the first to offer virtually unlimited rentals, and the first to offer streaming videos. And now it has a near monopoly.

That’s the good news.

The bad news is that it has to license the vast majority of content it offers subscribers and pay broadband service providers to deliver it, so it has to negotiate terms with those companies. That’s its business model. And I’m sure if it focuses on optimizing its business and quits whining to the government and everyone else who will listen, it’ll find a way to make it work as it has in the past.