Here’s How Netflix Can Be Impacted By The Decision On Zero Rating

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Recently, the Federal Communications Commission’s (FCC)  new chairman Ajit Pai stated that the investigation into zero rating is being closed down and the Commission will not take any further action against AT&T, Verizon Communications  and T-Mobile for this practice, by which they apply no data charges for selected streaming services.  Several experts believe that this strategy impacts net neutrality since it encourages customers to use their broadband connections for these specific streaming services impacting other players such as Netflix (NASDAQ:NFLX) negatively. Favoring one streaming service over another by a broadband service provider violates the principle of free internet.  Netflix states that this policy should not impact its domestic margins, given its popularity with users, which enables it to have stable relationships with internet service providers. However, this policy will make viewing Netflix more expensive for users compared to these other streaming services where data charges do not apply.

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Cost Vs. Quality

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It is Netflix’s strategy to maintain a competitive edge is based on high quality of its content, in which it is making a significant investment in original programming. Recently, the company entered into an agreement with Comcast where it would pay the latter an undisclosed sum for which Comcast would directly connect to Netflix’s servers, improving the streaming quality for Netflix content.  The company is also targeting customers who are willing to pay an extra subscription charge for a better video quality by introducing ultra HD (4k) quality videos. While consumers might be willing to pay a premium for this service, this impacts their data usage significantly. One hour of 4K videos consumes 7GB of data as opposed to 0.7GB for SD quality. Zero rating can impact decisions of fence sitting customers since they can get streaming services without data charges with these carriers but have to pay huge data charges for viewing Netflix. That said, the company’s popularity and a loyal consumer base should offset this to a degree, assuming its high quality original programming generates sufficient support.  If so, the company can continue to grow subscribers despite these higher costs.

Using The Policy To Its Advantage

Netflix can use the policy favoring zero rating to its advantage. It already has an agreement with Comcast in place to ensure high quality of its videos for Comcast subscribers and it can enter into such agreements with other players to develop a competitive edge over “free” streaming services which might not have a good streaming quality. Furthermore, smaller players might not be able to enter into such agreements, given the high costs involved, giving Netflix a competitive edge.  Netflix can also potentially enter into partnerships with major broadband providers such that its content can be watched by viewers free of data usage charges.

While the FCC’s decision to drop further investigation on zero rating violates the principles of net neutrality, it will impact the streaming services segment significantly over the long term. With demand for higher quality of videos increasing, the impact will be directly visible on data usage and data charges. With some streaming services not being counted in the data usage caps, the playing field is no longer level, impacting competition in this segment negatively.

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