Netflix warns loophole, Comcast-NBC merger could hurt open Internet

Netflix’s main business -- DVDs delivered by mail -- couldn’t be more 1990s. But increasingly, the company’s streaming online video service has emerged as a threat to cable and satellite television providers.

The company is now warning the Federal Communications Commission that unless the agency strengthens a key portion of its proposed net neutrality rules, companies like theirs won’t ever make it to the mainstream. And Netflix worries the merger by Comcast and NBC would make it even easier for the cable giant to give its own content priority over that of competitors.

Comcast CEO Brian Roberts said in House and Senate hearings last week that the company has no incentive to withhold NBC content from competitors. But he didn’t speak specifically about how that content would be offered and if, as one competing ISP said, the company would make NBC shows and movies available at such steep prices and conditions that it would be difficult for competitors to lease rights to the content.

In recent comments to the agency, the Los Gatos video services company said the “managed services” portion of FCC Chairman Julius Genachowski’s open-Internet rules could be a loophole for the biggest Internet service providers to gain unfair advantage for their own applications over those of competitors.

“If left unchecked, the “managed services” category could engulf

the Commission’s open Internet policies altogether. As such, the Commission

must carefully circumscribe the network operators’ ability to exempt certain

services from the openness rules by classifying them as managed services,” Netflix wrote in its filing.

Think of a managed service as a dedicated channel on the Internet for things like telemedicine or streaming video like Netflix. A carrier allots a certain amount of bandwidth and assurance of quality to that channel. Those companies have pushed for exemptions in the FCC's net neutrality rules, bringing up examples of video for remote medical care that need prioritization. But also imagine how a company would put their own video services in that channel – essentially extending the cable television model to the Internet.

Netflix is among a growing number of Internet video companies pairing up with TV makers like LG and set top boxes like that of Roku, which sit at the intersection of the Web’s convergence with the television. Those companies have pushed a slow but remarkable move by consumers to cut their cable and satellite subscriptions. Parks Group Associates, a research firm, said last week that 8 percent of broadband users (5.5 million homes) would cut the chord on paid TV services, down slightly from 11 percent the year earlier. The company said about 0.5 percent of all homes have cut the chord.

Consumer advocates say viewers are largely reluctant because they still can’t get full libraries of their favorite shows online. They media companies like NBC, Viacom and News Corp. aren’t as inclined to strike distribution deals with newcomers like Vuze and YouTube because of their relationships with carriers. Those upstarts don’t have the built-in subscriber base that those cable and satellite companies have.

They also point to a recent cable and satellite television strategy called TV Everywhere that brings cable and satellite content online, but only to subscribers of both paid TV and broadband services.

“By bundling the traditional cable TV offering with Internet delivery of content, vertically integrated MVPDs and network operators are potentially extending and expanding their dominant market position at the expense of competitive online offerings,” Netflix wrote. “Moreover, the recent announcement of the proposed merger of Comcast and NBC Universal serves to exacerbate the growing concern that MVPDs will use their control over programming networks to stifle competition, including the growing competition from online video providers like Netflix.”