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Analysts: Netflix throttling is a 'tempest in a teapot'

NetflixInc. riled up some industry peers with the revelation that itreduced the qualityof video for some mobile users, but maybe not enough to matter.

After the company disclosed the practice, a of critics rose fromregulators and incumbent ISPs, as well as some industry interest groups. AdonisHoffman, chairman of Business in Public Interest, said Netflix failed "netneutrality 101." AT&TInc.'s executive said his team was "outraged," andRandolph May of the Free State Foundation called the company a hypocrite. FCCcommissioner Michael O'Rielly said the practice warrants an investigation.

"There is no way to sugarcoat it: the news is deeplydisturbing and justly generates calls for government — and maybe evenCongressional — investigation," O'Rielly said during a speech at theAmerican Action Forum, MediaPostreported.

Whatever the interests of the most outspoken critics, manyindustry observers shared the opinion of Ooyala principal analyst Jim O'Neill,who dubbed the ordeal "a tempest in a teapot."

"Companies like AT&T … what they're outraged aboutis they didn't get the overages on their HD streams people are watching,"O'Neill said in an interview.

He and other analysts agreed that the situation would havebeen much better, and Netflix could have come out of the fray with a betterreputation rather than a slightly damaged one, if the company had provided fulldisclosure on the practice from the beginning.

"From the very beginning, or at least from when it wasa technical policy, they should have sent out a press release," JimmySchaeffler, chairman at an industry research firm The Carmel Group, said in aninterview. "Be perceived as somebody that had a problem, took it into thepublic forum in a professional way and let it resolve, rather than beingsneaky."

O'Neill, however, stopped short of calling the company sneakyor disingenuous. He acknowledged Netflix could have handled the situationbetter, but said it would not have an impact on Netflix's reputation in thelong term. The move did not violate net neutrality; it was Netflix's choice toprovide a lower-quality product to paying customers, ostensibly to increase thequantity of product that would be available to them, not a service providerdeciding the quality of product delivered between third parties, O'Neillargued.

This is just Netflix doing what Netflix does best, hecontinued, delivering its product to consumers in the most efficient waypossible.

"There's a lot of content and more and more contentthat is being delivered to mobile devices, especially video content, and whenAT&T, Verizon and any other large network puts data caps in place, it's notreally in the best interest of Netflix in terms of delivering theircontent," IDC analyst Scott Strawn said.

Some buzz around the kerfuffle indicates that Netflix isactually happy with all the attention the issue is getting. As SNL Kagananalyst Seth Shafer explained, the noise brings the zero-rated conversation tothe top of mind for providers and consumers, and puts Netflix squarely in themiddle of that conversation. T-Mobile US Inc. and Sprint Corp. were excluded from Netflix's so-called"throttling" practices because they offer unlimited data or zero-ratedvideo policies, unlike AT&T and Verizon Communications Inc.

As the market absorbs this news and the demands forstreaming video mount, the conversation and product offerings will likely turnaway from data caps and more toward unlimited data, O'Neill said. For example,AT&T recently added anunlimited data plan for customers subscribing to multiple AT&T products.The popularity of zero-rated services is also growing, as T-Mobile's Binge Onpartnerships have more than doubled since it launched the service in 2015.

Schaeffler was a little less forgiving of Netflix, sayingthat how quickly this blows over depends on how well Netflix learns its lesson.He said the company's fumble was surprising, considering their experience withmanaging public relations.

"If they impact the delivery of content, they areviolating the spirit of the net neutrality rules if not the letter of the law,and that's what's going to hurt them now," Schaeffler said in aninterview. "Will it hurt their stock? Will it hurt their value? Will itcost them with customers? Probably not much. … It hurts them in the policyworld, when they're trying to argue positions to governments, which they willdo a lot of, and when they're trying to get together with other companies."

Netflix is no longer the white horse wearing the banner oftransparency and customer priority, and their peers leading the media andcommunications industry will take notice, the analyst argued. But for customersand investors, all of this is new ground. The rules are still being written,and there will not likely be much concern from the demand side of the business.

In fact, Netflix's stock actually traded upward during thedays following the announcement.

"The bottom line is they're still an amazing company,and they'll stay an amazing company, but hopefully they'll learn alesson," said Schaeffler. "That's the real measure. What will they dowith this mistake?"

If Netflix makes a habit of failing to disclose importantproduct information, then it could erode trust with customers and investorsover time, making it increasingly difficult for Netflix to do business.

Netflix streaming on iPhone
Source: Netflix

For Strawn, any potential blame depends on Netflix's trueintentions. So far, the company has spun the situation to cast itself in aconsumer-friendly light: It slowed speeds on some mobile devices to protect itscustomers from overages and to deliver a finely tuned balance of quality andquantity. But the company could have more self-interested motivations.

"If they really were trying to lower their own costs bydoing this there would be cause for concern," Strawn said in an interview.

Netflix is paying for Internet just like anyone else, andthere is a finite amount of data the company can deliver with its networkagreements. It is in their interest to run a fine margin between deliveringhigh-quality streams and sending the least amount of data possible. To someextent, the company's network costs benefit from compressed streams, but howmuch is difficult to say.

"Networks only have so much bandwidth, so they want toallocate that in ways that are profitable to them. It's just not clear to methat Netflix has the same set of incentives that the carriers have to[throttle]," Strawn said.

Meanwhile, the squabble in the public sphere that hasregulators and service providers deriding Netflix as hypocritical is mostlikely just a jockey for position, deciding who pays what costs when it comesto delivering the steadily increasing streams of video pumping through thesmartphones and tablets of the world, analysts agreed.

As Shafer put it, "Part of being in that business rightnow is to do your best to shift the burden and blame to someone else and makethem pay for it."