Netflix and Alphabet will need to become ISPs, fast
This week completely scrambled the video landscape, and its implications are going to take months to fully understand.
First is the district court’s decision to approve the merger of AT&T and Time Warner announced just moments ago. That will create one of the largest content creation and distribution companies in the world when it closes. It is also expected to encourage Comcast to make a similar bid for 21st Century Fox, further consolidating the market. As Chip Pickering, CEO of pro-competition advocacy org INCOMPAS put it, “AT&T is getting the merger no one wants, but everyone will pay for.”
But the second major story was the final (final final) repeal of the FCC’s net neutrality rules yesterday that will allow telecom companies like AT&T to prioritize their own content over that of competitors. In the past, AT&T didn’t have all that much content, but the addition of Time Warner now gives them a library encompassing Warner Bros to TBS, TNT, HBO, and CNN. Suddenly, that control over prioritization just got a lot more powerful and profitable.
The combination of these two stories is spooking every video on demand service from YouTube to Netflix . If Comcast bids and is successful in buying 21st Century Fox, then connectivity in the United States will be made up of a handful of gigantic content library ISPs, and a few software players that will have to pay a premium to deliver their content to their own subscribers. While companies like Netflix and Alphabet have negotiated with the ISPs for years, the combination of these two news stories puts them in a significantly weaker negotiating position going forward.
While consumers still have some level of power — ultimately, ISPs want to deliver the content that their consumers want — a slow degrading of the experience for YouTube or Netflix could be enough to move consumers to “preferred” content. Some have even called this the start of the “cableification” of the internet. AT&T, for instance, has wasted no time in creating prioritized fast lanes.
That world is not automatic though, because Alphabet, Netflix, and other video streaming services have options on how to respond.
For Alphabet, that will likely mean a redoubling of its commitment to Google Fiber. That service has been trumpeted since its debut, but has faced cutbacks in recent years in order to scale back its original ambitions. That has meant that cities like Atlanta, which have held out for the promise of cheap and reliable gigabit bandwidth, have been left in something of a lurch.
Ultimately, Alphabet’s strategic advantage against Comcast, AT&T, and other massive ISPs is going to rest on a sort of mutually-assured destruction. If Comcast throttles YouTube, then Alphabet can propose launching in a critical (read: lucrative) Comcast market. Further investment in Fiber, Project Fi, or perhaps a 5G-centered wireless strategy will be required to give it to the leverage to bring those negotiations to a better outcome.
For Netflix, it is going to have to get into the connectivity game one way or the other. Contracts with carriers like Comcast and AT&T are going to be more challenging to negotiate in light of today’s ruling and the additional power they have over throttling. Netflix does have some must-see shows which gives it a bit of leverage, but so do the ISPs. They are going to have to do an end-run around the distributors to give them similar leverage to what Alphabet has up its sleeve.
One interesting dynamic I could see forthcoming would be Alphabet creating strategic partnerships with companies like Netflix, Twitch, and others to negotiate as a collective against ISPs. While all these services are at some level competitors, they also face an existential threat from these new, vertically-merged ISPs. That might be the best of all worlds given the shit sandwich that we have all been handed this week.
One sad note though is how much the world of video is increasingly closed to startups. When companies like Netflix, which today closed with a market cap of almost $158 billion, can’t necessarily get enough negotiating power to ensure that consumers have direct access to them, no startup can ever hope to compete. America may believe in its entrepreneurs, but its competition laws have done nothing to keep the terrain open for them. Those implications are just beginning.