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Fact-Checking NetFlix' Net Neutrality WSJ Op-ed

Netflix's General Counsel, David Hyman, hypocritically and deceptively blasted the broadband industry for its natural migration to usage-based bandwidth pricing in his fact-challenged WSJ op-ed: "Why Bandwidth Pricing is Anti-competitive."

First, it is both ironic and hypocritical that the largest subscription video provider in the United States by subscribers, Netflix,  criticizes the normal economic practice of usage-based pricing as anti-competitive when other companies do it, when Netflix has long priced and capped its business offering based on consumer usage.

Mr. Hyman must have known Netflix would look self-serving and hypocritical if people knew:

  • Netflix has long employed usage-pricing for DVD rentals and still does, while intimating that usage-based pricing by others should be considered illegal and should be price regulated.
  • Netflix caps the number of DVDs a user can have at any time at eight, when Mr. Hyman opines "that consumer access to unlimited bandwidth is good for society."
  • Netflix is not publicly transparent about its current usage-based pricing model on its public website, (one must accept the intitial webstream offer, and then once a subscriber, one then can find NetFlix' usage-based DVD pricing plans with higher prices based a on whether Netflix mails one to eight DVDs to a user at a given time.)

Second, Mr. Hyman, in trying to convince readers that "regulators need to take heed," and stop usage-based pricing for bandwidth, does not inform the reader that the FCC already rejected Netflix' argument last December in the FCC's most relevant proceeding, the Open Internet Order, saying in para 72 that the FCC "does not prevent broadband providers from asking subscribers who use the network less to pay less, and subscribers who use the network more to pay more."

  • The FCC went on to explain: "prohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks."
  • It would have been helpful for the reader of Mr. Hyman's op-ed to know the Government had already rejected Mr. Hyman's call for banning usage-based bandwidth pricing or caps.
    • [update] FTC Chairman Jonathan Liebowitz also supports usage-based pricing for broadband. Per the 2011 Cable Show Blog:
      • "Leibowitz said he was surprised that tiered packages weren’t more widely used since almost every other product is paid on a volume basis. He went on to say that the key is disclosure to consumers of what they can expect from those tiers."  

Third, Mr. Hyman also had the hubris to suggest that bandwidth usage should be based on marginal cost and not total cost.

  • Mr. Hyman, does not tell the reader the disastrous consequence of near zero marginal cost pricing that ignores total cost, i.e. that no one would have the economic incentive to build, operate, upgrade, or maintain an Internet network, if they could not recover their real economic costs and earn a competitive risk-adjusted return on investment capital.
  • It should be no surprise that Mr. Hyman espouses uneconomic views that totally ignore the real costs of a delivery infrastructure business.

In short, Mr. Hyman ill-served readers of his op-ed in not disclosing that:

  • Netflix offers the same usage-based pricing model it wants the government to ban others from offering;
  • The FCC officially rejected his proposal just six months ago; and
  • The ramification of his proposal would be to massively dis-incent investment in the very infrastructure his company desperately needs, given that NetFlix' uses 30% of the Internet's downstream bandwidth.

Please see my previous Netflix post: "Netflix' Open Internet Entitlement Hubris" here for more fact-checking of Netflix' self-serving and un-supported policy proposals.