Netflix fights attempt to make streaming firms pay for ISP network upgrades

Netflix co-CEO Greg Peters spoke out against a European proposal to make streaming providers and other online firms pay for ISPs' network upgrades.

"Some of our ISP partners have proposed taxing entertainment companies to subsidize their network infrastructure," Peters said in a speech Tuesday at Mobile World Congress in Barcelona (transcript). The "tax would have an adverse effect, reducing investment in content—hurting the creative community, hurting the attractiveness of higher-priced broadband packages, and ultimately hurting consumers," he argued.

ISPs have been seeking payments for years, and their demands are now being evaluated by European regulators in an exploratory consultation. The European Commission last week started taking public input on the proposal to make online platforms pay for telecom companies' broadband network upgrades and expansions.

"ISPs claim that these taxes would only apply to Netflix. But this will inevitably change over time as broadcasters shift from linear to streaming," Peters said at MWC.

Sandvine data suggests that nearly half of global Internet traffic is sent by Facebook, Amazon, Google, Apple, Netflix, and Microsoft. Online video accounts for 65 percent of all traffic, and Netflix recently passed YouTube as the top video-traffic generator.

“Charging twice for the same infrastructure”

Peters cited Nielsen data showing that "Netflix accounts for under 10 percent of total TV time" in the US and UK while "traditional local broadcasters account for over half of all TV time." Live sports account for much of that.

"As broadcasters continue the shift away from linear to streaming, they will start to generate significant amounts of Internet traffic too—even more than streamers today based on the current scope and scale of their audiences," Peters said. "Broadband customers, who drive this increased usage, already pay for the development of the network through their subscription fees. Requiring entertainment companies—both streamers and broadcasters—to pay more on top would mean ISPs effectively charging twice for the same infrastructure."

Telcos that receive new payments wouldn't be expected to lower the prices charged to home Internet users, Peters said. "As the consumer group BEUC has pointed out, there is no suggestion these levies would be passed onto consumers in the form of 'lower prices or better infrastructure,'" he said.

Peters said Netflix's "operating margins are significantly lower than either British Telecom or Deutsche Telekom. So we could just as easily argue that network operators should compensate entertainment companies for the cost of our content—exactly as happened under the old pay-TV model."

Netflix touts its own network spending

While telcos claim companies like Netflix don't pay their "fair share," Peters pointed out that Netflix has spent a lot building its own network that reduces the amount of data sent over traditional telecom networks.

"We've spent over $1 billion on Open Connect, our own content delivery network, which we offer for free to ISPs," he said. "This includes 18,000 servers with Netflix content distributed across 6,000 locations and 175 countries. So when our members press play, instead of the film or TV show being streamed from halfway around the world, it's streamed from around the corner—increasing efficiency for operators while also ensuring a high-quality, no-lag experience for consumers."

Peters also touted Netflix's encoding technology that cut bit rates in half between 2015 and 2020. While Internet traffic has increased about 30 percent a year, "ISPs have managed this increased consumer usage efficiently while their costs have remained stable," Peters said. "Regulators have highlighted this, too, calling out that infrastructure costs are not sensitive to traffic and that growing consumption will be offset by efficiency gains."

An October 2022 report issued by the Body of European Regulators for Electronic Communications (BEREC) found there is "no evidence of 'free-riding'" and that connectivity costs "are typically covered and paid for by ISPs' customers."

"The 'sending party network pays' (SPNP) model would provide ISPs the ability to exploit the termination monopoly and it is conceivable that such a significant change could be of significant harm to the Internet ecosystem," the BEREC report said.

Telefonica CEO José María Álvarez-Pallete López told Reuters last week that payments from tech companies "would not be like a tax—we would charge them like they were customers. Why do some customers pay and others not? It's correcting an anomaly."