Netflix Admits Interconnection Costs “So Small” They Don't Harm Consumers

Federal Communications Commission (FCC) Chairman Tom Wheeler announced last Friday that the agency would investigate whether consumers are being harmed by so-called “interconnection” agreements between Netflix and Internet service providers (ISPs). The Chairman stated the the information is being collected to “find out what is happening”, and that the agency is “not suggesting that any company is at fault.”

Though this disclaimer was likely motivated partly by the recent kerfuffle over the Chairman’s initial net neutrality proposal, he has another reason “to be clear” that the agency is only “collecting information, not regulating”: Netflix has already admitted publicly that “interconnection” fees are “so small” that they don’t affect consumers.

At an Aspen Institute event held earlier last week in Washington, DC, Hal Singer, a Senior Fellow at the Progressive Policy Institute, asked Netflix the following question:

“If you were put in a situation where one ISP wanted to charge you a fee — an exorbitant fee — and the other one did not, is there anything that would stop Netflix from charging two different prices for its retail package: One for customers of the high-priced ISP and another for the low-priced ISP? And if there is nothing that stops you, wouldn’t that be more powerful than a regulatory weapon?” (The question begins at 1:48:35.)

The response by Netflix’s Vice President of Global – Global Government Relations, Chris Libertelli, was a surprising admission against interest:

“It’s fair to say that the interconnection fees that are being charged here are — and I think our CFO said this at the same conference that Jim alluded too — not as big for example as our content costs, so the price differentiation you’re referring too is likely to be so small that the costs of it would outweigh the benefits because the differences in price wouldn’t be so huge and customer affecting.” (The answer begins at 1:50:32.)

In a rare bout of regulatory transparency, Netflix openly admitted that it is asking for FCC intervention solely to improve its own bottom line, not help consumers. If the difference between Netflix’s preferred “interconnection” cost of zero dollars is “so small” compared to an “exorbitant fee” that passing the difference through to consumers wouldn’t affect their decisions in the marketplace, then the agreements between Netflix and ISPs cannot cause “consumer harm”. In these circumstances, there is no reason to believe that the fees are unreasonable or that Netflix would pass through to consumers any savings it might realize from FCC intervention on its behalf.

This admission was likely the primary reason Chairman Wheeler was so careful to avoid any implication that his decision to investigate Netflix’s so-called “interconnection” agreements is indicative of any intent to regulate in this area. After Netflix admitted that such “interconnection” fees are too small to affect consumer prices, he has no reason to believe the investigation will produce evidence that regulation is necessary to protect consumers.