Netflix lays out opposition to Comcast-Time Warner Cable merger in shareholder letter

Netflix took a swing at Comcast’s $45 billion bid for Time Warner Cable on Monday, arguing that the merger would create a single company with too much power over the delivery of high-speed Internet service.

At the same time, Netflix delivered a more subtle jab at the cable giant, hinting that its controversial deal to pay Comcast for better streaming speeds may have contributed to its decision to raise monthly prices for subscribers, analysts said.

Netflix, the first major Web company to criticize Comcast’s acquisition plans, laid out its opposition to the merger in a letter to shareholders. Combined, Comcast and Time Warner Cable could control as much as half of all broadband Internet subscriptions, with most of those homes having no alternative options for broadband service, wrote chief executive Reed Hastings and Chief Financial Officer David Wells.

The executives added that Web companies could be forced to pay Comcast more for high-quality connections. In February, Netflix reached a deal with Comcast to pay “interconnection” fees to ensure a smooth stream of its video service to Comcast’s customers.

“Comcast is already dominant enough to be able to capture unprecedented fees from . . . services such as Netflix,” the executives said. “The combined company would possess even more anti-competitive leverage to charge arbitrary interconnection tolls for access to their customers. For this reason, Netflix opposes this merger.”

In a statement, Comcast spokes­woman Jennifer Khoury, a senior vice president, responded: “Netflix’s opposition to our Time Warner Cable transaction is based on inaccurate claims and arguments. There has been no company that has had a stronger commitment to openness of the Internet than Comcast.”

She also argued that the deal to stream Netflix videos at high speeds had little to do with that company’s decision to raise prices.

She added: “Netflix should be transparent that its opinion is not about protecting the consumer or about net neutrality. Rather, it’s about improving Netflix’s business model by shifting costs that it has always borne to all users of the Internet and not just to Netflix customers.”

In a letter to shareholders Monday, Netflix executives said the price hike would include a $1 or $2 monthly increase that could be levied on new customers at some point soon. A similar rise in prices eventually would hit existing customers.

“In the U.S., we have greatly improved our content selection since we introduced our streaming plan in 2010 at $7.99 per month. Our current view is to do a one or two dollar increase, depending on the country, later this quarter for new members only. Existing members would stay at current pricing (e.g. $7.99 in the U.S.) for a generous time period,” the Netflix shareholder letter said.

In after-hours trading, Netflix stock shot up as much as 6.6 percent.

When asked whether the Comcast streaming deal played a role in Netflix’s decision to raise prices, Netflix spokesman Joris Evers was vague, writing in an e-mail that “the main motivation is to provide more great things to watch, but content delivery costs are part of the costs we have to pay.”

When asked in a follow-up inquiry whether those content delivery costs specifically included the Comcast streaming deal, Evers replied: “I am saying that content delivery is part of our costs. I am not saying there is an increase or decrease in content delivery costs.”

More likely is that Netflix has chosen to raise costs while people’s memory of the Comcast deal is still fresh — opportunistically deflecting any ill will over the hike toward the cable company, one analyst said.

“I expect the price increase is more driven by content costs than interconnection fees,” said Paul Gallant, a telecom policy analyst at Guggenheim Partners. “But politically, it would certainly make sense for Netflix to explain its price increase partly by reference to its Comcast deal.”

Consumer advocates have been watching closely for any fallout from the Comcast-Netflix streaming deal, which they viewed as a step toward big distributors controlling what travels over the Internet, at what speed and at what price.

Cecilia Kang is a national technology reporter, writing about tech and Internet policies at the Federal Communications Commission and Federal Trade Commission and how regulations affect businesses and consumers.
Brian Fung covers technology for The Washington Post.
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