Netflix Stock Drops on Fears of Higher Costs After Ruling Strikes Down Net Neutrality

Shares down more than 5% after analysts predict that broadband providers will demand delivery fees from Netflix

Courtesy of Netflix

Netflix shares fell more than 5% Wednesday after analysts warned that a federal court ruling invalidating the FCC’s net neutrality regulations could lead to higher costs for the Internet-streaming company.

On Tuesday, the U.S. Appeals Court for the D.C. District struck down key pieces of the Federal Communications Commissions’ Open Internet Order rules that forbade Internet service providers from discriminating or blocking traffic. The court sided with Verizon Communications, which had appealed the FCC’s 2010 order, in ruling that the commission overstepped its legal authority.

Netflix declined to comment on the ruling. In the risk-factors section of SEC filings, the company has routinely noted that if net-neutrality rules were overturned by a legal challenge its business could be “adversely impacted.”

The FCC is expected to appeal the ruling, but if it stands broadband providers will likely demand Netflix to pay substantial fees for delivery of its content, Wedbush Securities analyst Michael Pachter wrote in a research note. Pachter maintained his “underperform” rating on Netflix, with a $160 per share price target.

SEE ALSO: Netflix Video Usage More Than 10 Times Amazon and Hulu Combined

“In our view, ISPs will seek to monetize the repeal of the Net Neutrality rules by imposing a fee on data providers like Netflix on a usage basis,” Pachter wrote.

On Wednesday, Netflix shares fell as much as 5.5% in morning trading, amid a slight lift in the broader market. The stock opened at $335 per share and was trading as low as $319.07 per share. Netflix is a historically volatile stock, and enjoyed a fourfold increase over the course of 2013.

Netflix is the single biggest source of broadband traffic in North American, representing 31.6% of all downstream Internet traffic during primetime hours last fall, according to a study from broadband-equipment vendor Sandvine.

Because Netflix uses broadband to deliver a service that could be viewed as competitive with cable or telco TV, Netflix stands alone among Internet companies that is possibly vulnerable to some type of
discriminatory action from ISPs, Bernstein Research analyst Carlos Kirjner wrote in a note Wednesday.

“We think the MSOs have not yet taken steps to curb Netflix’s growth because they believe the upside of curbing Netflix does not justify taking the risks of a) the PR and consumer perception issues that action may trigger… and b) the increased risk of regulatory scrutiny from the FCC and
potentially other agencies such as the DoJ,” Kirjner wrote. “We think that if Netflix users and usage grow as the Netflix bulls believe it will, it may trigger enough cord cutting and chord shaving to change this balance.”

With the net neutrality rules nullified — for now — there is definitely “a risk that Netflix customers will have to pay more, though it will probably take at least a year for it to take effect,” Wells Fargo & Co. analyst Jennifer Fritzsche said in an interview with Bloomberg.

Verizon and other broadband providers have stated that they do not expect to change the way they provide access to Internet sites and services. And for Comcast, Tuesday’s decision will have no effect: The nation’s biggest cable operator had agreed to abide by the FCC’s Open Internet Order — regardless of court decisions — until 2018, under its deal with the U.S. government to acquire NBCUniversal.

Some industry analysts argue that concerns about ISPs potentially setting up tollbooths for the likes of Netflix or other big Internet companies are exaggerated. That’s because those providers have an economic interest in keeping content flowing without disruption to their customers, according to BTIG Research analyst Rich Greenfield. “If all of a sudden, an ISP said to Netflix ‘pay us for access to our broadband customers or we will slow you down,’ and Netflix refuses to pay, the ISP ends up hurting its own customers and discouraging those subscribers from using the service that is driving them to pay for faster broadband speed tiers in the first place,” he wrote in a blog post.

SEE ALSO: FCC’s Options Narrow After Court Blocks Net Neutrality Rules