Netflix Quietly Emerging as New Power in Net Neutrality Debate

"They're an increasingly important player in the Internet ecosystem with a big subscriber base,” said Executive Director Markham Erickson of the Open Internet Coalition, which seeks net neutrality rules. “They do have a lot of goodwill. I think that’s positive for all the other Internet players.”

Net neutrality opponents say Netflix could throw a lot of weight around in Washington. “Netflix is a very serious player,” said NetCompetition.org Chairman Scott Cleland. Net neutrality advocates were dealt a serious blow by news that Google was in talks with Verizon earlier this year. If Netflix picks up Google’s mantel as a high-tech, big growth corporate champion, neutrality advocates can refocus and redouble their efforts, Cleland said. “Clearly a lot of consumers use Netflix,” he said. “That will get the FCC’s attention.”

The company already has Wall Street’s attention. Since November 2005, Netflix’s stock price has jumped by 500 percent to $173. That kind of economic clout -- especially in a lousy economy, with voters angry over job losses -- is something policy makers can’t ignore, Hogan Lovells cable lawyer Daniel Brenner said. “Few companies have been as glamorous in the stock market as Netflix."

Netflix has long been a member of Erickson’s coalition, but had kept a low profile. Before this year, it hadn’t filed any ex parte notices with the FCC, commission records show. Since January, the company has filed six. Last month, the company hired its first full-time Washington lobbyist, naming Michael Drobac its new vice president for government affairs. Despite the ramp-up, the company is still hoping to keep its lobbying out of the public eye. Drobac declined requests for comment for this story. Netflix spokesman Steve Swasey said “we've been stepping up in Washington” but added: “We don’t talk much about it.”

Drobac is a crucial hire for the company, said Art Brodsky, spokesman for Public Knowledge. “He’s been in the business for a while. He knows the issues well;, he knows the institutions.” Drobac had been at the Online Publisher’s Association since 2008. Before that, he was top in-house lobbyist for Barry Diller’s IAC, where he was active in net neutrality battles. “He’s a solid guy. He knows the players, the process and the procedures well,” veteran lobbyist and Cormac Group founding principal Pat Williams said. “On complicated competitive local exchange issues, I found him to be very effective.”

Drobac also has Republican street credibility. He was an aide to three different GOP senators: Gordon Smith of Oregon, Norm Coleman of Minnesota and Kay Bailey Hutchinson of Texas, Senate lobbying disclosure forms show. That background won’t hurt with a new GOP majority in the House, analysts said. Netflix executives have given generously to Democrats or Democratic causes in the last decade-and-a-half, Federal Election Commission records show. Founder and CEO Reed Hastings, his wife Patty Quillin and Chief Content Officer Ted Sarandos all raised tens of thousands of dollars for President Barack Obama and the Democrats in 2008, FEC records show. Since 1998 -- when Netflix was founded -- company executives have donated nearly $223,000 to the Democrats, FEC records show. Hastings also was president of California’s State Board of Education under Democratic governor Gray Davis.

Drobac has been indispensable in dealing with the GOP every time net neutrality laws were being weighed in Congress, Erickson said. He “was always someone Republicans would talk to about why the issue was important and what it meant for businesses,” Erickson said. Drobac isn’t tied to a single party, Erickson added. Under Drobac’s leadership, the Online Publisher’s Association became “major players” in privacy legislation debates -- with a Democratic-controlled Congress and White House, Erickson said.

Netflix may be taking a low public profile in its lobbying, but records show the company hasn’t been bashful about net neutrality. “Netflix, Inc. strongly supports the commission’s effort to adopt rules that will preserve an open Internet,” the company wrote in a January ex parte filing. “The commission’s proposed rules, taken as a whole, offer an effective framework for assuring an open Internet -- balancing the interests of both network operators and users.”

Analysts agree that Netflix supports an open Internet because the company sees its DVD-by-mail business migrating to the Web. That’s another area where Netflix’s influence is felt. During peak usage hours, Netflix accounted for 20 percent of downstream Internet traffic in North America, network management company Sandvine said earlier this month. Netflix just began a streaming-only service in Canada, and about 10 percent of that country’s Internet users have signed up, Sandvine said. Netflix subscribers there were using more than double the bandwidth of YouTube users, Sandvine said. Netflix’s Swasey declined to discuss his company’s view of net neutrality and said that online streaming is “the future.” “They named it ‘Netflix,'” he said, “not ‘DVDs by Mail.'"

"A lot is riding on the outcome of the whole policy debate” around net neutrality, said analyst Jeff Silva of Medley Global Advisors. “They can see how the debate on net neutrality has a big impact on what they want to do,” he said of Netflix executives. What’s unclear is what the company’s short-term goals are. Anti-neutrality voices have been pointing out that every Democrat who signed the public pledge for neutrality lost in the last elections. But some speculate that Congress could still revive the aborted neutrality legislation of outgoing House Commerce Committee Chairman Henry Waxman, D-Calif., in the lame duck session. Silva and others said even a modest holding action on neutrality will help Netflix. “There’s still going to be an attempt to try to get some anti-discrimination language. That would be a victory for them,” Silva said. “Anything they do is still a plus for them. It’s still worth it.”

There are many firms interested in net neutrality that are seeking influence. AT&T spent $23.7 million on lobbying in the 2010 election cycle, while Comcast shelled out $22.3 million and Verizon $19.5 million, said the public interest group Sunlight Foundation. In terms of employees, their family members and PAC campaign contributions, AT&T donated $6.5 million in the 2009-10 election cycle while Comcast gave $3.6 million, Sunlight said. That makes them the largest and second largest corporate-affiliated donors. Verizon wasn’t far behind, at $2.5 million. The anti-neutrality Republicans weren’t the only ones to benefit from the largesse: AT&T-connected donors gave 48 percent to Democrats, while Comcast gave 60 percent and Verizon 54 percent to Democrats. Not all contributions have to do with net neutrality, said Project Director John Dunbar of American University’s Investigative Reporting Workshop. “There is a temptation to settle on one issue as the source of all contributions.” Most big telecom companies have multiple issues affecting them, he said.

Netflix threatens cable companies if net neutrality means not discriminating or charging customers based on how many bits they download, Dunbar said. “There’s no question there would be an incentive on the part of pay TV that is also an ISP to sabotage a signal from an Internet TV provider,” he said. “But generally that’s not how these guys worked in D.C. They have such influence at the [FCC] and on the Hill that they can get what they want through lobbying and PR and legal channels."

Netflix needs net neutrality to lower the costs of delivering content and diversify from DVDs, said Larry Gerbrandt, principal of Media Valuation Partners, a market research firm. “Netflix is obsessed with net neutrality because it’s quickly becoming the single largest consumer of prime-time bandwidth, and it is only going to get bigger,” he said. “It needs the status quo to be maintained.” Some disagree. “Everyone you talk to will have an opinion on this,” said Dan Rayburn, analyst at Frost and Sullivan. Netflix complements big cable companies instead of competing with them, he said, and while ad dollars are shifting from TV to online ads, the shift is not large enough to replace one medium with the other, he said. AT&T, Comcast, NCTA, Verizon and USTelecom had no comment.

Beyond net neutrality, Netflix -- unlike many tech companies -- also seems to have absorbed a valuable lesson from Microsoft’s battles with the Clinton administration back in the 1990s, Silva and Brenner said. “One thing that’s absolutely true in lobbying is that as companies become more important in consumer markets, regulators and others will take a harder look at its business practices,” Brenner said. “The lesson is that Microsoft didn’t recognize early enough the role of Washington in its business practices.” It shouldn’t be surprising that Netflix is determined to avoid Microsoft’s fate: Company founder Hastings sits on Microsoft’s board.