Netflix shares drop after court tosses Internet traffic rules

LOS ANGELES Thu Jan 16, 2014 1:21am IST

The Netflix sign on is shown on an iPad in Encinitas, California, April 19,2013. REUTERS/Mike Blake/Files

The Netflix sign on is shown on an iPad in Encinitas, California, April 19,2013.

Credit: Reuters/Mike Blake/Files

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LOS ANGELES (Reuters) - Shares of video streaming service Netflix Inc (NFLX.O) fell more than 1 percent on Wednesday, a day after a U.S. court decision that could let broadband providers charge companies for faster access to content delivered over the Internet.

On Tuesday, the U.S. Court of Appeals for the District of Columbia Circuit rejected federal "net neutrality" rules that required Internet providers to treat all web traffic equally.

The decision appeared to pressure Netflix stock, Standard & Poor's equity analyst Tuna Amobi said. The stock was down 1.8 percent at $332.02 in mid-afternoon trading on Nasdaq. Earlier, the stock fell as much as 5.9 percent to a session low at $319.07.

"We see potential specter that (Netflix) and other bandwidth-intensive sites may be vulnerable to the whims of broadband service providers, with potentially inherent cost disadvantages, or other quality degradation for its user experience vs. competitors," Amobi said in a research note.

"Still, we doubt the court ruling spells finality for a highly controversial issue that the FCC could further shape within its domain mandate," Amobi said.

A Netflix spokesman had no comment.

The FCC could appeal the ruling to the full appeals court or to the U.S. Supreme Court, something FCC Chairman Tom Wheeler said he is considering as among "all available options" to ensure Internet networks remained free and open.

Video streaming is by far the heaviest bandwidth hog on the Internet. Netflix and Google Inc's (GOOG.O) YouTube alone are estimated to account for more than half of all downstream Internet traffic at peak hours.

All major broadband providers on Tuesday issued statements pledging no policy changes because of the ruling and no plans for restrictions on how people use the web on their networks.

AT&T Chief Executive Officer Randall Stephenson repeated that commitment on Wednesday.

"We will continue to abide by those rules, and I don't see it changing much in the short run," Stephenson said at a Christian Science Monitor breakfast with Business Roundtable in Washington.

Evercore Partners analyst Alan Gould said Tuesday's court decision was a "small negative" for Netflix because the company may incur new costs to ensure its movies and TV shows are treated equally on the Internet. Any new costs would be "manageable," he said.

"With 30 million (U.S.) subscribers, it would be really difficult for the distributors to disadvantage Netflix without a real customer revolt," Gould said.

Netflix was one of the year's best stock performers in 2013, surging 297.6 percent as the company added new customers in the United States and overseas.

BTIG analyst Rich Greenfield said he believed fears that broadband providers would start charging for Internet fast lanes were "far, far overblown." He said it wouldn't make sense for the companies to anger customers by slowing popular content from sites such as Netflix and YouTube.

"While there is certainly danger of bad behavior in the (Internet service provider) world now that net neutrality rules have been struck down, we believe economic logic will prevail, limiting abuses," Greenfield said in a blog post titled "Don't Believe Chicken Little: The Free and Open Internet is Not in Danger." (Reporting by Lisa Richwine in Los Angeles; Additional reporting by Alina Selyukh in Washington; Editing by Jan Paschal)

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