Netflix’s Throttling Scandal: Possibly Illegal, But Not an FCC Matter

As one of the chief agitators behind the Federal Communications Commission’s (FCC) controversial effort to regulate Internet service providers like public utilities, Netflix has long portrayed itself as a defender of the “open Internet.” So it was unsurprising that news of Netflix throttling video streaming to some wireless subscribers spurred immediate backlash—including some harsh words from AT&T, one of two major U.S. wireless carriers whose subscribers are affected by lower-quality streams, along with Verizon. (Netflix says it doesn’t cap Sprint or T-Mobile users’ video streams, citing these carriers’ lack of fees for subscribers who exceed their data plans.)

So does Netflix’s behavior advance the case for net neutrality? Not at all. Yet, consumers may be right to feel aggrieved.

For years, Netflix has degraded the quality of its streaming video service when subscribers access the platform using the nation’s two most popular wireless networks, the company revealed to The Wall Street Journal on March 24. Before the story broke, Netflix had never told its subscribers that it capped most video streams over cellular data networks at 600 kilobits per second. Although Netflix says it plans to offer users an option to watch uncapped videos in the near future, the cap will remain intact for the time being.

Many commentators have condemned Netflix’s hypocrisy—and rightfully so. After all, how can a company that supposedly believes in net neutrality justify discriminating against subscribers who access the service on mobile devices on certain wireless carriers? Moreover, despite Netflix’s claim that consumers benefit from lower-quality video in the form of fewer carrier-imposed overage charges, why didn’t Netflix tell subscribers about its throttling from the get-go? Netflix has dodged these questions, writing on the company blog that it “believe[s] restrictive data caps are bad for consumers and the Internet in general” and dismissing concerns that consumers might actually want high-resolution video on their mobile devices.

Some have even suggested that Netflix’s throttling may itself be a violation of net neutrality. But defenders of net neutrality such as Free Press’s Matt Wood insist that Netflix cannot be guilty of violating the FCC’s 2015 “Open Internet Order,” pointing out that the rules govern only the behavior of broadband Internet access providers, not the so-called “edge” services that offer content over the Internet but do not own the actual facilities that bring that content to consumers’ homes and devices. This happens to be correct—as FCC Commissioner Mike O’Rielly, who voted against the 2015 rules, said at an American Action Forum event last week: “[N]et neutrality rules only apply to ISPs, not standalone edge providers, such as Netflix.” And the FCC says it has no plans to investigate Netflix’s behavior.

Regardless of whether Netflix ends up in hot water with the FCC, its decision to secretly throttle millions of subscribers may well have broken federal law. The Federal Trade Commission Act makes it illegal for companies to engage in “unfair or deceptive acts or practices in or affecting commerce” and empowers the Federal Trade Commission (FTC) to take enforcement actions against violators. By intentionally degrading service for many of its subscribers without letting them know, Netflix arguably did just the opposite of what consumers might reasonably expect from the company.

Indeed, Netflix has long touted the video quality of its streaming content, issuing press releases with headlines such as “Highest Quality HD Now Available to All Netflix Members.” And starting in 2013, the company began publicly ranking Internet service providers by how reliably their users can stream Netflix content during prime time viewing hours. More recently, during the net neutrality fight, Netflix claimed—incorrectly—that it was the victim of intentional throttling by Comcast, the nation’s largest ISP. Given all this, one might reasonably have assumed that Netflix strives to deliver shows and movies in the highest-quality format the service offers. We now know that isn’t the case.

What about the fine print? Although Netflix’s terms of service say that the company “makes no representations or warranties about the quality of your watching experience on your display,” this caveat suggests merely that Netflix cannot promise a top-notch “watching experience” for every consumer. This makes sense, given the variety of Internet connections, devices, and other factors unique to each subscriber that can affect the quality of a Netflix stream. Yet nowhere in its terms does Netflix indicate that it intentionally impedes its subscribers’ “watching experience” when they access the service over an AT&T or Verizon Wireless mobile device. Moreover, if Netflix had mentioned its throttling policy in its terms of service, its advertising materials might still be misleading—courts have made clear that sellers cannot bury key details in the “fine print” if the “net impression” of their solicitation is likely to mislead a reasonable consumer. In other words, Netflix should worry not about the FCC, but the FTC.

To be sure, we at the Competitive Enterprise Institute tend to be pretty skeptical of three- (and four-) letter agencies regulating the private sector. Deceiving consumers, however, is not merely a concern of federal regulators; it’s also actionable under the common law tort of misrepresentation. Subjecting companies to liability if they lie to consumers, or otherwise deceive them, in such a way that materially affects their purchasing decisions is far from controversial, including among advocates of limited government. If it turns out that Netflix materially deceived consumers, the company should pay a price.

Meanwhile, lawmakers in Congress should take note of the Netflix throttling controversy, as it illustrates the flawed premise behind net neutrality regulation. If Netflix is free to discriminate against AT&T and Verizon Wireless users—as it should be, albeit with proper disclosure—why can’t AT&T and Verizon Wireless play the same game? The FCC’s Democratic majority has embraced the myth that Internet service providers hold all the cards, while content providers remain at the mercy of ISPs. In reality, neither set of players is dominant; both invest massive sums every year to improve their respective offerings. Disrupting this virtuous cycle is no trivial task, but the current FCC seems up to the task.