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Internet access ruling raises Netflix worries

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SAN FRANCISCO — Netflix's Internet video service thrives on drama and suspense, but not the kind triggered by a legal ruling that threatens to affect the company's growth and pricing.

The intrigue stems from an appeals court decision overturning Federal Communication Commission regulations that prodded high-speed Internet providers to treat all online services equally, including video transmissions that placed higher demands on their networks.

The dismantling of that FCC rule, known as "Net Neutrality," raises the possibility that Netflix may someday have to pay additional fees to Internet service providers to ensure that its video continues to stream smoothly.

Netflix Inc. could still refuse to pay if the cable and telecommunications companies selling most of high-speed Internet access demand more money. But that option would risk diminishing the quality of Netflix's video streaming to the frustration of its 31 million U.S. subscribers who pay $8 per month for the service.

The potential fallout rattled investors Wednesday as Netflix's stock shed $7.58, or 2.2 percent, to close at $330.38. At one point in the day's trading, the shares had fallen more than 5 percent.

Netflix declined to comment on the fallout from the Net Neutrality decision. But the Los Gatos, Calif., company has consistently depicted its video service as one of the main reasons many households are willing to pay $50 to $70 per month for high-speed Internet access, suggesting that the providers would be foolhardy to do anything to undermine Netflix.

Given that conviction, Netflix might be willing to defy any high-speed Internet provider that demands an extra fee to carry its video service, betting that the provider would back down rather than facing a backlash from its own customers.

That's one reason BTIG Research analyst Rich Greenfield doubts that high-speed Internet service providers will dare to enter a public relations battle with Netflix over the Net Neutrality issue. Besides possibly alienating its own customers, any Internet provider that tries to collect a toll from Netflix might provoke the FCC and lawmakers in Congress to draw up tougher regulations.

"We believe economic logic will prevail, limiting abuses" among Internet service providers, Greenfield wrote in a Wednesday research report.

Internet service providers so far have given no public indication that they will seek additional fees from Netflix or other online services that place heavier loads on their networks, such as Google Inc.'s YouTube.

Netflix nevertheless could be a tempting target for Internet providers looking for more revenue. Netflix accounts for about 15 percent of residential broadband usage in the U.S., according to Stifel Nicolaus analyst George Askew. The demands will only rise if Netflix realizes its long-term goal of attracting 90 million subscribers in the U.S.

Wedbush Securities analysts Michael Pacther believes Netflix could be hit with an annual bill of anywhere from $144 million to nearly $1 billion by the Internet service providers. The wide range between those estimates reflects Pachter's uncertainty about how much of Netflix's video is watched in a high-definition format that consumes more bandwidth and theoretically would result in higher surcharges.

If Netflix is hit with additional fees, Pachter thinks the company will be hurt as its profits shrink and it has less money to pay for high-quality programming such as its Emmy-award winning series, "House of Cards." Alternatively, Pachter believes Netflix could raise its prices by $1 per month to help defray its costs.

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