Why Netflix is not the next Covad

[Commentary] After a federal appeals court swept aside rules that required Internet service providers to share their networks equally with all users, I wondered whether Netflix might become the next Covad Communications, a failed poster child of the late-1990s telecommunications investment boom. Now that Netflix has reported another quarter of healthy subscriber growth, I'm reminded that the chances of it happening are slim. Yet, the chances of large telecom and cable providers cutting into Netflix's future growth are much higher than that, thanks to that court ruling, and a brief history of Covad shows how it could happen.

Like Netflix, Covad had a pioneering online business model that required the help of federal government regulation to get off the ground. For Covad, that regulation was the Telecommunications Act of 1996 and subsequent Federal Communications Commission rules that required Verizon, AT&T and the other regional Bells operating companies (RBOCs) to share their networks to competing broadband service providers for a nominal cost. Netflix was similarly protected by the FCC's so-called network neutrality rules, which prevented large Internet service providers from charging more to Netflix, Google's YouTube unit and other firms that hog lots of bandwidth on their broadband networks. That protection has allowed Netflix to become the No. 1 provider of online movies and TV shows. Netflix, though, has one strategic advantage lacked by Covad, whose main value proposition was that it could deliver the same service as its larger rivals for a fraction of the cost. By contrast, and thanks to its wide assortment of licensing deals, Netflix has access to movie and TV content that Verizon and the other giants can't offer. At least, not yet. No sooner had the ink dried on the appeals court ruling than Verizon agreed to buy the Web TV assets of chip giant Intel, in a move to help it expand its own digital entertainment offerings. If the giants can soon offer what Netflix can, the upstart's key differentiation will be on price alone. Sound familiar?