Why Netflix Is Not the Next Covad

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 telecom 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 1996 Telecom Act and subsequent FCC rules that required Verizon, AT&T and the other regional Baby Bells to share their networks to competing broadband service providers for a nominal cost.

Netflix was similarly protected by the FCC's so-called net 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.

In the fourth quarter, Netflix said its number of U.S. subscribers rose 14% to 2.3 million more U.S. subscribers. Counting overseas customers, the company now has 44 million subscribers.

The service is a hit on Wall Street and in Hollywood.

Netflix has gotten where it is by offering reliable, on-demand digital video service to consumers whether they're watching on their home televisions, PCs, tablets or smartphones.

And at $8 per month, the price of its service is a fraction of the on-demand entertainment packages from its entrenched rivals.

By contrast, the telecom and cable giants, including Verizon Communications -- which successfully sued...

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