By Kate Tummarello - 04/22/14 07:01 PM EDT
A long-running feud between Netflix and Comcast is on the verge of becoming all-out war.
Netflix threw down the gauntlet on Monday by coming out against Comcast’s proposed $45 billion agreement to merge with Time Warner Cable.
The deal, for which Comcast has hired an army of lobbyists to sell and defend, had attracted little opposition from other major companies or from lawmakers on Capitol Hill.
“Comcast is already dominant enough to be able to capture unprecedented fees from transit providers and services such as Netflix,” Hastings and Wells wrote in the shareholder letter, pointing to a deal Netflix struck with Comcast last month to boost the streaming experience for Netflix users.
“The combined company would possess even more anti-competitive leverage to charge arbitrary interconnection tolls for access to their customers.”
The letter drew a swift and aggressive response from Comcast, which said Netflix’s opposition was grounded in “inaccurate claims and arguments.”
“There is nothing unprecedented about our agreement with Netflix,” the company said, citing similar “interconnection” deals between other Internet companies and Internet providers, such as that between Yahoo and Google.
Comcast has testified to Congress that the merger would lead to faster Internet speeds and better service.
Netflix’s opposition to the deal could be significant because it could draw other Internet companies into the fight. If industry opposition is strong enough, it could threaten the merger’s approval from the Justice Department and the Federal Communications Commission (FCC).
John Bergmayer, an attorney at Public Knowledge, said Netflix’s opposition could make the arguments against the deal more compelling.
“The harms [of proposed mergers between large companies] are very real, but they’re not necessarily as relatable to people,” he said.
“When you have a very public company like Netflix with their concerns, that makes it relatable.”
Some observers said they expect Netflix’s vocal opposition will prompt other Internet companies to get off the sidelines.
“Netflix is really just the tip of the iceberg,” said Cathy Sloan, vice president of government relations for the Computer and Communications Industry Association.
Sloan’s group, which includes Google, Yahoo, Aereo and Facebook, has not yet taken an official position on the Comcast merger. If Netflix, with its large user base, is worried, “all the other content providers whose content may not be as popular should be worried,” Sloan said.
While it might be risky to publicly challenge Comcast, which most Internet companies rely on to reach many of their users, “it won’t be as risky for them if they band together,” she said.
A group of major Internet companies would have a better chance of successfully challenging Comcast, Bergmayer said.
“It’s unlikely that Comcast would be able to retaliate against an entire industry all at once,” he said.
Netflix’s opposition to the merger deal adds to tensions that have been building between the two companies for some time.
Comcast users across the country have complained that bandwidth for Netflix’s popular streaming feature has appeared at times to be choked off, often making the service nearly unusable.
Against that backdrop, Netflix and Comcast executives struck a deal earlier this year that allowed Netflix to connect directly to the company’s servers.
Netflix executives have complained bitterly about the arrangement, saying they agreed to it against their will. Netflix slammed Comcast for supporting “weak net neutrality” by requiring content companies to pay for Internet fast lanes.
“Netflix believes strong net neutrality is critical, but in the near term we will in cases pay the toll to the powerful [Internet service providers] to protect our consumer experience,” Hastings wrote.
Through conditions of its 2011 purchase of NBC Universal, Comcast is required to uphold the Obama administration’s net neutrality rules, which had prevented Internet providers from blocking or slowing access to certain websites. Those rules were struck down in court earlier this year.
With its letter to shareholders, Netflix joined Sen. Al Franken (D-Minn.) as one of the few prominent critics to explicitly call on the Obama administration to block the Comcast-Time Warner merger.
In hearings and television appearances, Franken — who also objected to Comcast’s acquisition of NBC Universal — slammed the company for its market power and poor service.
Comcast has “107 of lobbyists on Capitol Hill ... but I had more than 100,000 people write me [with] their objections,” Franken said.
Franken had asked Netflix earlier this month to voice any concerns it has with the proposed merger, and said its public statement bolsters his cause.
“Netflix’s opposition to the deal further illustrates just how bad it is for consumers, competition and innovation,” he said.
“One of the many reasons I oppose this deal is because I think it threatens the open nature of the Internet, and if it’s approved, Comcast will get even more leverage to act as a gatekeeper over the Internet, raising prices and limiting consumer choice.”
It remains to be seen how far Netflix will go to oppose the Comcast deal.
Comcast is playing the traditional power game and has devoted massive resources to ensuring the merger’s success.
Combined, Comcast and Time Warner Cable spent $5 million on lobbying in the first three months of 2014 while hiring multiple former members of Congress and staffers to lobby lawmakers and the administration.
A Netflix spokesman said the company has “many options” when it comes to opposing the deal.
“First you should expect a response to the Franken letter,” the spokesman said.
Netflix has also indicated in filings at the FCC that it might weigh in with the regulators who are reviewing the deal.