Netflix, Others Set To Challenge Net Neutrality Regulation

According to a new report by Argus, one of the major advantages Netflix, Inc. (NASDAQ: NFLX) has had over its competition may soon be facing a wave of legal scrutiny.

Netflix is hugely reliant on Internet service providers (ISPs), such as cable and telecom companies, to provide the capacity to handle the massive traffic loads that Netflix’s content requires. In recent years, Netflix has grown to become one of the Internet’s most heavy traffic generators, accounting for about 36 percent of peak U.S. Internet traffic.

Related Link: More Upside For Netflix Stock? Wall Street Reacts To 'Surprise' Global Announcement

ISPs have negotiated higher rates from Netflix to provide faster connections to Netflix users. However, Argus anticipates that “net neutrality” changes in FCC regulations could soon make Netflix’s preferential treatment illegal.

“We expect new government regulations on net neutrality to face legal challenges from Internet service providers for some time to come,” the firm writes.

For Argus, this amount of uncertainty surrounding Netflix’s competitive advantage coupled with the stock trading at a significant premium to peers is not enough to justify more than a Hold rating on the stock at this time.

Disclosure: the author has no position in the stocks mentioned.