Google and Netflix Form an Unlikely Alliance: 3 Reasons Why

Mergers and Acquisitions

Recent happenings in the telecom world have led to a variety of unforeseen consequences. Video streaming company Netflix (NASDAQ:NFLX) has had to reach into its own pocket to ensure its customers receive the company’s service without any issues, Internet-search giant Google (NASDAQ:GOOG) has taken it upon itself to build its own fiber-optic networks, and a chain-reaction of mega-mergers among Internet service providers has regulatory commissions back-logged with probes into conduct. Add on top of that a battle over net neutrality, in which the government is set to make new rules regarding how the Internet is regulated and to determine whether or not ISPs will be considered common carriers in the eyes of the law.

All signs point to a more difficult time for consumers in the coming years, as Internet service providers appear to be finding ways to increase revenue streams and block out any would-be competitors, rather than improve service through updated infrastructure and business models. The arms race among ISPs has also reached a fever pitch, starting with Comcast‘s (NASDAQ:CMCSA) announcement to merge with Time Warner Cable (NYSE:TMC), followed by AT&T (NYSE:T) attempting to purchase satellite-television provider DirecTV (NASDAQ:DTV). Verizon (NYSE:VZ) and Dish (NASDAQ:DISH) have also been in the news, but in contrast to AT&T’s strategy, Verizon will not be onboarding satellite television into its fold.

As consolidation takes a hold of the industry, customers are left with little options to avoid the pillaging that is sure to come when telecom is dominated by only a few monopolistic behemoths. Content creators and providers are also getting the short end of the stick, as it appears net neutrality is on its way out. Companies like Netflix and Amazon (NASDAQ:AMZN) are most likely going to be raising prices on consumers to off-set the new burden of paying Internet companies to be in the “fast-lane” of the Internet.

This brings us to Google and Netflix, two Internet giants that aren’t direct competitors in most respects, but do have common interests in the face of coming changes. Google has openly backed Netflix in the fight for a free and open Internet, leading the two companies to have an unlikely alliance. Read on to see the three major factors dictating their partnership.

Google Fiber

1. Google Fiber

What started out as an experiment on Google’s part has become, in the eyes of many, a saving grace for the Internet. Google rolled out its Fiber network in Kansas City, and due to the overwhelming popular responses and demand, has since expanded to several other cities, with more on tap. The network has become a thorn in the side of the bigger ISP companies, who are worried that customers will drop their current carriers and move over to Google if the service is introduced into their area. Although its still small time, if consumer feedback is any indication, Fiber could break into the big-time in coming years.

So how is this of interest to Netflix? Well, Google lets Netflix stream its content across its infrastructure free of charge, in contrast to what Comcast is forcing them to do. Google is taking on the role of Internet service provider, and treating it like a utility company. A blog post from Google Fiber’s director of engineering Jeffrey Burgan seems to contradict everything the bigger ISPs have been saying about how Netflix slows up their networks.

“Since people usually only stream one video at a time, video traffic doesn’t bog down or change the way we manage our network in any meaningful way–so why not help enable it?,” he said.

If Fiber can continue to grow and become a real contender in the ISP market, companies like Netflix may be able to go back to their old ways, and lift the burden of extra costs off its customers.

netflix family watch tv movie 2

2. Video-streaming interests

Both Google and Netflix have big-time interests in video streaming. Netflix’s entire business model has grown to become based around it, even though they still offer DVDs by mail. Google itself is the owner of YouTube, which sees unfathomable amounts of traffic on a daily basis. In fact, between Netflix and YouTube, the two sites have managed to capture roughly half of all Internet traffic in North America, according to CNET.

As Netflix has already bit the ceremonial bullet in offering to pay Comcast for faster streaming to its customers, if things don’t change, Google will have to follow suit to make sure YouTube continues to run at full capacity. While the two do take up some serious bandwidth on the ISP’s infrastructure, that is exactly what Comcast and Verizon’s customers pay them to deliver. By adding extra costs on the content delivery companies, the risk of stifling innovation from small and growing startups becomes very real.

Netflix CEO Reed Hastings has come out swinging with recent remarks, as his company sees a bleak future ahead if a net neutrality deal can’t be worked out. “If [they] charge a little bit now, they’ll charge more and more and more,” Hastings said, as reported by DSL Reports. “They want the whole Internet to pay them for when their subscribers use the Internet.”

While it may appear that Hasting’s comments are a bit melodramatic, his logic is not unsound. The problem for Google is that it is about to be in the same boat with YouTube. If the two companies can combine efforts to look after their video streaming interests, the better off the technology will be in coming years.

Source: Getty Images

Source: Getty Images

3. The enemy of my enemy….

The most obvious reason behind a Google-Netflix team up is that they both have common enemies. Once again, as the two companies battle it out over video streaming, they both have deeply-vested interests in making sure their content can reach customers in a fast and free way. Essentially, as Comcast grows and takes on Time Warner Cable, and AT&T and DirecTV combine forces, not to mention whatever path Verizon chooses to take and the second-tier telecom companies, content providers like Netflix and Google are going to need to mount a viable offensive.

Both Netflix and Google have considerable resources at hand, especially Google. Netflix hasn’t been able to accomplish anything near the kind of diversity that Google has been able to take on, but Google’s success in the long run is very much in Netflix’s best interests. If Google Fiber can become a major ISP, Netflix can ride its back to prosperity as long as Google doesn’t pull a 180. Right now, it looks like Google, and maybe some other smaller ISPs scattered across the country, are the only companies with infrastructure willing to let the Internet remain free.

With the two companies’ combined resources, along with political clout, the alliance between Google and Netflix may be enough to drive some stakes into the plans of the larger telecom companies. Although a seemingly-unlikely pair, they very much have the same interests at heart, and take their customers’ needs seriously. As things play out in the courts and FCC over the coming weeks, Google and Netflix will be standing by, sharpening their blades to prepare for what comes next.