01/10/2011 11:30 am ET Updated May 25, 2011

Netflix CEO Praises Net Neutrality Rules, Despite Looming Risks

As the Federal Communications Commission enacts new rules aimed at preventing Internet providers from blocking access to websites and online services, no company may have more on the line than Netflix.

The pioneering and disruptive online video rental service relies on having unfettered access to broadband networks that it uses to stream data-heavy video content to millions of subscribers. By some estimates, Netflix downloads already make up 20 percent of U.S. Internet traffic during peak hours. Without the FCC's protections in place, Netflix's access to the Internet's "pipes" could be challenged by broadband operators, who fear their networks are becoming increasingly congested by these large files.

During an interview at the Consumer Electronics Show's Leaders in Technology dinner, Netflix CEO Reed Hastings offered measured praise for FCC Chairman Julius Genachowski, who attended the event, on his work crafting net neutrality legislation that was recently approved by the commission.

"Julius has done a great job in a very challenging situation," Hastings said. "Many of us wish it was possible to go forward."

Despite Hastings' warm words, Netflix would benefit from stricter rules that do more to prohibit broadband providers from discriminating against online applications and websites.

The FCC's current framework does not explicitly ban "paid prioritization," which leaves open the possibility that Internet providers might favor the delivery of their own traffic, or that of partners who pay an extra fee. A Netflix competitor, such as the newly-launched Alphaline Entertainment, could pay to ensure its own movies are able to be downloaded more quickly, putting Netflix at a major disadvantage.

Also exempt from the open Internet rules are "managed services," a broad and nebulous category that includes voice and video subscription offerings from broadband operators, features that tread dangerously close to Netflix's territory.

Netflix is no doubt troubled by this provision. Last year, in a report to the FCC, the company warned that failure to regulate these "managed services" could create a tiered Internet, in which network operators would be allowed to deliver their own content via a "fast lane," while relegating their competitors' traffic to a "slow lane."

These problems are not merely hypothetical: In at least one case, network operators have already taken action that violates the FCC's net neutrality rules. In November of 2010, Comcast was accused of violating the principles of an open Internet when it demanded that Level 3 Communications, an Internet "middleman" that carries Netflix's video feeds, pay a fee for sending data over Comcast's network. These requests branded Comcast as the "poster child" for the necessity of laws prohibiting data discrimination.

However, despite the outcry Comcast's actions elicited, Hastings opined that most Internet service providers are "acting net neutral today." He noted that rallying support for the FCC's open Internet rules in the months leading up to the commission's vote was made more challenging because there have been few problems to date.

"Hopefully it's a warning shot so no further action is needed," Hastings said of the net neutrality regulations recently approved by the FCC.

Asked to imagine where he and his company would be in ten years, Hastings predicted he would still be chief executive, that Netflix would have expanded globally--"successful everywhere except China, maybe"--and that the company would be considered "a best friend to content producers."

Befriending studios and networks is crucial for Netflix, which has attracted 16 million subscribers thanks to the premium content it secured through licensing deals with home entertainment giants such as Starz, Disney, and Paramount. The TV shows and movies Netflix mails and streams to viewers throughout the U.S. and Canada is its lifeblood.

Although Huffington Post editor-in-chief Arianna Huffington, who led the discussion, joked that Time Warner CEO Jeff Bewkes and Hastings were "BFF" (shorthand for "best friends forever"), the actual relationship between the two titans of industry is, at least to the public eye, far less chummy. Bewkes has dismissed Netflix's chances for continued success and compared the company to a "200 pound chimp." He is also working on launching a Netflix rival, TV Everywhere, that would deliver streaming television channels to viewers' computers, tablets, and phones.

Hastings, a former Peace Corps volunteer, said the concern that keeps up him awake at night is "staying grounded" as he gains notoriety and as his company's stock price flirts with $200 per share.

But as media companies wake up to Netflix's growing dominance in a space that they have historically called their own, it is unlikely that Netflix's partnerships with these content creators, far from guaranteed, is distant from his mind. As key licensing deals come up for renewal, Hastings must do all he can to keep his "BFFs" from saying "TTYL."

Even as it has grown, Netflix has seemed perpetually on the verge of being wiped out by larger, more established rivals in the media, cable, and tech worlds, its success wholly dependent on negotiating with these larger players to maintain its access to content, televisions, and the Internet. Whether it can not only survive, but thrive, will depend on Hastings' ability to negotiate both the public and private spheres to ensure Internet providers play by the right rules at the same time that content creators remain generous with their video.