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Charter–Time Warner Cable Merger: Netflix Declares Its Support

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Netflix supports Charter–Time Warner Cable merger

Netflix (NFLX) declared its support for the merger between Charter Communications (CHTR) and Time Warner Cable (TWC) during its 2Q15 earnings call. Netflix is supporting this merger because the combined company has said it wouldn’t charge any interconnection fee to Netflix across the Charter–Time Warner Cable network.

Currently, companies such as Netflix pay interconnection fees to ISPs (Internet service providers) like AT&T (T) and Verizon (VZ) to move Netflix’s streaming videos across their networks in a fast and efficient manner.

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Charter has adopted the net neutrality rules that came into effect in February this year. The FCC (Federal Communications Commission) decided in February 2015 to reclassify broadband Internet as a public utility, similar to a phone service. This gives the FCC more regulatory power over ISPs such as AT&T and Verizon, and allows companies such as Netflix to file a complaint against higher interconnection fees.

The above chart indicates the average speed provided by each ISP for media streaming the Netflix service in the month of June. As the above chart shows, Charter and Time Warner Cable had average speeds of 3.37 Mbps (megabits per second) and 3.19 Mbps, respectively. Cox Communications, meanwhile, was the fastest ISP.

Open interconnection policy conditions

Even with the fees, Charter’s open interconnection system comes with a few conditions. Companies such as Netflix will have to pay for their own infrastructure to interconnect with Charter across nine POPs (points of presence). Netflix will also have to maintain 3 Gbps (gigabits per second) of traffic monthly at each Charter POP.

If an interconnecting company such as Netflix exceeds 3 Gbps of traffic, Charter and the interconnecting company will each have to upgrade their own infrastructure at their own cost. Charter will have the right to suspend interconnection agreements when there is high traffic over its network.

Currently, Netflix doesn’t have an interconnection agreement with Charter.

You can get diversified exposure to Netflix by investing in the Consumer Discretionary Select Sector SPDR Fund (XLY), which has invested 2% of its portfolio in the stock.

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