Netflix’s Deal With Comcast Isn’t About Net Neutrality—Except That It Is
For net neutrality to gain traction as a popular cause, it needs Netflix (NFLX). Yes, the infrastructure of the Internet is important, but few people will find it interesting without a clear connection to the new season of House of Cards. So Netflix’s acknowledgment over the weekend that it had reached an agreement with Comcast to make its service run smoother for the cable company’s customers has led to a mini-outcry over the health of the open Internet.
The twist is that Netflix and Comcast’s (CMCSA) arrangement isn’t a net neutrality issue in the technical sense of the term. A proper net neutrality discussion would involve Internet providers playing favorites with the traffic on their networks reaching end users, and analysts quickly pointed out that this deal has none of that. But when a company that drives one-third of U.S. Web traffic teams up with a company that could soon control access to 60 percent of broadband subscribers, it’s worth parsing.
Netflix’s slow speeds on Comcast have been an issue for a while. The video service releases regular reports about the streaming performance of various Internet providers, and Comcast’s quality dropped significantly in the past year. By December 2013, Netflix cited the country’s largest broadband company for offering the fourth-slowest service in a ranking of 17 providers.
Netflix has several strategies to fix this kind of predicament. In this case it wanted to connect directly to Comcast’s pipes instead of sending its traffic through other companies that struggled to handle the traffic. The sticking point, according to media reports, was that Comcast wanted to be paid for this privilege. Last week an analyst noticed that Netflix was sending traffic directly to Comcast, indicating that an arrangement had been reached, and the companies confirmed it on Sunday.
The announcement comes at an interesting time. Last month a federal court overturned the Federal Communications Commission’s net neutrality rules, which limited Internet service providers’ ability to give preferential treatment among types of Web traffic by putting up for bid speedier access to users. Critics of the decision immediately began predicting peril for Netflix, which is responsible for about a third of U.S. Internet traffic at any given time. Shortly thereafter, in a development with significant but uncertain ramifications for the net neutrality debate, Comcast announced it was buying its largest competitor, Time Warner Cable (TWC), for $45 billion, which could give it at least a 60 percent share of the national broadband market.
The talks with Netflix were already under way before the court decision or the merger; multiple reports trace the framework for the Netflix-Comcast deal back to the International Consumer Electronics Show in early January. Still, by coming to an agreement with Netflix, Comcast neutralizes a company that might have been a potent voice in blocking its acquisition of Time Warner Cable. “That was one of the side benefits, or silver linings, of this announcement,” says Paul Sweeney of Bloomberg Industries.
This looks like a worrying development, because Netflix is reportedly now paying Comcast directly for access to its customers—the much-feared vision of what life might be like without net neutrality rules. Then again, Netflix was already paying companies to carry traffic between its servers and Comcast’s customers. Details are murky, but this deal may have actually lowered Netflix’s costs by cutting out the middle man. It’s unlikely that it would have raised hackles at the FCC even before last month’s decision.
The real issue is who has power at the negotiating table. Having multiple third parties move traffic from companies like Netflix to those like Comcast reduces the chances for abuse because there is always another route. That’s different than content companies striking deals with service providers directly, especially one with as many customers as Comcast. If you run Netflix, can you afford not to agree to terms with the gatekeeper providing well more than half of the Internet subscribers in the country?
The most vulnerable companies here aren’t the likes of Netflix, which is big enough to force Comcast to the table. If nothing else, Comcast couldn’t afford to anger regulators with a fight against such a household name right now. But smaller companies will have much less leverage and could get worse terms. Dan Rayburn, an analyst for market researcher Frost & Sullivan, says this is no different than bulk deals that any large customer enjoys. “It’s a volume-based business with economics of scale,” he says. “The more eyeballs you push, the better deal you’re going to get.”
Whether that’s a good thing or not depends on your perspective.
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