Netflix’s deal with Comcast isn’t a sign of the apocalypse

The news media sounded a collective alarm Monday after Netflix agreed to pay Comcast for the privilege of streaming videos directly to Netflix subscribers who use Comcast’s broadband network.

The deal could lead to “higher rates for consumers.” It “may deal a setback to net neutralty” or even make it “obsolete” (and not in a good way). It’s another sign that broadband ISPs are “gaining leverage” over content companies.

Any or all of this speculation may prove to be true. But I’m more inclined to agree with Frost & Sullivan analyst Dan Rayburn, who argues that the deal is an unremarkable example of the way business is done online. Rayburn predicts that Netflix will actually save money by dealing directly with Comcast rather than using a third party to deliver its video streams.

And as most of the reports acknowledge, the deal will help Netflix viewers on Comcast’s network by eliminating the bottlenecks that degraded picture quality.

True, Netflix had hoped to persuade Comcast (as it has done with some other ISPs) to let it put servers within its network, avoiding the need to pay for interconnection. Instead, it appears that Comcast insisted on using commercial Internet exchanges, where networks of all sizes interconnect.

Yet Netflix is already paying for the ability to reach customers in the homes with Comcast cable modems; it’s just not paying Comcast. Instead, it’s been paying other Internet service providers, such as Cogent, to deliver its streams to Comcast and other broadband ISPs.

The problem for Netflix has been that some major broadband ISPs haven’t been willing to provide Cogent more capacious connections unless Cogent pays them. Cogent has balked, leading to more traffic jams and poorer video quality.

Cogent’s objections notwithstanding, it’s common online for ISPs to exchange traffic for free only when there’s a roughly equal amount going in both directions. Like other streaming services, Netflix sends far more traffic to its customers than they transmit back.

Some observers said the deal still was problematic on “net neutrality” grounds. Netflix will pay Comcast more in order to improve the quality of its video streams, which allegedly a) gives Netflix an advantage over smaller competitors that can’t afford to pay, and b) lets Comcast pick winners and losers among content providers.

But the net neutrality rules adopted by the Federal Communications Commission (most of which were invalidated by a federal appeals court) looked only at what Comcast and other ISPs did to traffic on their networks. The rules were silent about interconnection arrangements.

Maybe they shouldn’t be, Timothy B. Lee argues in his Washington Post piece. Netflix’s deal with Comcast suggests that major broadband ISPs have the power to force content providers to pay them for direct connections. That puts ISPs in the position to play favorites among content providers through the prices they charge for those connections and the capacity they provide, Lee contends.

Yet that’s just another way of playing the game that’s already being played today. Deep-pocketed content providers can afford to pay “content delivery networks” such as Akamai to deliver their programming with fewer hiccups and at higher resolution than their lesser-known rivals can.

Lee also worries that content providers will find themselves with no choice but to deal directly with Comcast, Verizon and other powerful ISPs. That remains to be seen, but it’s worth remembering that Netflix is in a class by itself when it comes to content providers. It has signed up so many active subscribers -- more than 44 million at last report -- that it generates more than 30% of the downstream Internet data in North America. (OK, YouTube is no slouch; it accounts for about 19% of the downstream traffic. But still.) That volume is great for Netflix, but it puts the company in a unique position in terms of the effect it has on ISPs and the fees it might be expected to pay.

Other content providers have little reason to deal directly with broadband ISPs. To connect to their customers, they can choose from among numerous Internet providers and content delivery networks, whose prices have declined dramatically over the years. Those middlemen, which aggregate content from an array of sources, are likely to have much more leverage in their talks with Comcast et al. than the typical content provider would have in direct negotiations.

Ultimately, the fact that so few companies offer high-speed Internet access to homes leaves broadband ISPs in an enviable negotiating position. In most communities, consumers have no more than two options for the kind of bandwidth needed to stream high-definition movies to a television set. And Comcast’s planned takeover of Time Warner Cable will only increase the company’s leverage by giving it a higher percentage of the homes with broadband.

That’s one of the reasons The Times’ editorial board raised concerns about the acquisition’s potential effects on interconnection, among other issues. Still, it’s hard to see Netflix’s deal with Comcast as a harbinger of worse things to come. Instead, it seems more like the predictable consequence of Netflix’s extraordinary success.

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