What The Netflix-Comcast Deal Really Means In Plain English

Reed hastings netflix
Netflix CEO Reed Hastings JD Lasica/Socialmedia.biz

Earlier today, Netflix and Comcast announced that they have come to an arrangement that should ensure quality television and movie streams for Comcast customers for the foreseeable future.

Here are the basics: Netflix will pay Comcast an undisclosed sum, and in exchange Comcast will connect directly to Netflix’s servers, improving streaming quality for all Netflix content.

Of course, there’s more to it than that. If you haven’t been paying attention, the situation can look really confusing.

For those trying to make sense of the latest reports or wondering what it means for Netflix’s relationship with cable companies and other ISPs, we’ve put together the following guide to the Netflix-Comcast deal.

Netflix stream performance has been falling on Comcast since September.

For the last several months, Netflix stream performance has been dipping for Comcast customers. Netflix’s ISP speed index shows that since September of last year, Netflix stream speeds on Comcast’s network have fallen by roughly a third — enough of a drop that it started to become noticeable for users streaming HD content.

Netflix comcast streams
Netflix stream performance on Comcast’s network. Netflix

The problem was caused by an expensive traffic jam occurring between Netflix and Comcast.

Streaming high-definition video to millions of homes every day means moving a ton of data around — 30% of peak Internet traffic in the U.S., in Netflix’s case. Since 2012, Netflix has let Internet service providers video improve stream quality by connecting directly to their Open Connect network.

Comcast, Time Warner Cable, Verizon, and AT&T have all refused to hook their data centres up to Netflix’s servers without payment from the video streaming service. Their logic: when they move data for content networks like Akamai, they get paid for delivering that content to end users. Netflix is doing the same thing, so they should pay up too.

Netflix has been using a middleman — Cogent Communications — to connect their network to Comcast and other ISPs while negotiating for Open Connect partnerships. For some time, the interconnects where Cogent and Comcast meet have been running at capacity.

Normally, Comcast and Cogent would both pay to upgrade this interconnect, but Comcast thought Cogent (or Netflix) should pay up since the traffic is flowing in essentially one direction; Netflix wanted to hook up one of their Open Connect servers inside a Comcast data center and theoretically save money for both of them.

Netflix and Comcast came to an agreement in January.

Both The Wall Street Journal and GigaOm have independently confirmed that Netflix CEO Reed Hastings and Comcast CEO Brian Roberts met at the Consumer Electronics Show in Las Vegas to work out a deal.

Comcast is the big winner in the agreement. Rather than installing one of Netflix’s Open Connect servers at a Comcast data center (giving up some control over the traffic it moves), Comcast will link up with Netflix at third-party data centres and charge the company for data that it delivers — likely on a per-gigabit basis.

The deal is an important strategic move for Netflix as well. An extended period of poor stream quality could convince users that paying for a Netflix subscription isn’t worth it, so getting performance back up for Comcast’s millions of customers was a top priority.

This might set a precedent for Netflix’s relationship with ISPs.

Time Warner Cable is one of several other ISPs that has refused to directly connect to Netflix’s servers without payment. As the second largest cable provider in the U.S., it may have had the leverage to get Netflix to make a similar agreement to that made with Comcast. Now that Comcast is buying Time Warner Cable, it’s unclear if that will even be necessary.

Meanwhile, Netflix stream performance has been dipping on Verizon for some time as well. Verizon may try to negotiate a similar deal now that it’s seen the video service give in to its cable counterpart.

Not about net neutrality.

Counterintuitively, the deal doesn’t have anything to do with net neutrality and the FCC’s upcoming new attempt to ensure that internet providers don’t reduce or “throttle” each other’s bandwidth. This is because the bottlenecks in the flow of Netflix downloads were taking place at Cogent and other interconnecting internet traffic companies such as Level 3.

The agreement thus takes place separately, but in parallel, to that issue.