Back in February, Netflix CEO Reed Hastings cut a deal with Comcast chief Brian Roberts. Netflix and Comcast’s servers would now communicate directly, so that Netflix’s content isn’t interrupted by bottlenecks on its way to customers. In return, Netflix would pay Comcast for smoothing delivery of its movies and shows.
The deal was arcane but massive in scope — Netflix video content at times accounts for 30% of all worldwide internet traffic.
It was not obvious at the time, however, that the deal actually revealed how weak and vulnerable Netflix is to broadband internet service providers — or how angry Hastings is about it.
The deal was no run the of the mill contract signing, either — Hastings and Roberts reportedly met in person at CES, the big computer trade show in Las Vegas, to seal it.
Yesterday, Hastings used his Q1 earnings call to blast Roberts’ plans to acquire Time Warner Cable — a deal Comcast desperately needs to shore up its superior position in a market riven with uncertainty due to “cord-cutters” turning their backs on paid TV subscriptions. In a note to investors favouring “strong net-neutrality,” Hastings called the Comcast-Time Warner deal an unacceptable accumulation of monopoly power, and cited the deal he had struck with Roberts as an example of that abuse. If Comcast wasn’t forced to obey the principles of “net neutrality,” he argued, it would have the power to charge companies and consumers different fees for different levels of access to the web:
The Internet faces a long term threat from the largest ISPs driving up profits for themselves and costs for everyone else …
… Comcast is already dominant enough to be able to capture unprecedented fees from transit providers and services such as Netflix. The combined company would possess even more anti-competitive leverage to charge arbitrary interconnection tolls for access to their customers. For this reason, Netflix opposes this merger.
Comcast didn’t wait any time to get its rebuttal in. In a blog post, the company all but called Hastings a liar:
Netflix is free to express its opinions. But they should be factually based. And Netflix should be transparent that its opinion is not about protecting the consumer or about Net Neutrality. Rather, it’s about improving Netflix’s business model by shifting costs that it has always borne to all users of the Internet and not just to Netflix customers.
The spat appears to have come about because, after Netflix paid Comcast, Comcast failed to join Netflix in its position favouring “strong” net neutrality. Back in March, Hastings had called out Comcast by name, again citing their deal. He even compared Comcast unfavorably to Cablevision, a rival:
Some major ISPs, like Cablevision, already practice strong net neutrality and for their broadband subscribers, the quality of Netflix and other streaming services is outstanding. But on other big ISPs, due to a lack of sufficient interconnectivity, Netflix performance has been constrained, subjecting consumers who pay a lot of money for high-speed Internet to high buffering rates, long wait times and poor video quality.
Netflix believes strong net neutrality is critical, but in the near term we will in cases pay the toll to the powerful ISPs to protect our consumer experience. When we do so, we don’t pay for priority access against competitors, just for interconnection. A few weeks ago, we agreed to pay Comcast and our members are now getting a good experience again. Comcast has been an industry leader in supporting weak net neutrality, and we hope they will support strong net neutrality as well.
The battle Hastings is fighting is poorly understood. Back in February when the two companies struck their deal, many concluded that it didn’t impact the net neutrality debate. The bottlenecks in Netflix’s traffic had been occurring at the level of internet backbone providers, traffic management companies that few people outside the industry have ever heard of like Cogent and Level 3. The Comcast deal looked like more of a workaround.
But since then Hastings has repeatedly pointed out that if Netflix can be forced to pay for superior access to its customers, then everyone else might be, too. For Hastings, this isn’t simply a workaround, it’s an existential threat to any company that becomes big enough to draw the attention of internet service providers. And by moving huge companies into direct contact with ISPs, it reduces the importance of the backbone companies that used to manage traffic on the net. This would rearrange the landscape of the web, as The Economist put it:
The Netflix/Comcast agreement effectively re-draws the model for internet provision in the US, and ends years of dispute between internet companies and service providers over who should shoulder the responsibility of paying to upgrade the country’s internet infrastructure. Crucially, it puts ISPs and content providers in direct contact with each other, threatening the future business of backbone internet providers such as Cogent.
Although this is not the first time that Netflix has secured a direct link agreement with a broadband provider (it has sealed agreements with smaller operators in the past, such as Cablevision Systems), the key difference this time around is that Comcast has demanded payment. And by convincing Netflix to shoulder the cost, not only does this give already-dominant US ISPs such as Verizon and Comcast significantly more leverage over pipeline infrastructure investment negotiations, it also puts them in primary position to decide whether they wish to engage in discriminatory practices when it comes to handling content provider data.
One example of that leverage? After Netflix agreed to pay Comcast to deliver its traffic, delivery speeds did indeed increase (chart below). In other words, Comcast extracted its fee and demonstrated its power … and Hastings doesn’t like it one bit.