Netflix has agreed to pay US internet service provider (ISP) Comcast an undisclosed fee to relieve internet “congestion” and ensure smoother streaming of Netflix content. The move has renewed fears that major US ISPs will prioritise content in return for a fee, jeopardising the principles of net neutrality.
The Comcast/Netflix deal, sealed earlier this week and only 10 days after Comcast’s announcement that it intends to purchase Time Warner Cable, is a landmark in the telecoms industry.
Although details of the terms have not been disclosed, it is understood that Netflix’s chief executive, Reed Hastings, and his opposite number at Comcast, Brian Roberts, agreed the framework of a deal at the Consumer Electronics Show in Las Vegas last month. The deal is expected to last several years, during which Netflix will route its content to Comcast through third-party data centres, despite its wishes to house its servers directly with Comcast.
As demand for Netflix’s streaming services has increased in recent years (it now accounts for just over 30% of downstream US internet traffic), so providers such as Comcast have complained that use of the streaming service has overloaded its pipes, leading to slow load times for consumers. Under the traditional internet model, the situation has been made especially challenging for Cogent Communications, just one of the many internet “middlemen” that receives Netflix data and distributes it directly to Comcast servers. Cogent has repeatedly asked Comcast to upgrade the infrastructure that connects it to Comcast in the past, but Comcast has laid the responsibility squarely at Cogent’s door. The situation has resulted in deadlock, until now.
Although little mention has been made of Cogent’s fate, 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.
Circumventing the need for backbone providers, which have broadly kept the market for internet service provision competitive and prevented ISPs from discriminating against traffic from specific sources, will undoubtedly strengthen both Netflix and Comcast’s hand. Given the adverse effect this will have on the prospects of future video-streaming start-ups, and the implication that ISPs will be allowed to divide what is essentially a single internet pipeline into “fast” and “slow” lanes (bestowing ISPs with more monopoly power), net neutrality advocates are worried.
The US Federal Communications Commission (FCC) has broadly shown itself to be on the side of net neutrality in the past, and it still harbours reservations over Comcast’s proposed takeover of Time Warner Cable on anti-competitive grounds. But given that the Netflix/Comcast deal is skating over relatively new ground, essentially creating a whole new framework for internet provision, current net neutrality guidelines are ill-equipped to deal with the potential issues that could arise.
Acting under the assumption that this latest agreement could spark off a whole host of similar agreements between content providers and ISPs, the FCC would have a hard job of regulating and monitoring different connection arrangements in terms of speed, reliability and payment structures. Reversing a decades-old trend that has seen ISPs buy up large parts of the US’s internet pipeline infrastructure, transforming themselves into both end-user service providers and owners of the pipeline network is, likewise, difficult if not virtually impossible.
The FCC’s options are therefore limited, although pressure from net neutrality advocates could force the regulator to scrutinise the Time Warner Cable deal much more closely, particularly given that it would give Comcast access to one-third of all high-speed internet users in the US. Pressure from consumer advocates is sure to heighten too, with the added concern that Comcast, which has been described by one individual in the industry as having “almost comically profitable” profit margins in excess of 90%, may pass on Netflix’s increased costs to consumers. Whatever action the FCC chooses to take, one thing is for certain, the next step is sure to unravel a whole new path for internet provision in the US.
Click here to subscribe to The Economist.
NOW WATCH: Tech Insider videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.