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Comcast-Netflix Peering Deal: A Game-Changer?

Mari Silbey
2/24/2014
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The peering deal struck by Netflix and Comcast over the weekend could well prove to be a game-changer for large cable operators, telcos, and other large broadband providers in their dealings with OTT video providers.

Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Netflix Inc. (Nasdaq: NFLX) confirmed over the weekend that they have signed a new interconnection agreement to improve the quality of Netflix streams for Comcast subscribers and allow for the continued growth of Netflix traffic. The announcement touched off a wave of excitable media reports and speculation over whether the deal has implications for network neutrality, OTT video carriage, and Comcast's planned acquisition of Time Warner Cable Inc. (NYSE: TWC).

First, here are the facts. The new peering agreement does not mean that Comcast will put Netflix's caching appliance in its last-mile network the way some other providers have. Several outlets are reporting that Comcast is not supporting the Netflix appliances, and Light Reading has confirmed with a source close to the deal that this is indeed the case.

Comcast has also been adamant that the agreement does not mean that Netflix traffic will get any preferential treatment. Here's what Comcast said in its official statement:

"Working collaboratively over many months, the companies have established a more direct connection between Netflix and Comcast, similar to other networks, that's already delivering an even better user experience to consumers, while also allowing for future growth in Netflix traffic. Netflix receives no preferential network treatment under the multi-year agreement, terms of which are not being disclosed."

Because the agreement has been in the works for months, it means that Comcast's offer for Time Warner Cable was not on the table when the negotiations began. As for the terms of the deal, while Comcast and Netflix won't disclose them, many news organizations are reporting that Netflix is paying Comcast for the direct connection into its network.

Now, here is the controversy. Industry observers worry that many of the functions of the Internet are being consolidated in a handful of network and content companies, and that eliminating all of the middlemen (such as telecom backbone provider Cogent Communications Holdings Inc. (Nasdaq: CCOI)) in the delivery process will ultimately give these companies too much power. Also, because peering agreements are not within the Federal Communications Commission (FCC) 's regulatory jurisdiction (and officially not a network neutrality issue), there's concern that much of the brokering over Internet operations is happening without any oversight. (See also The Great Peering War Rages Again.)

And here's the heart of the issue. Peering agreements are based on closed-door negotiations, which means that nobody gets to see how the deals are done. Many consider the agreement between Comcast and Netflix to be a win for everyone. Comcast gets paid, Netflix gets an acceptable deal for traffic delivery, and consumers get higher quality video delivery.

However, there is no way of knowing what the implications are for these types of deals in the future, when the players and situations will be different. And without a transparent view of the process, there's no way to know if the industry needs to put new checks and balances in place.

— Mari Silbey, special to Light Reading

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pcharles09
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pcharles09,
User Rank: Light Beer
2/26/2014 | 9:01:14 PM
Re: The problem
Only $15B...?

In all reality, that sounds like enough of a barrier to entry.
brookseven
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brookseven,
User Rank: Light Sabre
2/26/2014 | 2:09:17 PM
Re: The problem
Community networks are a 100 year old idea.  Try the Independent Operating Companies (many of the smaller of which are muni owned).

 

seven

 
cwgservices
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cwgservices,
User Rank: Light Beer
2/26/2014 | 11:38:56 AM
Re: The problem
I think municipal and community networks are an idea whose time has come. Check out all the activity in public-access small cell deployments as discussed here on Light Reading. Networks of interconnected networks can provide resilency and high performance, and will increase the options available to consumers.
sam masud
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sam masud,
User Rank: Light Sabre
2/25/2014 | 2:11:04 PM
Re: The problem
Thanks for suggestion (a)--I've been saying for quite some time that municipal networks aren't all that crazy an idea.
msilbey
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msilbey,
User Rank: Blogger
2/25/2014 | 9:39:48 AM
Re: The problem
gconnery- You are exactly right. Frankly, Netflix only became the success it is because of pitch-perfect timing. It grew big enough quietly enough that the cable/telco companies didn't pay enough attention until Netflix already had the power of a massive audience. I don't see how a new start-up could squeak in anymore given everything that's happening on the distribution side of the market. 
gconnery
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gconnery,
User Rank: Light Sabre
2/25/2014 | 3:07:43 AM
Re: The problem
We could:


a) allow local communities to build their own networks, and in particular make this legally nationally so we can stop the stupid cable companies from lobbying to block municipal networks in each state

b) we can require that the wire be installed by a separate company, which then charges all commers for access.  those can then sell ISP services.  yes this is how they would do it in Europe.  so?


c) we can hope and pray that Google fiber provides a real alternative over time

d) I guess we could do things to ensure that wireless eventually develops into a real alternative.  honestly though, this seems a bit far fetched right now, with the ridiculous data caps and the networks already getting bogged down by current LTE network penetration using only cell phones.  for the moment I'd say this isn't possible.

Other options?  Not sure there are any.

The issue with Comcast and Netflix is really not about Netflix.  Its about the next new disruptive service that won't exist because it now can't compete with Netflix which has already reached a scale where it can pay Comcast.  The next disrupter won't be able to.  There was a great post about this here:

http://avc.com/a_vc/2014/01/vc-pitches-in-a-year-or-two.html
mendyk
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mendyk,
User Rank: Light Sabre
2/25/2014 | 12:55:44 AM
Money in the middle
Isn't eliminating the middle man (aka disintermediation) what effective disruption is all about? And yes, this is a partially loaded question.
brookseven
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brookseven,
User Rank: Light Sabre
2/24/2014 | 8:28:03 PM
Re: The problem
Nobody has closed the door to competition.

Just pony up your own $15B and build your own network.  Anybody can!

seven

 
pcharles09
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pcharles09,
User Rank: Light Beer
2/24/2014 | 8:11:52 PM
Re: The problem
That's what gets me. How do these lobbyists & campaign donors get to choose what we, the people want, & get away with it. I mean, I know money talks but when it comes to democracy & capitalism, I thought it's supposed to the the consumer that votes with their hard-earner dollars, not providers closing doors to competition... and then it being OK...?
KBode
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KBode,
User Rank: Light Sabre
2/24/2014 | 6:06:52 PM
Re: The problem
I think the real problem (as Carol aptly hints at) is that the only way to truly get uniform broadband competition in place -- and improved networks to low ROI areas -- requires an independent regulator with the guts to do things that the incumbent operators won't approve of. We don't have that. We have a Congress and political culture that snaps its head at the slightest hyperbole, a total disdain of spending money on infrastructure (war and military investment is fine, though), and a general inability to sever regulation from campaign contributions.

Until we learn to fix some of these things, we're going to be mediocre at connectivity, and especially the kind of competition that prompts connectivity to flourish. I just don't think there's a route around this.
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