Sure Netflix and Comcast have jointly announced a connection deal, but what does that mean exactly? The internet's backbone, peering agreements and content delivery network's aren't things users spend most of their time talking about, but they play a huge part in whether you get House of Cards in 4K or spend the night staring at a loading screen. Internet service providers, including Comcast, have talked about extracting cash from services like Netflix, and after this news others like Verizon and AT&T wasted no time in announcing they expect similar treatment.
Still, the picture of who's winning and losing may be a bit fuzzier than it seems. While the two companies didn't publicly go into specifics for their deals, sources have indicated that it includes Netflix paying Comcast. What Netflix gets, is direct access between their networks at a number of regionally located third-party network centers and -- hopefully for its customers -- consistently smooth streaming video service. As Dan Rayburn points out on his Streaming Media blog, the change here is that instead of paying another company to connect to Comcast, the company is going direct. While it sounds like a simple change, consumer advocacy groups like Free Press and Public Knowledge have quickly voiced their issues with the move, and even before this weekend end users have shown a negative opinion about reported throttling by ISPs. We'll take a look at the news and rumors to see what all sides can expect going forward.
Customers of Netflix's increasingly popular streaming service, somewhat surprisingly, may not see much change in the end (other than the advertised improved connection -- all the better to eat up your bandwidth cap). While we don't know what Netflix is paying Comcast for access, multiple industry insiders (Matthew Prince, Martin Geddes) and analysts believe it's less than what the company would pay carriers like Cogent, Akamai or Level 3 for the same thing. That should mean better service, without this type of change resulting in a higher bill. Will that be the case years from now, when Netflix requires more throughput for more customers streaming higher res video, and companies like Comcast control even more of the end users? It's hard to say, but investor response to the news is telling.
Today Netflix's stock touched an all-time high price of over $449 per share, as Cogent's dropped six percent to $37.50. Netflix's OpenConnect proposal to ISPs has included either free peering at private or public exchange points, or colocating one of its servers full of cached content inside the provider's network. They haven't been successful in pushing either method on large ISPs, analysts suggest Comcast's hand was forced by the aforementioned public perception issue and its desire to pass regulatory approval to purchase Time Warner Cable. While we know the two sides negotiated over this very issue for years, that last point may have forced Comcast's hand enough to provide Netflix significant savings over its current bandwidth costs. That gives us the "mutually beneficial" reference in yesterday's announcement, and keeps a smile on the face of Netflix and its investors going forward -- even if its negotiations with other ISPs follow a similar path.
Comcast is obviously pleased, with cash in-hand, a potentially annoying obstacle to its big acquisition removed, and an example to point out if any other video services start to eat up similar amounts of traffic. This doesn't necessarily mean the companies are best friends now, and the sources we talked to indicated the deal only applies to this interconnection -- we shouldn't immediately expect a Netflix app to appear on Comcast's X1 boxes. Still, that they've reached an agreement on this seems like a good sign going forward, and despite media reports focusing on the competition between streamers and old media, Netflix's stated desires have always leaned towards working together.
The impact on net neutrality is also smaller than many might think. Despite the judge's ruling last month, Comcast specifically is tied to upholding the FCC's Open Internet principles as a result of its purchase of NBC. The changes made here are not covered by what is commonly referred to as "net neutrality," which talks about the treatment of traffic once it reaches a particular network. The gateways between networks have so far been self-governed, although some think the FCC should step in. The deal itself is also not particularly odd other than the publicity and the names involved. Other companies like Google, Facebook and Microsoft have reportedly made similar agreements for direct access, and for the same reasons Netflix finally did. Charging by volume is not a new concept, however discriminating based on the type of traffic or source would be a different issue.
So what's not to like? Many believe that this deal could actually increase Netflix's costs for a service ISP customers already pay for, and that it sets a precedent that could hinder any potential competition. Free Press has issued a response to the deal indicating that customers should worry for a number of reasons, not the least of which that ISPs like Comcast and Verizon are willing to let their service degrade as a negotiating tactic, instead of making "minimal investments" to upgrade. It sees a chilling effect in potential startups avoiding competition with Comcast, and points out that the potential merger with Time Warner Cable only makes things worse. John Bergmayer of Public Knowledge points out that the "opaque nature" of these transactions makes things worse, since customers are left wondering what's there to hide. He insists on putting the needs of customers first, and making it clear that "residential ISPs should be in the business of charging their users for access the Internet, not of charging the rest of the Internet for access to their users."
The true impact of this deal should be felt in stages. We're looking at a few weeks before the new connections are available nationwide, while Netflix and Comcast are months away from their next quarterly reports to investors. We'll expect more details about the financial impact of the deal at that time, and of course Comcast's attempt to acquire Time Warner Cable could stretch over a large part of this year. What is the proper response? As internet pioneer and venture capitalist Marc Andreesen suggests, it's not entirely clear that more regulation is the answer. At the same time, a lack of information about how these connections work, where they're made and who is responsible when clogs develop doesn't seem to help anyone. Unless that changes at a regulatory level, it appears pings, traceroutes and cluttered graphs will give us the best look at how and where the data is flowing.
*Verizon has acquired AOL, Engadget's parent company. However, Engadget maintains full editorial control, and Verizon will have to pry it from our cold, dead hands.