Netflix vs. the Comcast-TWC merger: Nothing to lose

Netflix is the first company to publicly oppose the giant merger between Comcast and Time Warner Cable. That’s largely a function of having the most to gain -- and least to lose -- from blasting it.

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Netflix

Netflix is showing once again that it is no friend to Comcast.

The Los Gatos, Calif., streaming video service on Monday warned that the proposed $45.2 billion merger of Comcast and Time Warner Cable would create a worrisome concentration of broadband control, opposition that makes Netflix the first major company to publicly speak out against the combination.

"I don't know that we want anybody to control half of the US Internet, and that's the real basis of our objection to the merger," Netflix CEO Reed Hastings said during a webcast to discuss results.

Reed's comments come just two months after Netflix reached a deal with Comcast to improve Netflix's quality of service for Comcast customers by ensuring a speedy delivery of its video service through the interconnection portion of the Internet, or the pipes owned by the cable giant. Comcast, for its part, claimed the move was more about Netflix's bottom line than consumer rights.

Though Netflix states its opposition to the deal in the same breath that it discusses a consumer-protection concept like equal access to Internet content and sites, a concept known as Net neutrality, Netflix's own financial interests in opposing the Comcast-TWC merger are significant -- and they aren't explained in the fullest detail by the company itself. Unlike some of its traditional TV brethren, at this point Netflix doesn't have much to lose by raising Comcast's hackles. And the merger opposition has next to nothing to do with a price hike Netflix teased yesterday.

A dearth of opposition

Though the merger between the No. 1 and No. 2 cable operators has sparked vocal opposition from consumer advocates and a faction of consumers themselves, few companies -- and no major ones -- have spoken out against it. At a Senate Judiciary Committee hearing, for example, the only companies to testify, besides Comcast and Time Warner themselves, were an independent cable golf channel and a small Connecticut Wi-Fi provider.

Absent were the likes of Viacom, Disney, or 21st Century Fox. Despite standing to gain from the collapse of a merger, they haven't budged. Unlike Netflix, they still have something to lose by getting on the behemoth's bad side, and no big television companies are breaking cover to protest the combination.

The relationship between a cable operator like Comcast and media companies like Netflix or Disney is mutually beneficial, even if the companies are often at odds over price. Neither side can really thrive without the other: Comcast needs the most popular content -- be it Disney's ESPN or Netflix's subscription streaming video -- for its video and broadband services to appeal to consumers, and Disney and ESPN need Comcast to reach a vast number of US homes.

But Netflix isn't your typical television company. It's the first and biggest Internet TV network. Its opposition to the Comcast/Time Warner Cable merger is related to the companies' broadband services, not their cable video business.

The combination of Comcast and TWC would mean the company is passing through 60 percent of US broadband households, Netflix said Monday, something Hastings called worrisome.

"We think it's more in the public interest to either not have them merge, or if the government goes ahead with it, to at least put some significant merger agreements, settlements in there," he said.

The public interest is important, but what about Netflix's interest?

What Netflix stands to gain

As a public company with shareholders and a board holding it accountable, Netflix's own financial interests are paramount in the moves it makes. Here's what the company had to say about its own interests, in relation to the merger: "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 anticompetitive leverage to charge arbitrary interconnection tolls for access to their customers."

While Netflix would like to rope into its argument Net neutrality, a concept meant to protect those who use the Internet from having to choose between paying more money or having services purposely throttled, interconnection fees have nothing to do with it. Deals like the one between Netflix and Comcast aren't part of the current definition of Net neutrality.

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Arthur Simoes, Getty Images for Netflix

Interconnection, rather, is a standard, garden-variety element of Internet infrastructure commerce -- companies like Comcast build Internet pipes at their own expense, and if companies want privileged access to them, Comcast asks for payment. Content providers similar to Netflix have been paying for interconnection all along.

So when Netflix says Comcast is already capturing "unprecedented fees," those fees are unprecedented for Netflix. The streaming video service, which makes up as much as third of North America's peak Internet traffic, had succeeded in getting free interconnection from other ISPs before Comcast dug in and refused. The fees have precedent among other content providers.

Basically, Netflix wants to morph the definition of Net neutrality into "strong Net neutrality" that gives Netflix something it wants -- interconnection -- without having to pay for it. Netflix's perspective is that the Internet, and not just Netflix, needs protection like that. (Federal Communications Commission Chairman Tom Wheeler has said interconnection and Net Neutrality are separate matters.)

Opposing the Comcast-TWC merger furthers that goal, which would save Netflix money.

Comcast pointed out the these omissions in Netflix's argument against the merger Monday.

"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," Comcast spokeswoman Jennifer Khoury said in a statement.

Little to lose

So far, traditional TV companies haven't been willing to stick their necks out to protest how the Comcast-TWC merger will make it harder to raise prices for content because, if the merger goes through as many expect it will, they'll have spent weeks setting up an adversarial relationship with the giant.

But Netflix has already been jabbing the giant in the eye with a sharp stick. A month after securing the Comcast interconnection deal, and issuing a joint statement with Comcast calling the arrangement a "mutually beneficial interconnection agreement" that resulted from months of collaborative work, Hastings penned a blog post that undercut those kumbayas. In it, he said Comcast was "an industry leader in supporting weak net neutrality" and that Netflix will "reluctantly pay large ISPs to ensure a high quality member experience."

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Netflix CEO Reed Hastings in a live video discussion of the company's third-quarter 2013 earnings. Netflix video/Screenshot by CNET

Where other TV companies don't want to set fire to their bridges with Comcast, Netflix has already started a fire at the foot of the bridge.

Netflix isn't exactly roasting marshmallows and dancing around the fire with glee, though. Hastings has plenty of adversarial rhetoric for Comcast but praised Comcast's chief executive, Brian Roberts, on Monday, indicating he wants to be on friendly terms with the leader of the gigantic corporation that may be getting even bigger.

"If there's anyone that you wanted to trust with controlling half of the US Internet, you might get Brian Roberts. He's very thoughtful, very long term about it, very reasonable," Hastings said. "But I don't know that we want anybody to control half of the US Internet."

The price hike

Finally, Netflix's announcement of its first price hike in three years Monday, alongside its opposition to the merger, has stoked some conversation that Netflix bills are rising because the company has to pay Comcast for interconnection.

So there's no misunderstanding: Netflix's planned price hike is not a direct financial result of its decision to pay Comcast for interconnection. The math just doesn't support it.

True, nobody in the public knows exactly how much Netflix agreed to pay to Comcast to directly link the two companies' networks. But we do know that payments for content -- the videos like "Breaking Bad" and homegrown series like "Orange Is the New Black" -- are by far Netflix's biggest area of spending. Netflix noted its huge and increasing costs for content as it explained the rationale for the price hike. And if the Comcast interconnection costs had been significant enough to meaningfully alter Netflix's ability to do business, securities law requires Netflix to disclose that to its shareholders -- for example, had the February deal been a truly momentous new cost, Netflix would have needed to reduce its guidance for the first quarter. It didn't touch the guidance, and the company ultimately beat that projection anyway. That speaks to how tolerable these Comcast interconnection costs are.

The concept that Netflix is raising prices because of its interconnection payments to Comcast would be like your brother-in-law buying a $40,000 85-inch ultra-high-def TV and then blaming the taxes he had to pay on it for why he can't afford to pay his cable bill. The drop in the bucket isn't what made Netflix raise prices, it's the fact that the bucket was already filled to the brim by other factors.

However, so far, the bucket of opposition to the Comcast merger is pretty empty. In the interest of a robust debate over a merger that could transform how the US watches TV and accesses the Internet, it doesn't hurt that Netflix has started pouring some water in.

 

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