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Rereading the tea leaves in the Netflix-Comcast deal

commentary Commentators appear to have assumed the worst about Netflix's recently announced paid peering deal with Comcast. What's the real message in the deal? The Internet isn't broken.


Ever since Netflix and Comcast announced an interconnection agreement aimed at improving streaming performance for Netflix users, commentators have been trying to read the tea leaves to determine what -- if anything -- this deal says about the future of the Internet and network relationships.

A few, including Dan Rayburn on Seeking Alpha, have hailed the agreement as a sign of the continued health of this largely unregulated market. (According to the multinational Organization for Economic Co-Operation and Development, more than 99 percent of interconnection deals are so straightforward that they're agreed to without a written contract.)

But most of the coverage of the brief announcement from Comcast and Netflix instead saw foreboding dark clouds between the undisclosed lines of the deal.

The Washington Post, for example, saw it as the beginning of the end for backbone providers such as Cogent, who would be displaced by direct connections between large content providers and ISPs (Internet service providers). While noting that this might make the Internet more efficient, the Post said the Netflix-Comcast deal could also make the Internet less competitive since there are many competing backbone providers, like Cogent, but only a few big ISPs.

Meanwhile, The Wall Street Journal implied that Netflix, whose customers were recently experiencing declining streaming performance, had no choice but to give in to Comcast's demands. Over on The Verge, the headline reporting the agreement was even clearer, if crude: "The Internet is Fucked."

On the one hand, it's understandable that critics of the deal are both confused and conflicted. Like nearly all peering agreements, neither the negotiations nor the terms of the Netflix-Comcast agreement have been made public. The very brief announcement has become something of a Rorschach test, allowing anyone who interprets it to impose their own preferred narrative, positive or negative, on a deal that, frankly, no one knows much about.

One important aspect of the arrangement, however, became clearer this week when Netflix Chief Financial Officer David Wells, speaking at a San Francisco communications conference, confirmed that the company is not paying Comcast significantly more for direct access to its networks than it was previously paying to a range of providers of content delivery networks (CDNs) and backbone services.

Indeed, the company may actually be saving money with the new direct connection, as well as improving the performance of its service for customers who access it through Comcast's Internet service. One analyst calculated the fee Netflix is paying Comcast at $12 million per year, which would, if correct, mean Netflix was getting bargain basement pricing for transit.

Wells was specific in confirming that whatever the cost of the Comcast arrangement, it would have zero impact on revenue forecasts previously made to Netflix investors.

That's a far cry from earlier reports that simply assumed the unstated costs of the deal would translate to higher prices for consumers. In fact, whether Netflix is paying Comcast the same or less for the direct connection than it previously paid to intermediaries, the amount represented by the deal is too trivial to affect the cost Netflix charges users for access to its service.

Netflix's growing leverage is the best Net neutrality rule
The Internet is saved, at least for now.

In fact, the interconnection deal with Comcast -- and possible similar deals that may be in the works with other large ISPs -- reflects, if anything, Netflix's growing leverage. As its user base has grown to over 44 million and its share of Internet traffic reaches, at peak viewing periods, up to 30 percent of total network activity, the company's bargaining position in all manner of business dealings has increased.

See also: Why you should care about Net neutrality

Now that the company's original programming, including the release of a new season of its popular series "House of Cards," has become essential, ISPs have little to gain from offering anything but the best terms to rapidly-evolving video content giants.

Netflix, in fact, has been flexing its new competitive muscle for some time. In January 2013, the company began pushing its Open Connect Content Delivery Network, the proprietary CDN it developed exclusively for its own content. The technology was developed and deployed largely in Europe, but in 2013 the company tried to speed up adoption in the US by announcing that only ISPs who met the technical and business requirements Netflix was offering would be allowed access to new SuperHD and 3D programming.

That restriction led some, including GigaOm's Paul Sweeting, to accuse Netflix of performing a kind of "Net neutrality jujitsu." Instead of an ISP blocking content, now it was a content provider doing the blocking, holding its own customers hostage in a gambit to get better terms than other CDNs for connections and co-location of its equipment at the ISPs' key distribution points.

As I wrote at the time, however, the early squabbles over Open Connect merely demonstrated how quickly networks were adapting to the onslaught of high-bandwidth video content, and how wise the Federal Communications Commission had been to exclude such arrangements from its 2010 Open Internet order.

Most of that order was rejected in January by a federal appellate court as exceeding the FCC's legal authority. But new FCC Chairman Tom Wheeler has now launched a proceeding to try again, grounding a new set of so-far unannounced Net neutrality rules on a different provision of the Communications Act that the court suggested might support them.

FCC commissioners
The FCC commissioners (left to right): Ajit Pai, Mignon Clyburn, Tom Wheeler (chairman), Jessica Rosenworcel, and Michael O'Rielly. FCC

Netflix's repeated acknowledgments that it can achieve favorable terms for Open Connect with ISPs, including Comcast, without incurring significant costs that affect either consumers or investors, should give Wheeler pause. The Internet ecosystem is and remains dynamic. When transit disputes occur, they are resolved quickly, and without the need for slow-moving courts and regulatory agencies either to set the rules or to enforce them.

The system could, of course, break down in the future. If so, the nature and timing of that failure can hardly be known today. "Prophylactic" rules (as the FCC repeatedly called its 2010 effort) will almost certainly be addressed to the wrong problems, and are likely instead to generate both unnecessary costs and unintended negative consequences of their own.

Even without enforceable rules from the FCC, in fact, antitrust and anticompetitive laws can and are applied to the Internet ecosystem by both the Department of Justice and the Federal Trade Commission. They have been the regulatory cop on the beat both before and after the FCC's ill-fated effort to wade into the thicket. So far, they seem to be providing all the incentive industry participants have needed to keep the Internet market working as well as any.

The Internet isn't dead. It isn't broken. That's the real message of the Netflix-Comcast deal, which simply doesn't fit the alternative narrative of its critics and the alternative reality in which they live.