[opendtv] Fwd: Comcast/Netflix: Unwinding the Latest Traffic Jam, but at What Cost? » Knowledge@Wharton

  • From: Craig Birkmaier <craig@xxxxxxxxxxxxx>
  • To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
  • Date: Wed, 26 Feb 2014 16:14:11 -0500

Comcast/Netflix: Unwinding the Latest Traffic Jam, but at What Cost?

Depending on whom you ask, Comcast’s deal with Netflix to provide improved 
speeds for streaming by the latter’s subscribers is either a bargaining chip in 
the cable giant’s bid to merge with Time Warner Cable, or simply a fix for an 
issue that has long been a source of complaints from subscribers to both 

The two companies announced Sunday that Netflix will pay Comcast an undisclosed 
amount to have the cable provider ensure that subscribers can stream its movies 
and television shows more quickly. The agreement comes on the heels of a 
January federal appeals court ruling saying that the Federal Communications 
Commission does not have the authority to prevent companies like Netflix from 
paying Internet service providers to prioritize its content. Comcast said in 
its statement announcing the deal that Netflix receives no preferential network 
treatment under the multi-year agreement.

Meanwhile, Comcast is expected to face significant federal scrutiny of a deal 
announced 10 days earlier to buy Time Warner Cable for $45 billion. The deal 
would create a cable and Internet behemoth that would provide television 
services for nearly one-third of American households and Internet for about 40% 
of homes.

Some consumer advocates worry that the Netflix deal may force the company to 
increase its subscriber rates and trigger a wider trend among similar services. 
Critics also note that if Comcast expands via the merger with Time Warner, it 
could exert unfair leverage over smaller video providers that may not have 
Netflix’s deep pockets.

Gerald R. Faulhaber, a Wharton emeritus professor of business economics and 
public policy, Lawrence G. Hrebiniak, a Wharton emeritus professor of 
management, and Kevin Werbach, Wharton professor of legal studies and business 
ethics, hold divergent views on the strategy behind the Netflix deal and how it 
would impact both customers and competing streaming video providers.

While Hrebiniak suggests that the Netflix deal is Comcast’s way of showing 
federal regulators that it “plays fair” and that the Time Warner merger does 
not warrant extra oversight or antitrust action, Faulhaber says the 
Netflix-Comcast agreement is merely an example of business as usual for the two 
firms. Werbach points to legitimate concerns about broadband providers enjoying 
too much power, and he wants the FCC to examine relationships between carriers 
like Netflix and Comcast.

Below, the three professors offer their views on this latest deal.

Kevin Werbach:

“We don’t know the details of the deal…. [What we do know is that] Netflix is 
paying Comcast for direct interconnection of traffic, instead of paying transit 
providers to deliver traffic to Comcast. As a matter of principle, Netflix had 
been arguing it shouldn’t have to pay for direct interconnection, but it’s 
possible the new deal costs it less than its prior arrangement. It seems 
unlikely that Netflix would have caved at precisely the moment when it had the 
most leverage, due to Comcast’s proposed acquisition of Time Warner Cable.

“There are legitimate concerns about whether Comcast and the other large 
broadband access providers have too much power, but simply being big or having 
a substantial market share isn’t by itself a cause for regulation. The FCC’s 
network neutrality rules explicitly excluded interconnection relationships 
between carriers, which is what the Comcast-Netflix deal involved. I’ve been 
arguing at least since 2007 in my research that the government needs to examine 
interconnection, because that will ultimately be the key issue for openness and 
innovation in Internet infrastructure.

“At a minimum, we need transparency. The terms of interconnection deals like 
this one between Comcast and Netflix are generally confidential, which makes it 
impossible to assess whether they reflect a competitive market or 
anti-competitive bullying by one provider.

“In addition to concerns about Netflix, there are two other reasons to worry 
about potential implications of this deal. Netflix may have the leverage and 
resources to negotiate a reasonable interconnection deal, but what about 
smaller and newer players in the online services market?

“Second, what we’ve seen in the video market is that consumers may lose even 
when the providers on both sides are satisfied. The costs of cable TV keep 
going up, in part because programming costs are spiraling upward. That reflects 
a series of agreements between content providers and cable operators, which 
ultimately pass on the costs to consumers. The FCC hasn’t intervened in these 
“retransmission” negotiations, partly because its authority is severely limited 
by Congress. In the case of the Internet, the DC Circuit Court of Appeals 
recently acknowledged that that it had significant authority under Section 706 
of the Communications Act.”

Lawrence Hrebiniak:

“Comcast is flexing its muscles with Netflix and using its power to create a 
positive deal for itself. The 800-pound gorilla is acting out, and its power is 
obvious. Netflix has no or few other choices if it wishes to free itself of the 
problems subscribers have complained about of late.

“Interestingly, however, Comcast may try to come across as the benevolent giant 
and not show off its power. It can easily and quickly raise prices for 
[unimpeded streaming of content from] Netflix, [and those costs will] clearly 
be passed on to [the consumer].

“But Comcast managers are smart and calculating, and they might have a ploy in 
mind. They might play things softly and slowly and try to show that Comcast 
indeed can work nicely with other companies like Netflix and that no regulatory 
oversight or intervention is needed.

“Comcast is [also] arguing that net neutrality is alive and well with good 
prospects for the future. [The company argues that] Netflix is receiving no 
preferential treatment, so the deal with Netflix — and implicitly with Time 
Warner — only goes to show that Comcast is committed to an open Internet. 
Again, the message to regulators and critics is that it is not necessary to 
create hurdles for Comcast as it is proving it is a good neighbor and fair 
company. Coupled with Comcast’s strong political connections in Washington, a 
host of people might be seduced by this logic.

“Will someone actually be hurt some day [by the deals]? Yes. Customers of 
Netflix eventually will pay more.” –Lawrence Hrebiniak

“Will someone actually be hurt someday [by the deals]? Yes. Customers of 
Netflix eventually will pay more. A combined Comcast-Time Warner will be able 
to control Internet traffic and raise prices for customers. Some small 
companies without the ability to pay won’t be able to secure a Netflix type of 
arrangement and will suffer for it. And what will happen to net neutrality in 
the future? Watch a combined Comcast-Time Warner, if the acquisition is 
approved, and let’s see what happens. You can probably guess that I’m a bit 
nervous about the outcome.”

Gerald Faulhaber:

“Since the very first days of the Internet in the early 1980s, networks had 
financial arrangements for exchanging traffic. They had two forms of 
arrangements. One was between Network A and Network B, where if they had 
roughly the same amount of traffic, they did unpaid ‘peering,’ so they didn’t 
charge each other. [The second form] had smaller networks with ‘unbalanced 
traffic,’ where they sent more traffic out than they received back. They were 
called ‘transit networks’ and were charged because the traffic was unbalanced.

“Fast forward to today when the situation is a lot more complicated, and there 
are all kinds of different networks. Netflix is a classic content provider, and 
it had deals with Level 3 Communications [of Broomfield, Colo.] and Cogent 
Communications [of Washington, D.C.] to deliver traffic to end-users. In 
particular, Netflix used Cogent’s network to send streaming video to Comcast 
customers. Netflix paid Cogent, and Cogent paid Comcast. That was always the 
way these networks worked — it is called paid peering.

“The principal problem, apparently, was that Cogent had limited capacity, and 
Netflix and Comcast were aware of it. [Therefore,] Netflix wanted to 
interchange its traffic directly with Comcast. Netflix for years tried to get 
the Internet service providers to peer with them for free, but it did not 
succeed. All that has changed is Netflix, which was paying Cogent [previously], 
will now pay Comcast for its video traffic.

“The speed and the latency with which video content gets delivered depend on 
every link in the market — it depends on Netflix, it depends on Cogent and it 
depends on Comcast. But who do you call [to improve it]? You call Comcast.

“It is also very clear that any other video provider is going to be able to go 
to Comcast and connect their content delivery network directly with it. Comcast 
will negotiate a deal with them, and that will be that. We don’t know if 
Netflix is going to be paying more. We won’t know because these are typically 
confidential agreements. But when you step back and you see both parties are 
happy with it, that tells you something right there. I don’t see this as a 
problem at all.

“Any other video provider is going to be able to go to Comcast and connect 
their content delivery network directly with it.” –Gerald Faulhaber

“Comcast is a tough negotiator. But you will find very few people that will say 
[the company is] not fair. Every time there is a breakdown in communications 
between a content provider and a cable company, it takes the content off cable. 
These disputes hurt subscribers. Comcast, as far as I understand, has never had 
one of these. The FCC has shown zero interest in regulating the interexchange 
of information on the Internet — and it is quite sensible [for not doing so].

“Another issue that comes up is that Netflix would like Comcast to do ‘caching’ 
for it. With caching, Netflix would send Comcast content before it is actually 
requested by subscribers. Then, when the request comes, the content pops up 
right away. Comcast has said it doesn’t want to do caching for Netflix. The 
main reason is that once they do caching for Netflix, they have to do caching 
for everybody.

“According to the terms of Comcast’s agreement with the FCC when it merged with 
NBCUniversal [in 2011], whatever Comcast offered one, it would have to offer to 
all. [At the time of the merger with NBC, Comcast agreed to abide by the 
principle of net neutrality, where it would not give preference to its own 
content and treat all traffic equally; that agreement runs through 2017.]

“Incidentally I am much less concerned now than earlier that Comcast is going 
to be able to exercise some ‘monopsony power.’ I just don’t see it [happening]. 
The merger [with Time Warner Cable] gives Comcast a little stronger leverage 
upstream with content providers. But with the new competitive market, the 
content providers have been getting a lot more money recently. They can sell to 
Hulu, Netflix, AT&T U-Verse and Verizon, and prices for content have been going 
up. If Comcast-Time Warner [gains] more power over content providers, I am not 
going to object to that — the [content providers] have been raising their 
prices for the last year. A little payback wouldn’t be a bad idea.

“The future of Comcast and Time Warner Cable is going to be about how it deals 
with the likes of Netflix. This is not a merger based on strength. It is a 
merger based on the fact that there is a new video market out there, and they 
have to figure out how to deal with that.”

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  • » [opendtv] Fwd: Comcast/Netflix: Unwinding the Latest Traffic Jam, but at What Cost? Knowledge@Wharton - Craig Birkmaier