Peer Pressure

The Comcast-Netflix interconnection deal announced last week drew a vocal and divisive reaction — either the sky remained firmly in place, or it was getting ready to fall.

While many labeled it as a standard, ho-hum, there’snothing- to-see here transit deal mimicking the thousands that preceeded it, others saw it as a pact dripping with significance that marked the beginning of the end of an open Internet.

Amid the confusion and conjecture, the truth lies somewhere in between. To be sure, the interconnection relationship is relatively straightforward and common, one of many for the cable giant. But the implications are more far-reaching than they appear to be, because it involves the world’s largest broadband ISP and the world’s most popular video-streaming service.

The timing of the announcement was suspect for sure. While the deal was said to be in the works for months, it did not get sealed up until after Comcast struck its $45 billion deal to acquire Time Warner Cable, the second-largest U.S. MSO. That led to suspicions that Comcast scrambled to nail down a deal Netflix to head off a potentially loud critic before the regulatory review that’s on the horizon. Coincidence?

The Comcast-Netflix deal also drew concerns from network-neutrality advocates, even if nothing in the agreement appears to be breaking any of the rules that currently apply to Comcast.

Though simple in nature, the potential ramifications of the agreement are complex and could set the stage for many more like it among the nation’s other big ISPs. What follows is a primer on the deal and answers to key questions in the world of Internet traffic.

1 What does the Comcast-Netflix deal cover?

It’s an interconnection agreement that allows Netflix to forge a direct link to Comcast’s network at dozens of entry points and remove the middle man. Historically, Netflix has interconnected to the Comcast backbone through such third-party Internet transit players as Cogent Communications and Level 3 Communications. The new pact, considered a fairly standard one by executives familiar with Internet transit fees, will remove some of the complexities Netflix deals with when it delivers video to Comcast’s broadband subscribers.

The addition of these new ports and on-ramps should reduce traffic jams as Netflix traffic enters Comcast, freeing up room to accommodate higher quality Netflix streams.

Before the deal, when Netflix traffic was said to be flooding Cogent’s peering points to the networks of Comcast and Verizon Communications (think of them as a revolving door connecting two rooms), evidence mounted that the resulting congestion was reducing the quality of streams going to customers.

Peering disputes have emerged when one side is feeding more traffic than the other and refuses to pay for additional ports and capacity. Comcast and Level 3 engaged in such a dispute — ultimately settled — in 2010, soon after Level 3 signed a deal with Netflix and anticipated the coming traffic spike.

2 What does Netflix get out of the deal?

Netflix now has some assurance that its Internet-fed service will have an easier time scaling and delivering high-quality streams as it expands its HD library and prepares to launch its first byte-heavy 4K/Ultra HD offering.

It also appears that Netflix is getting quite a discount, at least in the short term. Comcast and Netflix did not disclose the financial terms of the deal, but it’s believed that the transit costs Netflix will pay to Comcast will be lower than what it’s been paying to Cogent to route traffic to Comcast.

Wedbush Securities estimated that Netflix is paying Comcast between $25 million and $50 million, versus the $400 million Comcast had been seeking, but also predicted that payments to ISPs such as Comcast will likely grow in the coming years as traffic continues to grow. Dan Rayburn, the executive vice president of and a principal analyst at Frost & Sullivan, offered a “rough estimate” that the Comcast deal will cost Netflix a lot less — about $12 million per year, based on assumptions that Netflix would be paying at bit less than $0.50 per Megabit per second of capacity for its ever-growing streaming requirements.

Netflix was also rewarded on the stock market as shares reached an all-time high last week of $457.79.

3 Does this deal have anything to do with network neutrality?

Despite fears that this transit deal could destroy the Internet economy, the agreement with Netflix and Comcast has absolutely nothing to do with the classic definition of network neutrality, insisted multiple sources close to the deal.

While this paid arrangement does give Netflix a direct link to Comcast’s network, the MSO is not prioritizing or giving any special treatment to Netflix traffic as it reaches the Comcast access network, where it is ultimately shuttled along to the consumer. Although the anti-blocking and unreasonable discrimination provisions of the Open Internet order have been struck down in the courts, Comcast must adhere to the old rules per the conditions of its NBCUniversal acquisition through 2018.

Thus, it’s not in the best interest of Comcast to discriminate against Netflix streams or any other Internet traffic running on its networks.

“The concept of net neutrality refers to the nondiscriminatory treatment of traffic within a given carrier’s network,” Craig Moffett, partner and senior analyst with Moffett Nathanson Research, explained in his research note summing up the deal. “The concept of peering relates only to the point at which different carriers’ networks interconnect and the volume of traffic that is exchanged.

“[T]he deal has nothing to do with paying for speed or network access; rather, it is simply a commercial payment to Comcast to open up additional ports to allow traffic to flow in excess of the settlement-free ratio,” Moffett said.

The Comcast-Netflix deal represents the kind of commercial agreements that have long governed the Internet. “Google and AOL have been doing it for years,” Rayburn said, citing just two of many examples. “Transit is the way the Internet works. This is how the Internet has worked for 20 years.

“Netflix has always paid for delivery,” he added. It’s just now adding Comcast to a list that already includes Cogent, Level 3, Tata, XO, Telia, and NTT, according to Rayburn.

“If they [Netflix] are getting a better deal and consumers are getting a better service, then it’s good all around,” he said.

4 Are there concerns beyond net neutrality?

Even if classic network-neutrality rules don’t apply here, some fret that the deal still refl ects the power Comcast now wields as the nation’s largest broadband ISP. Further, there are concerns that the deal’s lack of transparency could represent a slippery slope toward a tax on over-the-top video providers.

Comcast’s play for Time Warner Cable will indeed make the world’s largest ISP only larger. Some are already ringing the warning bells of antitrust.

Tim Wu, a professor at Columbia Law School and a longtime network-neutrality advocate, argued last week in a column published in The New Yorker that the interconnection deal “makes clear that Comcast, which recently proposed acquiring Time Warner Cable, has already accumulated too much power for the health of the Internet economy, and should not be allowed to accrete more.”

Wu said he fears the deal will “embolden Comcast to extract more tolls from any popular Web company that wants to reach its broadband customers and fears degradation of service.”

Some analysts believe there is more than a coincidental link between the Comcast-Netflix deal and the TWC agreement, or at least believe that Comcast will use the new Netflix deal to its advantage as the TWC deal gets scrutinized.

Reaching this deal now “reduces the risk that the issue will play a major role in the merger review,” Carlos Kirjner, an analyst with Sanford Bernstein, wrote recently. “Comcast will likely use the deal with Netflix to argue that there is no need for regulatory intervention as it is capable of reaching a mutually satisfactory agreement with other parties, even with the party that is likely the major source of peak IP traffic.”

A person close to the agreement said Netflix chose, and was not coerced, into striking the direct transit deal, but acknowledged that it was a compromise. Netflix was willing to take this option, believing it would allow it to provide a solid experience to Comcast customers for years to come.

5 What is Comcast obliged to do now?

Comcast has already begun the process of building and opening up these new on-ramps that will provide links between its network and the Netflix servers. In fact, the engineering teams of both companies were getting ready for this well before the deal was announced.

Following the initial turning up of capacity in areas like Philadelphia and the San Francisco Bay area, Comcast is expected to continue to open up ports and capacity to Netflix at all interconnection points. It’s anticipated the whole process will take weeks, not months.

6 Why didn’t Comcast join Netflix’s Open Connect program instead?

Simply stated, it didn’t have to. By getting Netflix to agree with this option, Comcast avoids falling in line with other ISPs, including Google Fiber, Cablevision Systems, Cox Communications and Suddenlink Communications, that have opted to join the Open Connect club.

There are pros and cons to Netflix’s preferred option. Rather than a simple interconnection and transit relationship, Open Connect requires an ISP to install single-purpose caches (read: expensive computers) on its last-mile network. While that does enable ISPs to provide higher-quality Netfl ix streams, some operators — Comcast, Time Warner Cable and Verizon Communications among them — view it as ceding partial control of their network to a third party, setting in place a policy that would require them to do the same for multitudes of other OTT providers. To them, that route presents a potential scaling issue.

Although Netflix is providing Open Connect for free to ISPs, it’s folly to think that it means Open Connect is a zero-cost option for the ISPs, Rayburn said. He pointed out that those providers must free up co-location space and pay for the Netflix appliance’s powering and cooling needs.

7 How will this deal affect others that follow?

With Comcast seemingly setting the blueprint, there should be more deals coming in short order between Netflix and major broadband service operators that so far have resisted the Open Connect option.

Verizon doesn’t have a deal in place yet, but “I would expect that we would” sign an interconnection deal with Netflix, CEO Lowell McAdam said on CNBC last week. “Netflix has been talking to everybody, and we’ve been talking to them for about a year.” AT&T has also confirmed that interconnection talks are underway with Netflix. TWC declined to comment.

What’s not clear is whether Comcast will be flooded with interconnection deal requests from other OTT video players. Then again, they might not have to, based on current streaming volume trends. Netflix was the perfect candidate because its brand of traffic already eats up the most downstream capacity on fixed broadband networks, followed by YouTube. From there, traffic by application drops off a cliff, with Hulu just scratching into the top 10, according to recent Sandvine data.

8 Will the deal make it easier to integrate Netflix into Comcast set-tops?

No. According to sources, Netflix has insisted that MSOs join Open Connect as part of any set-top integration deal, and the interconnection deal with Comcast does not get Netflix any closer to that. That said, Comcast has not set a high priority on working with Netflix on a set-top deal and is said to be more focused on heightening the profile of Streampix, its own multiscreen subscription video-on-demand service.