Count Netflix (NFLX) among those that think companies such as Netflix shouldn’t pay to access broadband networks owned by the likes of Comcast (CMCSA). It’s just bad for customers—except, of course, when it’s good for customers. Fortunately the steaming-video service’s arrangement with Comcast is one of those exceptions, as Netflix Chief Financial Officer David Wells explained this week.
“I would say that we still philosophically believe that the customer is still best served in an environment where a content provider like ourself doesn’t pay,” Wells said at a conference put on by Morgan Stanley (MS) in San Francisco this week. Netflix’s streaming-video customers are already paying for broadband, he added, so why should Netflix pay too? “But,” Wells concluded, the Comcast deal “was an opportunity for us to ensure better service long term for our subscribers.” Got that? Netflix went against its customer-service ideals in the name of serving customers better.
Comcast, as it turns outs, also favors the open-for-everyone Internet “from a principle perspective,” as its chief financial officer, Michael Angelakis, told the audience at the same conference. “We’ve always believed in net neutrality,” he said. “We think it’s the right thing to do from a consumer perspective.”
How did we get to this place of topsy-turvy logic? To recap: Comcast agreed in late February to allow Netflix to connect directly to its network rather than route its traffic through a middleman. Netflix has similar agreements with other Internet service providers, but this deal seemed different, because the streaming-video company had agreed to pay Comcast an undisclosed sum. On first glance it seemed to be setting a dangerous precedent in which ISPs could force content companies to pay for access to customers, cutting off those who won’t play ball.
Given that Comcast is in the process of buying its largest competitor, and the rules over net neutrality were just overturned by a federal court, people got worried quickly. Back at this week’s conference, however, both executives tried to reassure the anxious. Netflix’s Wells described the outrage as a tempest in a teapot. While Netflix was adding “incremental cost,” he said the deal didn’t mark a meaningful change in the economics of the Internet.
The deal with Netflix also doesn’t violate net neutrality. That term refers to a situation in which an Internet provider decides to handle traffic on its network differently. Netflix is paying Comcast for a more direct path to its network; once its movies are in Comcast’s tubes, they’ll travel the same as other content. Netflix would rather pay to improve service than have its customers suffer, and its customers will see improved video quality as a result.
For critics, however, this is an existential crisis. In their view, Internet providers just found a new way to charge companies for access to their customers, who are already paying for access to content. That sounds like an incremental step toward a corporate-controlled Internet, where big players use their market power to smother competition. While Netflix may find it’s in its best interests to pay, it is a powerhouse; companies that can’t negotiate favorably are more vulnerable.
A major question here is whether you believe that Netflix is an extreme outlier or a canary in the coal mine. Having a single company that accounts for one-third of all Web traffic in the U.S. throws off the basic economy of the Internet. As it stands now, networks have generally agreed to carry traffic back and forth without money changing hands, so long as the amount of traffic each sent to the other was roughly the same. But if one network is sending Netflix-size traffic to another, maybe there’s no way to balance that, except with money.
This imbalance is also at the root of a dispute between Verizon Communications (VZ) and Cogent Communications (CCOI), one of the online middlemen carrying Netflix traffic to residential Internet providers. Verizon is demanding payment but also says the whole thing is a “fairly boring story about a bandwidth provider that is unhappy that they are out of balance.” In a recent earnings call, Cogent’s chief executive ranted about “monopoly-type taxes” and called for new regulations.
Being a bad guy is fairly familiar territory for Comcast—no one liked the giant cable company, even before it sought to buy its biggest rival or make bargains with a popular service such as Netflix. On the other hand, Netflix has generally enjoyed the rabid love that customers show for Silicon Valley startups—an enthusiasm that sometimes fades as companies start making business decisions they have trouble explaining to their customers, usually with regards to privacy.
It’s not at all clear that Netflix’s seeming violation of its ideals will resonate in the same way. But as we saw again this week, such deals are indisputably difficult to explain.