Comcast Deal With Netflix Shows Cable Rules in Streaming

Those “House of Cards” binges may soon be going down easier, at least when it comes to how quickly they arrive over the Web. Just don’t ask how much that’s costing Netflix Inc. (NFLX) -- or how much it might one day cost consumers.

After months of talks, Netflix finally agreed to pay Comcast Corp. (CMCSA) an undisclosed amount for more dependable delivery of shows and movies. As the world’s largest subscription video-streaming service, Netflix concluded that using intermediaries to transmit its content just wasn’t cutting it anymore. And it couldn’t persuade Comcast to let it connect directly to the cable company’s servers for free.

What Netflix stands to gain out of the deal is simple: fewer complaints about video that’s slow to load or interrupted midstream. Comcast wins by securing its hold over content companies, which need the Web to deliver their wares to televisions, tablets and computers.

“In the long term, the agreement is definitely better for the Internet providers,” said Ken Doctor, an analyst with Outsell Inc.

Netflix rivals including Amazon.com Inc. (AMZN) and Hulu LLC already have similar commercial relationships with Comcast and others, according to people with knowledge of the matter. Netflix’s joining them cements a shift in the economics of how entertainment is delivered. In the past, the major streaming services relied on third parties such as Akamai Inc. to convey their videos and webpages. Now the traffic has shifted to favor broadband providers.

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Photographer: Andrew Harrer/Bloomberg

The Netflix Inc. application is displayed on an Apple Inc. iPhone arranged for a photograph in Washington, D.C.

Access Payments

It’s unclear whether Netflix subscribers will have to pay more down the line. The rates the Los Gatos, California-based company agreed to give Comcast total only several million dollars annually, according to a person familiar with the matter. Because Netflix already pays third parties to access the Internet -- much as consumers pay broadband operators to get on to the Web -- what Netflix charges its customers might not be affected, at least not right away. It’s simply shifted its traffic costs in favor of Comcast.

The equation is different in the relationships cable companies have with programmers like HBO or ESPN, which charge fees that have gone up over the years and have spurred rises in people’s cable bills.

HBO, owned by Time Warner Inc., (TWX) gets about $7.77 per subscriber per month, while ESPN, part of Walt Disney Co. (DIS), gets about $5.54. Those are the two highest average rates in the industry, according to research firm SNL Kagan.

Transit Fees

Comcast has said that one of the benefits of its proposed $45.2 billion acquisition of Time Warner Cable Inc. (TWC) is that a combined company could negotiate better rates with the television programmers.

In the meantime, Netflix and the other streaming providers are essentially helping subsidize the costs of broadband.

Not long ago, most online video companies sent their content to customers via secondary providers and paid them transit fees. For Netflix -- which streamed more than 2 billion hours of programming in January -- the main deliverer has been Cogent Communications Group Inc. (CCOI), which routes content across the backbone of the Internet to the phone and cable companies with wires into people’s homes. Cogent could be a loser, as Netflix will be diverting some of its transit fees to Comcast.

The agreement between the two outlines a private business relationship known as an “interconnect” agreement and so doesn’t run afoul of net neutrality, according to a person with knowledge of the arrangement.

No Preferential Treatment

Net neutrality holds that providers like Comcast shouldn’t discriminate between the different types of content that flow through its network. In a statement announcing their agreement, the two companies said Netflix “receives no preferential network treatment” under the terms of the contract.

The contention is that Netflix has essentially entered an already established marketplace, following other content companies like Google Inc. that have commercial relationships with broadband providers.

The payments Comcast receives from Netflix and other content companies aren’t large enough to define a new business, said Richard Greenfield, an analyst with BTIG LLC. “These are tiny numbers in the scheme of things.”

The accord with Netflix could be helpful to Comcast’s bid for Time Warner Cable, removing the potential obstacle of Neflix’s arguing to regulators that Comcast was impeding its service, said Outsell’s Doctor. Netflix accounts for about 32 percent of all peak Internet traffic in North America, according to estimates from Sandvine Inc.

The deal is also good for subscribers, Greenfield said.

“It’s hard to see this as being anything other than a win-win for consumers,” he said. “They get better Netflix at the same price for both their Netflix and their broadband.”

That’s the case for now. In the future, Comcast and others could end up demanding more if bandwidth capacity is reached or because there are no alternatives for the video companies.

To contact the reporter on this story: Edmund Lee in New York at elee310@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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