Why A Comcast/TWC Merger Is Good For Netflix’s Business

There’s been many arguments by Netflix and others as to why their recent interconnect deal with Comcast is bad for them and for the rest of the market. Some have suggested that when Netflix’s contract with Comcast is up, Comcast will do a bait and switch and raise prices. Others have said that Netflix has to pay more to Comcast than it was costing them to buy transit from Cogent and other transit providers. The reality is, Netflix’s deal with Comcast, which is for more than five years, gives Netflix competitive advantages that no other OTT service provider has.

Imagine having a business where you know your fixed cost of delivery for more than the next five years. You can estimate what your costs will be and plan accordingly, even as your business grows. Based on a recent survey I just completed of more than 700 broadcast, media and entertainment customers that use third party CDNs to deliver video, the average length of contract was under two years. Netflix’s is more than 3x that.

While some want to debate whether or not it’s cheaper for Netflix to go direct to Comcast as opposed to using transit providers like Cogent, it’s not debatable. Netflix’s deal with Comcast is cheaper. Netflix knows it and won’t deny it. In fact, some money managers on Wall Street and others have told me that Netflix is quietly telling them that their deal with Comcast deal is cheaper. By going direct to Comcast, Netflix locked in their costs for more than five years and at the same time, locked in a guaranteed level of QoS with Comcast. I’m not talking prioritization of their packets, that’s not taking place, but Netflix does have an install SLA, packet loss SLA and latency SLA from Comcast, which guarantees quality. This is very different from what Netflix was getting from Cogent because Comcast is providing fully dedicated capacity, unlike sending it through someone like Cogent where those connections are potentially over-subscribed if a transit provider over-sells their capacity, which Cogent has a history of doing. So Netflix now pays less by going to Comcast, and gets better quality.

Can you think of any other OTT service in the market that wouldn’t like to have their costs and quality locked in for more than the next five years, for 1/3 of their customers? Of course not. And even though Netflix is against the Comcast and TWC merger, that deal helps Netflix even more. Netflix’s deal with Comcast covers any other companies Comcast might acquire. So all of the TWC customers that Comcast would get, if the deal goes through, would also fall under Netflix’s contract. Add in the recent deal Comcast just did with Verizon, (6.1M subs) whose contract is also for a long time and if the Comcast and TWC merger goes through, Netflix just locked in their delivery costs and quality for roughly 37% of all broadband subscribers in the U.S. This allows Netflix to spend less on delivery, increase their quality, reduce churn do to streaming issues, and has a direct and positive impact on their bottom line. Show me any company that wouldn’t want this, or feel it’s an advantage.

With all of these benefits to Netflix’s business, this raises the question of why Netflix is out in the market complaining, when it’s actually good for their bottom line and for their customers? Only Netflix truly knows what their strategy is, but I can take a pretty good guess. Even if what you are paying for now is cheaper than what it was before, nothing is better than free. If you can use the media and the public to try to get something for free and no longer have to pay for it, Netflix probably feels like they don’t lose anything by trying.

I find it very interesting that while Level 3 has also been on Netflix’s side regarding how interconnections should work, at no time has Level 3 said they should get it for free. In fact, during Level 3’s original peering dispute with Comcast, and the brief they filed with the FCC last month, Level 3 didn’t say they wanted it for “free”, just that they wanted “commercially reasonable terms”. I have yet to see Netflix asking for what they consider to be fair terms or a lower cost, they are simply saying they don’t want to have to pay anything. There is nothing logical or reasonable about their argument, especially when Netflix gets so many business benefits from their deals with Comcast and Verizon, as does their subscribers.

If Netflix simply wants peering for free, that actually hurts their business. There are no guarantees of capacity, install and performance when it’s free. So Netflix can advocate all they want for it to be free, but if it was, no one would be bound to anything in a free peering relationship and you lose certainty. Maybe all of Netflix’s arguments are intended to achieve some other objective because if you took away the deal they have with Comcast and Verizon, Netflix’s costs and their customers are worse off.

As you can imagine, the appropriate government authorities have subpoenaed the documents pertaining to Netflix’s deal with Comcast, which I’m sure will come up on the hearing on May 8th. So while many have said that there is no transparency when it comes to these deals, the government authorities do know the terms.

Related Posts

Here’s How The Comcast & Netflix Deal Is Structured, With Data & Numbers

Inside The Netflix/Comcast Deal and What The Media Is Getting Very Wrong

Netflix & Level 3 Only Telling Half The Story, Won’t Detail What Changes They Want To Net Neutrality

Netflix’s Arguments Against The Proposed Comcast & TWC Merger Aren’t Valid

My Latest Thoughts On The FCC’s Statements and The Netflix/Comcast Dispute

  • Vaughan Read

    Not to stir the pot, but if this deal gives Netflix competitive advantage over other content providers, at what point would you think this might become an issue? While I believe SLA’s will be a necessary part of content delivery in the future, I wonder at what point the line will be drawn between legal and anti-competitive deal-making… ESPECIALLY as this entire process becomes more and more politicized.

  • kwerb

    One thing I don’t get about your analysis. Heading against increased costs makes sense for commodities like airline fuel or electricity subject to price spikes. But the costs of bandwidth and associated services for shipping packets across the Internet have been declining rapidly for years. Isn’t the spot market price for paid peering with Comcast in 5 years likely to be substantially lower than it is today?

    • danrayburn

      Netflix and others who have long term deals, even with commercial CDNs, have a sliding scale built into their pricing. So they are not paying the same price per Mbps, GB delivered or per port year after year. Their price goes down with volume and over time. So Netflix is not locked into the same price for the next 5+ years.

  • http://www.ivpcapital.com/blog Michael Elling

    Dan, you are still missing 4 points:
    1) Comcast and other edge access providers are trying to push the WAN/MAN demarc closer to the core. that is long-term bad for scaling of 4K (which will be bandwidth equivalent of 4-8 HD streams depending on the content) and other forms of 2-way IP traffic. elsewhere I’ve said, and the market agrees, the trend is to move the cloud closer to the edge
    2) this hurts all other internet companies relative and absolute costs, as Cogent and other transit providers don’t benefit from scaling across Netflix’ traffic
    3) Netflix is in a much better position to estimate traffic to the edge and therefore optimize layer 2 transit and storage from the core out to the edge across multiple edge access providers like in a market like Springfield MA in the future and other 3rd and 4th tier markets as their demand grows. it basically increases the digital divide between 1st, 2nd, 3rd, 4th tier and rural markets
    4) what choice does Netflix have in the matter? Comcast was clearly limiting very cheap port capacity which in turn degraded edge delivery

    All you have to do is look at the impact special access “deregulation” had on that market in the early 2000s. Very similar things happening here in terms of purchasing power and uneven playing field.

    • danrayburn

      1. 4K streaming for the masses is a “pipe dream”, it’s not reality.

      2. Cogent benefits as Netflix pays them for transit. Why should transit providers get to benefit in any way from what last mile providers do?

      3. Netflix has no interest in trying to deploy Open Connect to “rural markets”. They have said that it does not make sense for any ISP with less than a few hundred thousand subs.

      4. Netflix could have used commercial CDNs and they could have bought better transit. To imply that they had no “choice” is factually incorrect. Define “cheap”. Cheap as compared to what?

      • http://www.ivpcapital.com/blog Michael Elling

        1) Dan, I wasn’t there for voice (long distance) disruption in 1983 but it was much bigger and more sustained than people thought (in fact it laid commercial foundations for internet!). But I was there in 1990 for competitive data networks and did predict rapid disruption to voice (15 years or so; with email and texting it was 3-5 years). I was there with wireless voice in 1996 and predicted rapid disruption to wireline voice (<6 years). I was there with smartphone and predicted rapid disruption of Telco stack (4-5 years). Now 4K has ALL the seeds across layers and boundary points in place which have been scaling nicely. So unlike HD which took 15 years, 4K will take 3-5 years.

        2) Transit costs for voice in the WAN today are $0.0000004 and falling 30-40% annually. In the MAN it is $0.001 and dropping 5-10% annually. This has been going on 10 years since Brand-X and (un)divestiture. Hence the spread/arbitrage. Where there is competition, like GoogleFiberKC, the cost is $0.00001. And that is early days, without the benefit of scale from SMB, enterprise, wireless offload and backhaul. The point being that both absolute and relative costs between WAN and MAN are not very different (maybe 1, at most 2 decimals) when fiber enters the picture and the diversity of demand at the edge also gets scaled.

        To prevent these economics from developing and disrupting their LinearTV model, Comcast is trying to push the WAN/MAN demarc towards the core just like AT&T used interconnect exclusion zones 100 years ago.

        3) Yes, but numerous Netflix video OTT (see GigaOM story on AMC going OTT) does begin to scale to places like Springfield MA, even Hatfield, and who knows, maybe the Berkshires during summer months. And they are best situated to "multiplex" this demand across transport, storage and switching (across transit providers that may be bottlenecked). Not the balkanized edge access providers. The cloud is moving to the edge as demand density scales. And that's being driven by 1-way. You missed my point on 2-way IP solutions that need latency, QoS, security and redundancy issues simultaneously addressed in order to scale. Need to factor in exogenous supply/demand drivers. All this necessitates even more intelligence (interconnect) closer to the edge.

        4) Reading Level3 and Netflix blogs it is really apparent that 6 last mile monopolies (edge access providers or IAPs) are restricting ports. These ports cost incrementally 1/4-1 cent per sub on average for those IAPs. One-time! At most the total cost/sub is less than 10 cents. Again one-time! That compares with the $50/month ARPUs they derive for selling their sub-standard and overpriced access as I describe above.

        These are good discussions and we (and the FCC) need to use the right data and objective analytical frameworks that that can be consistently applied to all types of information, applications, networks and users over the past 170 years. It's not easy, but it can be done and we have numerous "competitive" interconnection blueprints from the 1980s-90s to use as guides/proxies. Wheeler knows this and is asking for this.