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.