Comcast and Netflix have announced what they are calling a “mutually beneficial interconnection agreement” that will provide Comcast broadcast customers with “a high-quality Netflix video experience for years to come”. Their joint statement provides few details but has big implications.
The announcement comes just days after the news that Comcast was seeking to acquire Time Warner Cable, creating a cable company with over 30 million broadband customers in the United States.
Netflix now has nearly 32 million paid up members of its service in the United States, which is more than a traditional premium cable network like Home Box Office. It is said to account for up to a third of evening internet traffic in the United States.
The news also follows a judgement that dismissed the authority of the Federal Communications Commission to impose network neutrality on broadband providers.
Comcast is committed to maintain network neutrality until 2018 through undertakings given when it acquired NBC Universal.
Companies like Netflix, that deliver their services ‘over the top’ of third-party broadband service providers, are nevertheless dependent on unrestricted network access to their customers.
Given that Netflix not only challenges traditional cable television services but also the online video services of companies like Comcast, that represents a key threat to business models.
The brief statement from Comcast says that “Working collaboratively over many months, the companies have established a more direct connection between Netflix and Comcast, similar to other networks, that’s already delivering an even better user experience to consumers, while also allowing for future growth in Netflix traffic.” It states that: “Netflix receives no preferential network treatment under the multi-year agreement, terms of which are not being disclosed.”
Netflix has openly promoted which broadband service providers offer the best performance for its services. Its monthly ISP Speed index ranked Comcast 14 in the United States, at an average streaming rate of just 1.5 megabits per second. Strangely, it has been falling steadily over the last year, from a previous average of 2 megabits per second. Time Warner Cable ranked 6, at just over 2 megabits per second. AT&T and Verizon ranked even lower, with average speeds around 1 megabit per second, which is barely sufficient for video.
Netflix has previously worked with some broadband service providers under a free scheme called Open Connect to offer a better experience for end users. This involves Netflix either connecting directly with service providers at major internet exchanges through peering agreements or providing caching servers in or near their networks.
While companies like British Telecom and Virgin Media in the United Kingdom already participate in the Open Connect approach, relatively few service providers in the United States are involved.
The joint announcement does not refer to Open Connect, nor does it suggest that it is non-financial arrangement, although it does not necessarily mean that Netflix is paying for access to the Comcast network.
It is not necessarily a bad deal for Netflix. The main alternative has been to pay third-party content distribution networks like Akamai to help deliver its services. Dealing directly with a major network provider may be more technically and commercially sensible.
The companies suggest that this has been under discussion for some time, and was probably on the agenda when the chief executives of the two companies met at the CES Show in Las Vegas in January. The timing of the announcement may nevertheless help pave the regulatory path for Comcast in securing approval for its acquisition of Time Warner, which would give it just under a third of the broadband market in the United States.
While online video services help drive the adoption of premium broadband bundles, Netflix is entirely dependent on third-party broadband providers to deliver its service. Reaching agreement with largest broadband service provider in the country is therefore a positive move for Netflix.