Previously the lone holdout among internet giants to not pay for direct access, Netflix is expected to make similar deals with AT&T and Verizon
By paying Comcast to improve its internet streaming service in a new deal announced this weekend, Netflix is setting the stage for similar agreements with the likes of AT&T and Verizon, as broadband access becomes the province of a group of digital superpowers.
“It sets a new business model in place,” Tony Wible, an analyst with Janney Montgomery Scott, told TheWrap. “Anybody who is sending a lot of data through the internet will presumably have to pay more.”
Netflix is one of the largest consumers of bandwidth over the Internet, and the deal makes other pacts seem inevitable in the increasingly competitive video streaming arena. Verizon CEO Lowell McAdam told CNBC on Monday that a deal with Netflix is already in the works.
However, the arrangement has little to do with the core issue of net neutrality, because it is not an example of a company paying more for better placement of digital content. In a release touting the deal, Netflix made a point of stating it will receive no preferential treatment on Comcast's network.
Netflix ponied up to improve its streaming service, but companies such as Google pay fees to directly connect their content delivery networks to internet service provider's networks. Others, such as CBS and Fox pay third-party networks to link up to providers’ architecture, as analyst Dan Rayburn notes on his blog.
“The concept of net neutrality refers to the non-discriminatory treatment of traffic within a given carrier's network,” Craig Moffett, an analyst with MoffettNathanson, wrote in a note. “Contrary to what has been reported, the deal has nothing to do with paying for speed or network access; rather it is simply a commercial payment to Comcast to open up additional ports to allow traffic to flow in excess of the settlement-free ratio.”
Netflix was the lone holdout among the internet giants in refusing to pay for direct access. Seeing that Comcast was poised to dominate the bulk of the major media markets, Netflix had little choice but to capitulate and pay the fees.
The deal is further evidence that Comcast, which stands to be the high-speed internet provider for nearly 40 percent of American homes if its deal to acquire Time Warner Cable is approved, has an enormous amount of leverage when it comes to negotiations. It is yet another indication, as if more were needed, that the internet is becoming a battleground largely reserved for new media and technology titans with money and access.
“It's a game of elephants,” Paul Saffo,a technology forecaster at the investment firm Discern Analytics, said. “The vision of an open internet in which everyone is equal is in danger of disappearing.”
Many analysts believe that Netflix may benefit from the deal, because it unfolds over many years, during which time streaming video seems likely to continue growing in popularity and choking up more and more bandwidth.
“By going straight to Comcast's network, Netflix knocks out the intermediaries,” Saffo said. “It saves on costs and Comcast makes money by having them connect directly. The net effect on consumers is minor.”
Yahoo and Google have already paid for direct access, but the fees that exist across America's broadband infrastructure point to a troubling reality: These costs are nothing for wealthy companies such as Netflix or Google, but the barriers to entry are becoming steeper for new players who might be interested in video or disseminating other high capacity content. That creates a playing field that is less meritocratic and harder for entrepreneurs to access.
“The plan that the cable providers, the monopolists had, is coming together,” Vivek Wadhwa, a fellow at Stanford University and a technology entrepreneur, said. “America is at a big disadvantage because the internet availability is poor, pathetically slow and expensive.”
That in turn, could provide more of an impetus for the expansion of alternatives to cable internet, such as fiber-optic cable, which carry with them more bandwidth and speed. That's something that Google has been investing heavily in, announcing last week that will roll out its high-speed internet service, Google Fiber, to as many as 34 new cities.
For Wadhwa, the Comcast deal with Netflix is an example of the short-sightedness that is prompting customers to abandon cable for the internet as a means of cost savings. It may lead them to migrate towards fiber-optic services.
“The cable industry is accelerating its own demise,” he said. “They're doing the same monopoly garbage that is hurting cable. These companies don't get it. They're living in the past.”