Comcast-Netflix Paid Peering Deal Raises Public Interest Concerns

Free-market proponents say the deal is driven by simple laws of supply and demand: Netflix takes up much of ISPs’ capacity, and it only makes sense it would pay more to defray the costs. Verizon CEO Lowell McAdam told CNBC Monday his company had a similar deal with Netflix in the works. Paid peering deals have become increasingly common in recent years.

The government should take a “wait-and-see approach” to the Netflix and Comcast pact, said FTC Commissioner Maureen Ohlhausen Monday at an FCBA event. “This continues to be a dynamic area.” Government agencies won’t know the ultimate effect on consumers until the agreement is in practice, she said. “Using an antitrust approach, things happen and then you see, ‘Was that anticompetitive? Was that bad for consumers?'” In the end, “the proof is in the pudding,” she said.

The “mutually beneficial interconnection agreement” that Comcast and Netflix announced Sunday will give Netflix customers on the Comcast network “an improved Netflix experience, particularly during peak viewing hours,” a Netflix spokesman told us by email. The companies have worked “collaboratively over many months” to establish “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,” said the companies in a statement (http://nflx.it/1fh8whS). “Netflix receives no preferential network treatment under the multi-year agreement.” The companies declined to disclose financial terms of the deal.

Comcast for December and January finished fourth from the bottom, in terms of average broadband speeds, among 17 ISPs in the Netflix “USA ISP Speed Index,” posted monthly on the Netflix blog (http://nflx.it/1hJXHN9). For the January index, Comcast scored an average speed of 1.51 Mbps, only three slots above the worst performer, Verizon DSL, at 0.97 Mbps. The leader for the month was Google Fiber, at 3.78 Mbps.

According to the index, Comcast’s performance has slipped significantly in recent months. As recently as October, Comcast placed eighth on the list of 17 ISPs with a 2.07 Mbps average broadband speed. As a result of the agreement announced Sunday, “we would expect Comcast to start trending upwards” in the index, Netflix’s spokesman told us. “I can’t say how quickly the performance will be reflected in the index, but the direct connections are already being deployed.” Netflix said its index is based on subscriber data and that the listed speeds “reflect the average performance of all Netflix streams on each ISP’s network and are an indicator of the performance typically experienced across all users on an ISP network. A faster network generally means a better picture quality, quicker start times and fewer interruptions.”

The FCC has been “pretty clear that these kinds of peering deals aren’t governed by net neutrality rules,” said Guggenheim analyst Paul Gallant. “You can certainly argue that there might be some negative implications for smaller companies that don’t bring 30 million subs to the table like Netflix does. So it’s not impossible to imagine the FCC looking at peering at some point, although like everything in this space, it would generate another big political fight."

Paid peering isn’t a violation of the “spirit of network neutrality,” said Penn State telecom and law professor Robert Frieden. But Frieden said he’s troubled by “the potential for Comcast and other retail ISPs to make premium, paid peering the new baseline standard for everyone upstream. By leveraging now even greater control over the last mile, retail ISPs can not so subtly imply that upstream content sources -- even ones with less congestion causing volumes as Netflix -- better pay the surcharge or risk throttling, dropped packets and other types of service degradation.” When the threatened congestion occurs, broadband subscribers won’t know the guilty party, said Frieden. “If Comcast can get away with a surcharge, then every other ISP will try as well."

The threshold question is whether the agreement violates the commitments Comcast made when it got FCC approval to acquire control of NBCUniversal, Frieden said. “In light of the widespread disclosure and self-congratulations surrounding it, Comcast must have confidence that no concession violation occurs.” Expect consumers to be keenly interested in having a “better than best efforts” option for “mission critical” applications like sporting events and live award shows, said Frieden. “If companies like Akamai can offer this option within the cloud, then retail ISPs should have the conditional option of offering a similar service for the last mile."

The exact details of the Comcast-Netflix deal weren’t disclosed, but “one thing is known for certain,” said Free Press Research Director Derek Turner: “Millions of consumers, who pay a premium each month for a quality broadband experience, received poor service for months on end.” Untold customers have spent hours on the line with technical support, and “have been told to reboot their modems” or been upsold to a higher speed tier, Turner said. “Comcast knew exactly what the problem was here. And yet they failed to disclose it."

"This agreement is in no sense the outcome of a free market,” Turner said. “This isn’t voluntary interconnection; this is Comcast having Netflix over a barrel.” Comcast only backed off when it realized complaints of slow Netflix over Comcast’s broadband might interfere with its plans to buy Time Warner Cable, Turner said. “I would like the FCC to at least step up and say, ‘Hey, we still have a transparency principle here that applies to Verizon and still applies to Comcast.'” The agency could also use its Telecom Act Section 706 powers to ask questions about peering, he said. If sunlight really is the best disinfectant, Turner said the FCC should “demand some answers here from Comcast and Verizon as to why they let their customers have a crappy experience for so long."

"Strictly speaking, I don’t think the Commission’s net neutrality rules would have been applicable to this particular situation, even if they hadn’t been thrown out” last month by the U.S. Court of Appeals for the D.C. Circuit, said Free State Foundation President Randolph May by email. The Comcast-Netflix agreement involves interconnection at points in the Internet generally governed by negotiated peering arrangements, rather than FCC regulation, May said. But uncertainty over the FCC’s domain “creates the space for parties to lobby for Commission intervention,” he said. “The notion that Comcast and other ISPs could continue to carry more and more Netflix traffic without receiving more compensation to defray the additional costs incurred defied the laws of economics and engineering. For now, it looks like those economic and engineering laws might prevail over the laws of regulation."

"This is exactly what we want to see from firms in the space: business model and service delivery experimentation,” said New York Law School advanced communications professor Michael Santorelli. “A regulatory regime that would slow or prevent these kinds of efforts should be avoided because consumers ultimately benefit. They benefit because the firms involved here saw a problem and worked collaboratively to fix it.” Ultimately, Santorelli said, “reports of the death of the open Internet are greatly exaggerated.” Paid peering has been around for a very long time; Netflix has simply elected to cut out the middle man, Santorelli said. “For a service that can eat up nearly a third of all bandwidth during peak times, the economic and technical details make a lot of sense."

It’s important that a deal like this applies equally in all Comcast’s markets, said TechFreedom President Berin Szoka. “For Comcast to be competitive where it directly faces a fiber alternative, Comcast has a strong incentive to make sure all its customers can get high-quality Netflix.” Ultimately, these sorts of deals will help consumers by solving the real problem, Szoka said: “Connecting directly with ISPs can be the most efficient and cost-effective way to ensure high-quality streaming for consumers.”