Netflix Had ‘No Choice’ in Signing Comcast Paid-Peering Deal, Hastings Says
Netflix regrets the need for the paid-peering broadband deal it signed with Comcast (CD Feb 25 p2), but the increasingly poor broadband speeds that Netflix members were experiencing on Comcast left Netflix with few options, CEO Reed Hastings said Monday in a Q1 earnings interview.
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The Internet “is in constant evolution in terms of the relationships and interconnection that we see,” Hastings said. “So we did end up choosing to pay Comcast to improve the video quality that our members experience. We don’t think we should have to, but in the short term we felt like we had no choice.”
Though broadband speeds have improved for Netflix in wake of the Comcast deal, it hasn’t specifically measured subscriber churn among members who access the service through Comcast, Hastings said. Netflix “had years of a good experience on Comcast broadband for our members and then it was only in the prior six months when it started declining rapidly,” he said. “So it’s a fairly short-term thing. We are glad we have got that now fixed.” Netflix thinks a “bigger, stronger Internet” will result for all “if everyone can agree” that “no-fee interconnect” makes for a better business model than paid-peering deals, he said. Paid deals “started off with a very small fee and then escalated into this blackout type model that has been a real problem for the industry and for consumers,” he said. “So we are trying to avoid that by seeing if we can move everyone to no-fee interconnect.”
Netflix won’t disclose “the exact specifics” of its deal with Comcast, including whether it’s obligated to pay Comcast substantially higher fees when it starts streaming 4K content, said Chief Financial Officer David Wells. “But as you might imagine, we have been thoughtful about what might be important down the road in the future, including those items that would be important for us to provide our consumers.” Content, not interconnect fees, “continues to be our largest piece of expense” on the Netflix profit-and-loss statement, Wells said.
Hastings said again, as he and Wells did in their Q1 letter to shareholders (CD April 22 p13), that Netflix opposes the Comcast merger with Time Warner Cable, but he spoke highly of Comcast CEO Brian Roberts. “We are really concerned” about the market implications of the “combined entity,” given that it will account for 60 percent of U.S. homes passed and “eventually over 50 percent of U.S. homes subscribing to cable Internet, and that’s a worrisome factor,” Hastings said. “So we think it’s more in the public interest to either not have them merge or if the government goes ahead with it,” to at least approve the merger with “significant” competitive conditions, he said.
Hastings regards Roberts as “incredibly thoughtful,” he said. “I mean I would say, if there is anyone that you wanted to trust with controlling half of the U.S. Internet, you might pick Brian Roberts. He is very thoughtful, very long-term about it and very reasonable. But I don’t know that we want anybody to control half of the U.S. Internet, and that’s the real basis of our objection to the merger.”