Netflix cuts deal with Comcast for faster, more reliable service

In a two-sentence statement released Sunday, Comcast and Netflix announced a landmark agreement that could signal a seismic change in the Internet’s already fast-evolving landscape.

Netflix, the popular entertainment streaming service that can take up to 30 percent of the Internet’s pipelines during peak hours, agreed to pay Comcast for faster and more reliable access to the broadband company’s millions of customers – a deal that represents a major power shift in the basic economics of the Internet, experts say.

Content providers such as Netflix have, in general, never had to pay service providers any fees to improve their services before, but over the past few months, broadband behemoths like Comcast and Verizon have seen their leverage expand dramatically.

In January, a US court curtailed the Federal Communications Commission’s power to regulate high-speed Internet providers, dealing a blow to the concept of “net neutrality,” the long-held principle under which all Internet data are treated equally as they travel through interconnected webs of network pipelines.

And Netflix, which has more than 34 million subscribers in the US and 44 million worldwide, is facing a critical moment for its business. In mid-February, the company released the second season of its innovative and award-winning original drama, “House of Cards,” one of the first shows to appear online only, rather than within the traditional TV-era paradigm, and an essential part of its plans for future growth.

But during the past few months, the company has seen its streams to Comcast subscribers plagued by the dreaded rotating buffering beach ball. Netflix’s streaming speeds have dropped 27 percent on Comcast’s networks from October to January, the company reported. Sunday’s deal will give Netflix’s streaming service a much-needed boost, given that its spotty streaming speeds had been giving its customers fits.

Other broadband companies, too, such as Verizon, AT&T, and Time Warner, have been pressuring Netflix this past year to pony up, if it wants its network connections improved. Sunday’s announcement with Comcast is sure to reverberate out to those broadband providers – as well as to the entire industry, experts say.

“It is so radically transformative that it's hard to overstate it, because it fundamentally changes the nature of doing business on the Internet,” says Aram Sinnreich, professor at Rutgers University School of Communication and Information in New Brunswick, N.J. “If a company like Netflix wants to sell you movies or communications services of any kind ... they’re basically going to have to pay twice to reach the same consumer.”

“And that means that the cost bases for companies like Netflix are going to climb,” he continues. “And that, in turn, means that they’re going to have to pass those costs on down to the consumer.”

As a technical matter, Comcast will not be speeding up Netflix streaming services per se, and it has not been intentionally slowing them down. Instead, the deal will allow Netflix to connect directly to the networks of the nation’s largest broadband service provider, bypassing some third-party networks and improving the efficiency of its data streams. Other Web companies have already paid for such direct connections.

The distinction is important, too, in that Comcast agreed to buy Time Warner Cable less than two weeks ago – a deal that would make Comcast the most dominant broadband provider in the US, by far. Federal regulators must approve the deal.

But the growing leverage of broadband providers, and their new ability to charge content providers to “pay to play,” if they want more direct and efficient connections and thus faster speeds, could end up costing consumers and stifling competition, experts say.

“The deal will also transform the debate over network neutrality regulation,” writes the Washington Post’s Timothy Lee. “Officially, Comcast's deal with Netflix is about interconnection, not traffic discrimination. But it's hard to see a practical difference between this deal and the kind of tiered access that network neutrality advocates have long feared.”

But because Netflix is big enough itself to pay for the improved connections, purchasing direct connections could help it in the long run as well, since a future competitor would have to pay up, too, to compete on a level playing field.

“It cuts both ways, and Netflix actually benefits strategically from this to a certain extent,” says Mr. Sinnreich. “Because even though they’re paying more, and even though they may have to charge their consumers more ... consumers can’t go anywhere else, because only the companies like Netflix who can afford to pay are going to be able to compete on equal terms.”