With net neutrality on hold, Netflix buys favored position with Comcast

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In a deal that can power the talking points of “net neutrality” detractors and advocates alike, video streamer¬†Netflix announced “a mutually beneficial interconnection agreement” with cable giant Comcast. Financial terms are undisclosed. The press release refers to “a more direct connection between Netflix and Comcast.”

The deal is historic, inasmuch as a content provider (Netflix) is paying an Internet access company (Comcast) for prioritized reach into homes.

Promotion of Netflix as an independent content channel is apparently not included in the deal. The purpose of this alliance is to provide smoother streaming to consumers accessing Netflix videos, especially during primetime, when Netflix is reported to soak up a third of North America’s Internet bandwidth.

The FCC is seeking regulatory authority over deals like this, in which streaming content companies (like Netflix, and also theoretically like Pandora, iTunes Radio, Spotify, Radionomy, and dozens of other music providers) might wish to pay for favored access to homes via Internet service providers (ISPs). The FCC lost a recent court battle, but is gearing up for the next. This entire issue is bundled as “net neutrality.”

Advocates of net neutrality predict that a business arrangement like Netflix/Comcast makes the playing field uneven, reduces competition, and makes it difficult for the “next Netflix” to surface in an unfair marketplace. On the other side of the fence, net-neutrality detractors claim that a free market must allow ISPs to bargain with their expensively-built bandwidth however they want.

Aside from net neutrality, this momentous deal is laden with intersecting issues. Among them:

  • Comcast intends to acquire competing cable juggernaut Time Warner Cable, subject to regulatory approval, greatly expanding is reach into American homes.
  • The cost to Netflix of gaining favored access to homes must be paid somehow. Netflix investors want to know whether that cost will be passed along to Netflix subscribers. Market sentiment seems bullish this morning, with Netflix stock, already trading at all-time highs, moving upward by about two percent in early trading.
  • Netflix is engaged in an HBO-like strategy, creating award-winning original series. In that context, it makes strategic sense for the company to acquire a level of glitch-free access into homes comparable to Comcast channels.
  • The bandwidth-soak issue will get worse as Netflix executes it promise to deliver ultra-HD movie streaming (known as 4k streaming). Premium bandwidth delivery, a competitive advantage over competitors like Amazon Prime, is doubtless an added incentive to deal directly with Comcast.

All this relates directly, if indefinitely, to online audio. As the free market establishes bandwidth solutions that contradict net-neutrality principles, the stage is set for inequalities to develop around streaming music. As we have noted, if Apple (as a purely hypothetical example) were to make a similar access deal with Big Cable, it would create disadvantage for all its competitors, and future startups.

Brad Hill