Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing Access Your Profit Alerts

Netflix Inc. (Nasdaq: NFLX) Deal Does Not Mean Net Neutrality Is Dead – Yet

On Sunday, Netflix Inc. (Nasdaq: NFLX) announced a massive deal with Comcast Corp. (Nasdaq: CMCSA). The agreement would pay the country's largest cable provider a premium to ensure reliable, high-quality streaming services to Netflix subscribers.

For an undisclosed figure, Comcast will connect directly to Netflix's servers, a move expected to dramatically improve Netflix's streaming quality.

Many believe this is just the first of many deals between Internet service providers and online content distributors. Hulu Plus, Amazon Prime, Apple Inc. (Nasdaq: AAPL), and Netflix will all require greater access to necessary infrastructure and high-capacity networks in order to provide the best in-home content experience.

That's why opponents of the deal are hailing it as the latest deathblow to Federal Communications Commission rules that guaranteed free and equal access to online bandwidth – or net neutrality.

Despite such claims, here's why this deal actually has little to do with recent net neutrality developments…

Netflix (Nasdaq: NFLX) Deal Prioritizes High Quality

The Netflix deal is really about Comcast's ability to deliver content to its subscribers.

Since November, stream performance of Netflix content has dropped significantly for Comcast customers, from 2.1 megabits per second (mbps) to 1.5, according to its ISP Speed Index. This was the fourth-lowest performance out of the top 17 service providers.

As a result, Comcast customers have complained of grainy, low-resolution video that doesn't meet the standard of past viewing experiences.

The problem stemmed from the sheer bandwidth demand of Netflix customers. Netflix's 33 million U.S. customers swallow a little more than 30% of the nation's entire peak Internet traffic.

Since 2012, Netflix has sent the bulk of its traffic through third-party companies that no longer can handle the traffic.

Given that Comcast's purchase of Time Warner Cable (NYSE: TWC) will easily make it the largest Internet provider in the United States (with 32 million households), Netflix's decision to pay for improved quality and connect its pipes directly to Comcast is a no-brainer. Comcast, after the Time Warner deal, could end up with 60% of U.S. broadband subscribers under its belt (before any divesting).

The streaming problems faced by Netflix were actually taking place at a third-party provider's servers. Netflix has been using a company called Cogent Communications to connect its network to Comcast and other service providers. However, this connection had been running at capacity for some time, thus affecting the quality of content.

Time Warner and several other ISPs had refused to hook up to Netflix's exchanges without payment to prioritize the bandwidth. Critics argued that Netflix's surge in online demand could affect the online performance of non-streaming households. But the reality is that these companies simply wanted to be paid money for the time and convenience.

Though the sum was undisclosed, it is fair to expect the amount was significant. However, Netflix will see future revenue opportunities through this agreement.

This deal changes the dynamics of the online streaming debate…

Join the conversation. Click here to jump to comments…

  1. H. Craig Bradley | February 27, 2014

    Net Neutrality vs. User Pays

    New Neutrality sounds so cool doesn't it? Has ANYONE taken the time to figure out what it means? In spite of its warm and fuzzy sound, it is really all about subsidizing someone else. It would be more accurate to phrase it: " Who Pays?", but it would not get the same response. So, Net Neutrality is really a marketing term for subsidy. After all, deception is a fine art these days.

    You can make a lot more money if you save on expenses and can sell your product for less than otherwise would be the case, as well. Cable companies want the user to pay for their upgrades. That saves outfits like Comcast its subscribers some money. Netflix saves even more by letting someone else pay for the transmission costs and it can concentrate on the next feature movie, which is then given away to attract new subscribers ( 1 month free trial period ). Stockholders profit, the government profits ( capital gain taxes) and everyone can party-on.

Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK