Netflix Decides The Free Market Isn't So Good After All, Wants Government To Step In

 

 

Contributor

Mark Rogowsky

I write about technology, trends and companies on the leading edge.

 

What a difference a month makes. On February 23, Netflix and Comcast announced a deal under which the video streaming service and the cable company would “team up to provide customers (an) excellent user experience.” Netflix said it worked “collaboratively” with Comcast and that the deal was “mutually beneficial.” So it was a little surprising that today, Netflix CEO Reed Hastings more or less blasted arrangements like that in a blog post on his company’s web site. Hastings wants the government — specifically the FCC, which will receive his remarks officially today as part of an open request — to widely expand the doctrine of net neutrality to cover not only end customers like you and me, but also the internal workings of the internet. And he specifically wants ISPs to apparently be responsible for bearing all the costs of carrying internet traffic. That this would be likely be beyond the legal authority of the FCC is almost beside the point. What Netflix is asking for is government interference in longstanding business practices on the internet. To get it, he’s apparently willing to engage in a lot of half-truth telling and vague accusations. And he wants to throw his own business deal under the bus.

The new neutrality

To date, net neutrality has been about protecting consumers from losing equal access to parts of the internet. You should be able to get to any web site or service without an additional “toll” and without that service being degraded in any way by your ISP. Because a federal court threw out the existing neutrality FCC rules in January, however, there is only one company currently obligated to abide by them. That company, ironically, is Comcast, which agreed to follow them as a condition of buying NBC Universal.

The deal Netflix and Comcast cut technically had nothing to do with the rules as I discussed when it was announced (“Comcast-Netflix Didn’t Violate Net Neutrality But It Wasn’t Benevolent, It Was Business“). But it did something important: By placing Netflix’s servers inside of Comcast’s network, it would give viewers the best possible performance when watching House of Cards or whatever else they were streaming. The three critical takeaways from the deal to remember are this (1) Netflix paid Comcast money (2) It was comparable to what Netflix would have paid a third-party to get you that content had the deal not been struck — likely it was less (3) In bypassing as many internet roadblocks as possible, the end result is likely better streaming performance for most people and only someone with deep pockets could make this kind of deal.

Netflix now wants some unspecified rules that basically make this kind of arrangement unnecessary because they believe Comcast, Verizon and other ISPs should simply cover all the costs of getting your their content without charging Netflix anything. Under Netflix’s terminology, this is called “strong net neutrality.” In actuality, what the company wants amounts to a regulation forbidding ISPs from recovering the cost of connecting to large content providers. Because Netflix is responsible for up to 30% of peak internet bandwidth, it has long relied on content delivery networks (CDNs) to stream its video. Those companies, like Akamai, have being paying ISPs to deliver traffic for more than a decade.

 

Separate and unequal

 

The reason why they pay is that as delivery mechanisms for Netflix — and many other large content providers — CDNs aren’t like other ISPs, which carry traffic both in and out regularly. Netflix is similar: You stream video from it, but you don’t send much to it. So Netflix eventually built its own CDN, an expensive proposition and the only reason it could even sit down at the table directly with Comcast. While ISPs don’t exactly make big profits from carrying CDN traffic, they do incur costs: network ports, power, system administrators. None of that comes for free. But most important, as Dan Rayburn of Streamingmedia pointed out to me, when a CDN pays an ISP to carry its traffic (through the “transit” providers that move those bits and bytes around), it gets a guarantee that the traffic will be delivered with a certain level of service. This means that you won’t suffer buffering while trying to binge-watch Orange is the New Black.

Comcast, Rayburn says, made a total of $30-60 million from agreements to carry traffic last year, a figure that’s extrapolated from public statements and company financials. If that sounds like a number the company really cares about or thinks is an important source of future revenues — a place where it intends to stick it to content providers like Netflix — keep in mind Comcast’s top line was close to $65 billion in 2013. So while the company may be marking up its direct costs of carrying traffic a bit, the total it earned is less than 0.1% of its revenues.

 

Hastings claims that ISPs are holding the company hostage, letting Netflix streaming quality go bad and then — once the ransom is paid — restoring quality. But that’s simply not what’s happening. Instead, Netflix today is trying to get you video through multiple CDNs and multiple transit providers (it has arrangements with several throughout the country to reach various ISPs and devices). Some of them, like Cogent, seem perpetually in battles with ISPs over upgrading connection points. Those upgrades, as described above, require actual monetary investments in equipment and man-hours as more and more data is pushed through saturated connections. Cogent has become a special kind of bottleneck because it has effectively oversold its capacity to deliver traffic to certain ISPs and then complains when those ISPs won’t spend money to help it keep its promises to others.

It’s too crowded in here

 

To understand the problem, imagine a gated community. More and more people are ordering things that are delivered by a shipping company called Netflix Deliveries. While the community has a half dozen gates, Deliveries keeps sending its trucks through one of the gates. Each time it tries to enter, there’s some delay to be let in by a homeowner, get through the gate, navigate to the home, etc.. Netflix could help by either (1) using multiple gates to create shorter and more diverse path or (2) agreeing to foot some of the bill for upgrading the intercom or gate system to make things faster. What it did with Comcast was actually a bit of both, but mostly the latter. When Netflix complains about slowdowns with certain ISPs, it’s mostly because it has a tendency — like the fictional Deliveries company — to push content through the same overloaded gates, Rayburn said. That’s true even though it could send some trucks through the other, less-crowded ones.

 

Now, what it wants is a government mandate that all “gate upgrades” be the full financial responsibility of the community or, in this case, the ISP. There’s no rationale for this, nor any specifics. Should Comcast, Verizon, et al. be required to spend whatever amount that Netflix demands on ports to carry however much traffic Netflix ends up sending? If Netflix customers adopt high-resolution 4K TVs en masse, quadrupling their bandwidth demands, presumably Comcast should just pay four times as much for network infrastructure to accommodate that, too?

 

The problem with this kind of doctrine is that it isn’t “strong net neutrality” at all. It’s “net neutrality for the strong.” While it’s true that this kind of rule won’t explicitly harm smaller content providers, the current system of requiring large ones to pay doesn’t either. When Comcast and Netflix announced their deal, we heard a lot about how the little guy was going to be shut out in the future. But in reality, the little guy is either going to escape the notice of ISPs until he’s big (and thus be safe by obscurity) or do business with a CDN, as Rayburn notes, to appear big and have nothing to worry about. In Netflix’s proposed rule, the very largest providers who bypass CDNs altogether could demand ever increasing amounts of resources from ISPs. And if they get rules written by the government that, for example, favor those with the biggest traffic commitments, that could end up hurting the little guy.

Of course, the whole thing could also backfire on Netflix. Once you start asking for regulations, you might not like what you end up with. That’s why for years, internet firms told the government to just stay out of the way and the net neutrality rules didn’t go into place until 2010 when the pendulum shifted from free-market ideals to fear.

 

The FCC, for its part, would be wise to stay out of the part of the internet Netflix is asking for help with. The back end has done just fine for nearly 20 years without interference and the Comcast-Netflix deal is actually proof of how the market solves problems the market is having. Besides, Rayburn says: “You’ve got Netflix, Level 3 and Cogent all complaining in the media and the public’s eye that they want changes. Not a single one of them is saying what they want.” That’s a troublesome starting point for a government agency to start making rules. It ought to stop before it begins.

(For more on this topic, if you’re technically inclined, Rayburn’s excellent blog can be found here: Netflix & Level 3 Only Telling Half The Story, Won’t Detail What Changes They Want To Net Neutrality)