Netflix-Comcast Pact Is Win-Win-Win… for Now

Comcast Only Gets Several Million Dollars Annually, but What About Next Time?

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Credit: Andrew Harrer/Bloomberg

Those "House of Cards" binges may soon be going down easier, at least when it comes to how quickly they arrive over the web. Just don't ask how much that's costing Netflix -- or how much it might one day cost consumers.

After months of talks, Netflix finally agreed to pay Comcast Corp. an undisclosed amount for more dependable delivery of shows and movies. As the world's largest subscription video-streaming service, Netflix concluded that using intermediaries to transmit its content just wasn't cutting it anymore. And it couldn't persuade Comcast to let it connect directly to the cable company's servers for free.

What Netflix stands to gain out of the deal is simple: fewer complaints about video that's slow to load or interrupted midstream. Comcast wins by securing its hold over content companies, which need the web to deliver their wares to TVs, tablets and computers.

"In the long term, the agreement is definitely better for the internet providers," said Ken Doctor, an analyst with Outsell Inc.

Netflix rivals including and Hulu already have similar commercial relationships with Comcast and others, according to people with knowledge of the matter. Netflix's joining them cements a shift in the economics of how entertainment is delivered. In the past, the major streaming services relied on third parties such as Akamai to convey their videos and webpages. Now the traffic has shifted to favor broadband providers.

Consumer costs?
But it's unclear whether Netflix subscribers will have to pay more down the line. The rates Netflix agreed to give Comcast total only several million dollars annually, according to a person familiar with the matter.

And because Netflix already pays third parties to access the internet -- much as consumers pay broadband operators to get on to the web -- what Netflix charges its customers might not be affected, at least not right away. It's simply shifted its traffic costs in favor of Comcast.

The deal is good for subscribers, said Richard Greenfield, an analyst with BTIG.

"It's hard to see this as being anything other than a win-win for consumers," he said. "They get better Netflix at the same price for both their Netflix and their broadband."

That's the case for now. In the future, however, Comcast and others could end up demanding more if bandwidth capacity is reached or because there are no alternatives for the video companies.

The Netflix-Comcast equation is different than the relationships programmers like HBO or ESPN have with cable companies, which pay them for the privilege of offering their signals to subscribers. Those retransmission fees have gone up over the years, spurring rises in people's cable bills as well as carriage disputes leading to programming blackouts. CBS went dark on Time Warner Cable for about a month last year, for example, and DirecTV dropped Weather Channel earlier this year.

Net neutrality
The agreement between Comcast and Netflix outlines a private business relationship known as an "interconnect" agreement and so doesn't run afoul of net neutrality, according to a person with knowledge of the arrangement.

The accord with Netflix could be helpful to Comcast's bid for Time Warner Cable, removing the potential obstacle of Neflix's arguing to regulators that Comcast was impeding its service, said Outsell's Doctor. Netflix accounts for about 32% of all peak Internet traffic in North America, according to estimates from Sandvine Inc.

~ Bloomberg News with Ad Age staff ~

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