Netflix “Most Favored Nation,” Paid Peering Agreement With Comcast: The Good, Bad and Ugly

            Notwithstanding Comcast’s open Internet access commitment made to close the NBC-Universal acquisition, the company has executed a preferential access deal with Netflix.  For me the primary question is what kind of discrimination does “better than best efforts” routing constitute?

            At the risk of giving an inch so Comcast can take a mile, I consider paid peering a reasonable quality of service discrimination with several caveats.  First the possibility exists that payments flowing directly from Netflix to Comcast are largely offset by reductions in the direct payments the company makes to Content Distribution Networks like Level 3 and Cogent.  Netflix and its customers benefit from higher quality of service with fewer intermediary carriers and routers. 

Of course no one knows, because the parties execute nondisclosure agreements and the FCC has not thought to require disclosure.  Perhaps with its new found emphasis on transparency the FCC will demand disclosure of all “special routing arrangements” complete with redacted public release of the agreements.

More direct traffic routing probably accords Comcast greater leverage upstream with Netflix and similarly situated content providers.  Without adequate oversight nothing prevents Comcast from making paid peering—and the surcharge it incorporates—standard operating procedure.  In other word little remains of plain vanilla “best efforts” routing: Comcast can demand similar payments from other content providers and distributors backed up by a not so veiled threat that it simply will not have adequate downstream delivery capacity to accommodate even what it previously was able to handle. 

Such contrived congestion forces almost every upstream venture, with the financial resources available, onto some type of premium service provisioning.  In other words there probably will be a rush to “Most Favored Nation” quality of service making it the default standard, even though ISPs previously accommodated increasing network demand without upstream carrier surcharges.  Retail ISPs either absorbed the cost of upgrades as a cost of doing business, or they raised retail rates.  Now they can do both.  Just last week AT&T announced significant increases in retail broadband access rates.

Perhaps other content providers, generating less traffic, can continue to squeeze by with standard best efforts routing.  But why would a competitor of Netflix risk the consequences knowing that ISPs like Comcast can throttle, degrade and create artificial congestion without FCC sanction.  Bear in mind that retail ISPs can create bitstream delivery problems without their broadband subscribers knowing the cause and the responsible party. 

Consumers can complain all they want about a reduced value proposition from their $30-75 monthly subscription payments, but competitive carriers are scarce and unlikely to refrain from such higher rent extraction options themselves.  

Netflix must have decided that the sooner it can lay to rest the risk of artificial or real downstream congestion the better.  It also must have considered a near term solution as according it the cheapest option, knowing that going forward Netflix competitors also will have to pay perhaps on less generous terms.  So Netflix secures a competitive advantage even as retail ISPs extract more revenues.

Expect Netflix to respond with new service tiers and higher rates.