Saturday, March 22, 2014

Netflix Has Buyer’s Remorse Over Its Paid Peering Deal with Comcast

         Soon after capitulating to Comcast’s surcharge demand for improved treatment of its traffic, Netflix got better downstream delivery speeds.  Apparently Comcast did not have to undertake a major bandwidth expansion program.  Much to the immediate relief of Netflix, Comcast merely needed to allocate more ports for Netflix traffic.  So with a reallocation of available bandwidth, Comcast solved Netflix’s quality of service dilemma apparently without degrading service to anyone else, upstream or downstream.
 
          Rather than make Netflix satisfied with its surcharge payment, Comcast has triggered buyer’ remorse.  Netflix CEO Reed Hastings now rails against the deal he cut as payment of a unfair toll; see http://nflx.it/1pgX4cd.  
 
         
          Haven’t we heard this scrip before?  Yes.  Level 3 used words like toll bridge and surcharge when Comcast hit that company up for more compensation.  See http://telefrieden.blogspot.com/2010/11/comcasts-demand-for-video-surcharge.html.
         
          Comcast surely can exploit a bottleneck in the sense that it exclusively controls the “last mile” link to its sizeable share of broadband subscribers.  Acquiring Time Warner Cable would increase Comcast’s market share, and most consumers don’t have a faster, cheaper, or better alternative. 
         
          Comcast has won the game of chicken, because Netflix and content providers have to fix the problem of subpar download delivery speeds as soon as they occur, or risk inconveniencing their subscribers.  Comcast and retail ISPs have greater leverage, because Netflix has to ensure high quality of service across the entire link to its subscribers.  Comcast can deliberately degrade service by refusing to allocate sufficient ports, but Netflix subscribers don't care who has caused the deterioration.  Netflix has to "fix the problem" immediately even if Comcast has leveraged inferior delivery to force a return to the status quo in terms of downstream service quality.
         
          Upstream content providers and carriers appear to have declining leverage in forcing retail ISPs to accommodate any and all increases in downstream demand.  Arguably Comcast could have hit its subscribers with higher rates, but the company has embarked on a strategy designed to maximize payments from upstream content providers and carriers, but also from downstream retail subscribers.  Netflix, Level 3 and Content Delivery Networks get hit with surcharge demands, but at the same time Comcast and other retail ISPs can raise retail rates across the broad, or create more tiers of service resulting in higher rates for large volume subscribers.
         
           Going forward I believe it will be quite a stretch for content providers to wrap themselves around a network neutrality banner when a downstream carrier manipulates the allocation of ports and bandwidth for maximum leverage.  This “network management” function does not constitute deliberate blocking of packets.  Similarly Comcast will reframe the issue as one of commercial negotiations about access to property rather than discrimination and an unfair trade practice.