Netflix and the Future of NGN Interconnection

            Recent press accounts report that Netflix and cable television companies have collaborated on carriage agreements.  What results from these negotiations may provide a model on next generation network (“NGN”) interconnection and compensation arrangements.

            Currently telecommunications, cable television and Internet arrangements have problems for video-heavy traffic flows.  Traditional telephone carrier settlements have too much granularity when the meter counts minutes of use.  Cable television retransmission consent agreements primarily cover copyright licensing, because the content typically arrives at the cable head end via satellite (paid by the content provider) leaving the cable operator with the last mile distribution it already performs for all other channels.  Current Internet arrangements focus on directly interconnecting carriers and customers making it difficult to extend a compensation demand farther upstream to sources or distributors of content.

            Retail ISPs in particular have objected to providing last mile carriage of Netflix traffic “without compensation,” a false allegation, but one gaining some traction.  ISPs want Netflix to pay them directly, in addition to the significant retail subscriptions paid by their end users and the transit, paid peering and other compensation arrangements paid to them by Content Delivery Networks and even other ISPs with comparatively more traffic needing downstream delivery.

            Netflix and cable operators appear to work on a mutually beneficial interconnection and compensation regime where compensation flows directly to the cable operator, but the length of carriage—and presumably the cost—drops with the installation of a proxy server directly at the headend.  Netflix benefits by securing higher quality of service and some future assurance that the cable broadband plant can and will handle even more traffic as Netflix’s subscribership grows and when content formats increase in bandwidth requirements, e.g., 3D and ultra high definition. 

            Cable operators benefit, by securing financial compensation for their retransmission consent.  While the interconnection arrangement may differ from other satellite-delivered cable networks, or the retransmission of broadcast channels, cable operators will receive direct compensation for providing a subscriber-friendly platform using the existing set top box.

            Consumers may end up having to pay more for their Netflix subscription to cover higher delivery costs as well as higher copyright licenses, but the convenience in access enhances the value proposition.  Rather than trying to engineer and “sling” Netflix content from the computer to the television set wirelessly, the content arrives directly to the television set, a winning proposition.

Self-serving Self-regulation

            In most transactions, my instincts favor market-driven outcomes.  Typically fair outcomes result when stakeholders act on competition-induced incentives.  But when and how do apparently competitive playing fields clearly tilted in favor of sellers?  Put another way, under what circumstances can and will competitors collude and agree not to spend sleepless afternoons competing?

            I often examine the wireless marketplace for lessons.  I part company with the party line that the U.S. marketplace is “vigorously competitive.”  Yes there are aspects of competition, but on closer examination virtually all of the pricing and service initiatives come from Sprint and T-Mobile when they decide not to join a single, consensus party line on service terms and conditions established by Verizon and AT&T.  For years all 4 of the top 4 national carriers offered pretty much the same rates and enforced the same rules.  Some of these rules imposed more significant restrictions on subscribers than anything the FCC would consider imposing.     Sure some of these restrictions might have technological justifications, e.g., spectrum scarcity and congestion concerns.  But most of them worked to lock in subscribers, raise the cost of service and restrain consumer sovereignty.  I cannot think of any legitimate reason a wireless carrier would have in prohibiting any of the so-called Carterfone freedoms available to wireline service subscribers including the right to use any FCC-certified handset, for any available service. 

            Restrictions on handset use and pricing decisions—embraced and enforced by all four national carriers—collectively accrued benefits.  For a single carrier to deviate from the deliberately shared consensus it would have to calculate what market share and revenues it might acquire offset by the likelihood that a relaxation would reduce revenues.  Consider a recent initiative by TMobile to offer a flat 20 cent per minute foreign roaming charge instead of country specific rates that can exceed $1.00 a minute.  One can see the sweet deal so-called competitors can achieve by implicitly agreeing not to deviate from extortionate roaming rates.  But if a market is “robustly competitive” how can obviously rip off rates persist in the marketplace?  Even after factoring the cost of date base interrogations and backhaul no one can justify as cost-based foreign roaming charges that exceed conventional domestic rates by 1000s of percentage points.

            So there exist instances where competitive, self-regulating ventures can agree not to compete.  TMobile becomes the maverick, party pooper, perhaps now that it realizes that the big payday of a merger will not happen.  But so many sponsored researchers swore that the merger would “enhance competition” and “serve consumers” no doubt enhanced by trip digit roaming margins.