Over the weekend Netflix (NFLX) and Comcast (CMCSA) announced a deal that both companies hope will, in the words of a joint statement, “provide Comcast’s U.S. broadband customers with a high-quality Netflix experience for years to come.” In short, Netflix will pay Comcast to stream their content at higher speeds, making the viewer experience all that much better...or at least normal.
Cue the outrage
The announcement immediately raised outcry over the end of so-called “net neutrality” rules which were originally designed to prevent internet service providers (ISP) from charging different rates to companies at the ISP's discretion. The fear over the net neutrality debate is magnified by a ruling last month in which a federal court threw out the Federal Communications Commission’s net neutrality rules, saying the policy as written was without legal justification. The FCC said it wouldn’t appeal the ruling, instead choosing to rewrite the rules per the court's directives.
The other reason the relatively arcane deal between Netflix and Comast struck a nerve with consumers was the recent snags related to the release of Netflix’s “House of Cards.” The company opted to release the entire second season of the program at once, causing download delays and triggering widespread accusations of so-called “throttling,” or slowing of data feeds, by ISPs.
In light of the court ruling and "House of Cards" problems the Netflix / Comcast partnership smacked of extortion by Comcast, leading to fears consumers would be forced to eat the additional costs, either via higher cable rates or monthly Netflix bills.
Relax… for now
After years of rates that dramatically exceeded that of underlying inflation, customers are right to fear and distrust their cable companies. That said, this Netflix deal doesn’t stand up as yet another example of a corporate fleecing of consumers. In fact, the consumer might (emphasis on “might”) win from the arrangement. Fears to that point seem to be based on a misunderstanding of the deal on both sides as well as simply free market motivations. Here’s why the deal works for you:
Why Netflix will hold the line of pricing
Netflix accounts for some 30% of all Internet traffic. Lately they’ve been complaining about their ISP speed has been dropping, the implication being that any customer complaint over streaming problems was the fault of the ISPs, not Netflix.
The fact is Netflix is paying third parties and intermediaries for much of their throughput from source to your house. The Comcast deal gets these intermediaries out of the way. By economic law that should be more cost-effective for Netflix. Rather than getting extorted Netflix is improving their service and making their distribution more cost-effective.
If Netflix hikes rates anytime soon it’s likely to be a function of content cost, not the Comcast deal.
Why Comcast won’t raise your rates because of Netflix
Comcast just agreed to take over Time Warner Cable (TWC) for $45 billion. The combination would account for 32 million U.S. households. That works out to 1/3 of U.S. homes and 40% of high-speed Internet bandwidth. Regulators are already going to scrutinize this deal and demand divestitures. This scrutiny is likely to last for more than a year.
Comcast benefits from providing Netflix to its customers with high-quality definition and speed. Anything less in terms of quality motivates other parties to encroach on cable’s virtual monopoly on the last mile of cable into your home.
As of August of 2013 the average U.S. consumer was spending $83.25 for multi-channel video. Netflix has a base price of $7.99. If either of those costs goes higher in the near term it won’t be because of this deal.