Comcast-Netflix deal may upend Internet payments model

Netflix's agreement to pay Internet giant Comcast for smoother delivery of its video-streaming service sets a precedent which could upend the model for who pays for online content. The agreement, confirmed over the weekend by the companies, will see Netflix pay an undisclosed amount for "a more direct connection" to consumers using Comcast's Internet service. Some analysts say this kind of deal threatens the model of "net neutrality" -- or equal access for all kinds of online services -- a concept enshrined in US regulatory policy until a court ruling last month invalidated most of the rules. "For the first time in the cable industry's history, a content provider will pay for direct access to the pipe," said Kannan Venkateshwar, a Citi analyst, in a note to clients. "This flips the traditional distribution model thus far whereby content has been paid by the pipe." The announcement came after reports that Comcast, the largest US cable and Internet provider, was slowing Netflix traffic, making it harder for viewers to see programs such as the hit series "House of Cards." It also comes after the Federal Communications Commission regulator announced that it would seek to rewrite its "Open Internet" rules in an effort to achieve many of the goals of the "net neutrality" principle, struck down by a federal appeals court. Earlier this month, Comcast announced a massive deal to acquire rival Time Warner Cable, which would boost its already dominant position in the United States. - Rivals may follow suit - Youssef Squali at Cantor Fitzgerald said the Comcast-Netflix deal could set a precedent for other Internet and content providers. "We believe that this agreement is likely to precipitate others in the US and internationally," Squali said in a research note. This was confirmed on Monday by telecoms giant Verizon's chief executive Lowell McAdam, who said his company was looking to follow Comcast's model. "We are pleased to see that Netflix and Comcast had an arrangement," McAdam told analysts. "We will have to see what the details of that are but we have had discussions with Netflix ourselves and feel that the commercial markets can come to agreement on these to make sure that the investments keep flowing." John Bergmayer at the consumer activist group Public Knowledge said the news is troubling because it shows how Internet service providers can assert themselves as powerful gatekeepers. Bergmayer said the Internet and cable firms "should be in the business of charging their users for access to the Internet, not of charging the rest of the Internet for access to their users." Sarah Morris at the New America Foundation said that if the precedent takes hold it could hurt smaller companies that provide services online. "Netflix didn't become the company it is overnight," Morris told AFP. "If we want to see competitors to Netflix going forward there is a risk that the barriers to entry are so high" and will be prohibitive. - Netflix 'paying its share' - But Scott Cleland, a former White House telecom adviser now with consulting firm Precursor LLC, said news is positive because it helps distribute the cost of delivery to the Internet's heaviest user. "The Internet backbone is a very expensive high-tech infrastructure and Netflix has realized it needs to contribute to that cost recovery because it's the Internet's largest user in the United States, with 30 percent of traffic," Cleland told AFP. "Kudos to Netflix for stepping up to the plate and paying their share of costs." Dan Rayburn, an analyst who writes the StreamingMedia blog, said the deal should not increase costs for Netflix or its customers, contrary to what critics say, because Netflix has been using third parties for Internet delivery. "This is not a new cost to Netflix, it's simply paying a different provider, and it should be at a lower cost," he said. "It should actually be cheaper for Netflix to buy direct from Comcast." Everett Ehrlich, a senior fellow at the Progressive Policy Institute, said the deal reflects the unique position of Netflix, which as the largest streaming video service needs a robust delivery system. "This isn't your grandfather's Internet where academic researchersexchange papers," Ehrlich told AFP. "It's now the medium for a far greater array of traffic. The good news is that the markets that govern interconnection work and were able to find a solution without government intervention." Netflix shares rose 3.4 percent to close at $447 Monday while Comcast advanced 0.2 percent to close at $51.15.