March 21, 2014 10:07 AM

Netflix's Hastings: It's Not All About You, Brother

Yesterday, Neflix CEO Reed Hastings published this blog post, arguing that "strong" net neutrality rules would not require Netflix to pay for the costs to augment its inbound ports to Comcast's ISP gateway (it did last month).  I have no problem with Netflix buying something from Comcast, and then complaining about having to pay for it.  It kind of makes Mr. Hastings seem like every other Comcast customer, no?

Ric Flair_caption.jpgBut (to paraphrase "the Nature Boy" Ric Flair):  you may not like it, but you better learn to love it, because it's the best thing going, brother.  What I mean is this.  We're all appreciative of Netflix's success, but we would like more companies like Netflix.  This means that it's possible to imagine a day when people don't buy subscription TV service from their ISP at all.

Yesterday, I talked about the difficulties that the present system that prevents broadband-only customers from getting access on any terms to in-market streamed games (if those games are available only through an RSN).  When these problems are resolved, consumers will presumably be able to buy content from a number of sources online, in addition to the HD channels you can get over the air (which covers most local NFL, a good amount of college basketball/football, and some baseball).

In a future where the Internet is the primary video delivery media, but programming is purchased by consumers from multiple vendors, it is unrealistic for video providers--who will be getting paid by consumers to deliver the service being sold--it is unfair and unrealistic to expect that all of the ISP's users should pay for each upgrade of inbound capacity required by a limited number of subscribers.  

For example, at the end of last year, Netflix probably had about 33.5 million users (based on this article).  The total number of broadband customers at the end of last year was around 84.3 million, based on this recent report from Leichtman Research.  So, at present, Netflix would have 100% of ISP customers pay for a service that only 40% are signed up for, and an even smaller percentage use Netflix service intensively enough to require the inbound capacity upgrades.  

On its face, Netflix's request doesn't seem huge when it and YouTube may be the only really large video content providers.  However, even if only Netflix switches IP transit vendors or CDNs, every so often, the ISP will have to make the investment again because not all backbones handle Netflix traffic.  

Moreover, in a world where the traditional "cable" company is selling a much smaller amount of programming than today--and the average consumer may be buying Netflix-style, over the top video from 4-5 independent providers--it seems more unfair for the ISP to be required to charge all of its customers for service only some will use.  

The only reason Hastings' argument has a scintilla of appeal to consumer groups is because consumers pay so much for cable today.  If/when everyone will get video from their own over-the-Net service, then Netflix will better understand that if you're the one taking the people's money, then you pay for any incremental additional costs to deliver your product--and it's your responsibility to make sure traffic hits the ISP's network at a high enough speed to be useful to your customer.

The bottom line is that consumers want more "Netflix's" and less subscription TV, and the fairest way to apportion inbound capacity costs is to bill the incremental cost causer--which is the party collecting the revenues from the customers that are using the service which requires in-bound capacity upgrades.  To do otherwise, is to simply re-adopt the unfair cable price structure of the existing pay TV market (everyone pays for the people that use the most high cost--a/k/a "sports" programming).

When you're the only widely used alternative to Comcast, you get a lot of sympathy--as Netflix does, and often deserves.  But, business arguments disguised as "public policy" arguments don't work unless they work for all users.  In the past, Netflix has also shown an indifference to costs that its heavy users impose on general, lighter use Internet customers.   But these arguments are near term winners for Netflix that don't get all members of the public into a better place; understandable, but not persuasive, arguments that the government should reject.

You are missing the point that by pushing the WAN/MAN demarc as far into the core as possible, Comcast is reducing the opportunities for competitive transit to bring all forms of transit closer to the edge. This makes it cheaper for everyone and scales the network to facilitate efficient 2-way HD telepresence solutions (which are not possible today due to limited upstream bandwidth). But incumbents have been doing this for 100 years; ever since the exclusion zone under Kingsbury.

Michael Elling (@Infostack) | March 27, 2014 9:41 PM | Reply

Michael, thanks for your comment. I'm not sure you'll get notified of my reply, but I'll send you a dm on Twitter. I apologize for just seeing this now--but I never got an email from my blog site (usually comments come to me as email notifications, which I have to go to the blog to approve/publish). Anyway, I know this was a year ago, and I wish I had seen it then.

For what it's worth (and b/c this issue is still "live"), Comcast (to my knowledge) was not the party with exclusive demarc control in this instance. Of course, in a sense they do--b/c they say where they will interconnect with Internet transit networks--but NFLX chose the transit as its preferred method of delivery.

I don't dispute what you say in your follow-up comment--that I/C at the edge is more efficient for everyone--but the evidence (which was not available to either of us when this blog was written) indicates that NFLX did not like the terms Comcast was offering it (for collo/ports) for closer (to the customer) interconnnection.

So, while I am a huge fan of metro fiber guys, NFLX didn't like the costs it was offered by Comcast that would have facilitated its use of competitive metro fiber transport to the edge. Thanks again for your comment, Michael. --Jonathan

Jonathan Lee replied to comment from Michael Elling (@Infostack) | March 7, 2015 10:08 AM | Reply

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