Netflix got a wake up call two years ago when Comcast abruptly dropped its free peering arrangement with Level 3 Communications, Netflix’s then-newly allied CDN, and slapped it with steep new interconnect fees, ostensibly to account for the now disproportionate flow of traffic between the two networks. Since then, Netflix has been working to take control of its own distribution destiny by building its own, private CDN, Netflix Open Connect.
Part of the reason for the investment is the long-term cost savings of not having to pay someone else to haul its bits arounds. But it was also a move to close a dangerous (to Netflix) loophole in the FCC’s net neutrality rules. While those rules prohibit cable-based ISPs from discriminating against over-the-top video services like Netflix, they say nothing about wholesale peering arrangements between network operators. And they expressly permit ISPs to engage in “network management,” without quite defining what that means. By slapping fees on Netflix’s CDN at the point of interconnection, Comcast found a way to make life difficult for a potential competitor while hiding behind the skirts of permissible network management.
Netflix Open Connect is in part a effort by Netflix to counter that gambit by offering to peer directly with ISPs or by co-locating servers at the ISP’s facilities. The idea is to offer ISPs a way to reduce their overall transit costs as incentive to connect directly with Netflix. Once connected, any effort by the ISP to get cute with Netflix Open Connect would smack of discrimination against Netflix itself, and likely would draw a red flag from the FCC.
A year after launch, however, Netflix has found few takers among U.S. ISPs, a measure of the ISPs’ wariness both of Netflix and of the FCC’s net neutrality rules. Outside the U.S., in contrast, where Netflix generally accounts for a much smaller share of ISPs’ total traffic and where direct competition between cable TV and OTT video is less of a concern, the majority of Netflix’s backbone traffic is now handled by Open Connect.
Netflix is now upping the ante in the U.S. This month, it began offering streaming 3D content for the first time, along with something it calls “Super HD” video, which is says is superior to “full 1080p” video. The catch is that Netflix claims it can only deliver the new services to subscribers’ whose ISPs have configured their network for Open Connect due to the high bandwidth requirements of 3D and Super HD. In case any ISP didn’t get the point, Netflix is also offering subscribers handy tool to check whether their ISP is properly configured for Super HD, in case they might want to urge their service provider to get with the program.
The strategy has begun to split U.S. ISPs’ once-united front, no doubt as intended. At CES last week, Cablevision cut a deal with Netflix to start using Open Connect. In a statement announcing the deal, Cablevision CEO James Dolan framed the move in explicitly competitive terms. “With Open Connect, we are establishing a direct local connection with Netflix that delivers a higher-quality Netflix viewing experience for Optimum customers than Verizon or AT&T can provide, including access to new Netflix Super HD and 3D TV shows and movies,” he said.
Google Fiber and Clearwire have also signed on to use Open Connect.
Not all U.S. ISPs appreciate being pressured, however. On Wednesday, Time Warner Cable accused Netflix of “withholding content” from its subscribers to try to gain “unprecedented access” to the ISP’s network.
“While they call it ‘Open Connect,’ Netflix is actually closing off access to some of its content while seeking unprecedented preferential treatment from ISPs,” Time Warner Cable said in a statement provided to Multichannel News. “We believe it is wrong for Netflix to withhold any content formats from our subscribers and the subscribers of many other ISPs. Time Warner Cable’s network is more than capable of delivering this content to Netflix subscribers today.”
Whether TWC is in fact capable of delivering 3D and Super HD over its existing infrastructure is beyond my expertise. But the dispute, and the ongoing maneuvering by Netflix and the ISPs reflect the degree to which crucial issues of network management, competition, and consumer choice remain unresolved two years after the FCC tried to resolve them.