Clarifying net neutrality

Netflix’s new deal with Comcast is a clarifying moment, or at least should be. It should now be clear that the mechanics of over-the-top video delivery are not a question of net neutrality.

The Netflix-Comcast deal, in fact, was made under conditions of maximum net neutrality — at least as the FCC had initially construed it in its now-defunct Open Internet Order — and of maximum scrutiny of Comcast. Comcast is still legally covered by those rules under the terms of it NBC Universal consent agreement with the Justice Department, and with Comcast now looking for the government’s blessing to acquire Time Warner Cable you can bet its lawyers are being scrupulous about hewing closely to the terms of that earlier agreement with the feds in its dealings with Netflix.

If ever there were a time for Netflix to hold out and wait for the government to force Comcast’s hand in resolving whatever issues were behind the recent deterioration in the quality of Netflix streams on Comcast’s network it was now. And yet here we are, with Netflix apparently agreeing to pay Comcast to ensure smoother, more reliable streaming. So clearly, Netflix didn’t think the problem had to do with net neutrality or that it would be fixed by stricter enforcement of Comcast’s net neutrality commitment. 

To be fair, Netflix itself may have contributed to the confusion on that point. In its fourth-quarter letter to shareholders last month, Netflix seemed to wave the bloody shirt of net neutrality, warning shareholders in the wake of the D.C. Circuit Court’s vacating the FCC’s rules that, “a domestic ISP now can legally impede the video streams that members request from Netflix, degrading the experience we jointly provide,” and vowing to resist the “draconian scenario” in which ISPs demanded fees to stop the degradation.

At least one analyst, Wedbush Securities’ Michael Pachter, is now calling that statement “quite disingenuous,” adding, “We think that the agreement reinforces the leverage that broadband providers have over Netflix, leaving the latter no recourse other than to open its checkbook (albeit for an undisclosed amount), as service degradation is a real threat now that the Net Neutrality rules have been eliminated.”

I don’t know that Netflix was being disingenuous with investors so much as seeking maximum rhetorical leverage with Comcast for what Netflix knew would be — and was always going to be — a business deal, not a legal fight. Netflix knew that Comcast was not impeding its video streams on the ISP’s network; their’s was a dispute over how those streams got onto Comcast’s network, which has always been a subject of negotiation between content providers and network operators.

What the Comcast deal really reinforces is what an awkward poster child for the cause of net neutrality Netflix has always been, even when it volunteers for the part. The fact is, Netflix sends a ton of traffic down stream. Getting all of that traffic to the end user has always posed both an engineering challenge and a business challenge, and Netflix has solved those challenges in different ways with different network providers.

In some cases, Netflix has been able to negotiate placing its own specialized services within an ISP’s last-mile network to minimize the amount of traffic it needs to pump into that network through crowded exchange points. In other cases it has leased capacity from others to cache content locally. In still others it has relied on third-party CDNs (primarily Level 3 and Limelight) to cache and deliver its content to last-mile networks, leveraging the CDNs’ business relationships with ISPs. In most cases, Netflix has created multiple routes from point A to point B, in fact, so it can route around problems that arise and minimize the load it is placing on any one network.

In the Comcast deal, Netflix has apparently come up with yet another way to skin the cat. According to initial reports, Netflix will not be caching content locally in Comcast’s data centers. Instead, Comcast will connect with Netflix’s servers directly at data centers operated by third parties, and Netflix will pay Comcast an undisclosed amount for that direct connection.

That may seem like a clean win for Comcast but that doesn’t mean it comes at Netflix’s expense. Netflix is getting a multi-year, service-level agreement with Comcast (and presumably Time Warner Cable at some point) at a predictable cost, that accounts for future growth. Whatever that cost is, moreover, it’s likely to be lower than what it had been costing Netflix to send traffic to Comcast up to now via a third-party transit provider. Netflix is probably saving money, in other words, by cutting out the middleman — a fact that appears to be sinking in with investors as they sent Netflix shares to new record highs on Monday.

On this one, at least, it’s hard to identify an injured party, apart perhaps from the now cut-out transit middlemen. That makes it a poor candidate on which to hang the campaign for net neutrality.