Inside the Netflix-Comcast dealFebruary 24, 2014: 11:55 AM ET
Despite media reports, the deal has nothing to do with net neutrality or speed.
By Dan Rayburn
FORTUNE – On Sunday, Comcast and Netflix announced a commercial interconnect relationship between the two companies, which is in the very early stages of implementation, and as a result, many who clearly don't understand how the Internet works are writing about the news. Those who don't cover network infrastructure for a living should not be trying to explain the technical details behind Sunday's announcement. Articles from mainstream outlets like TechCrunch, the Wall Street Journal, NPR and many others aren't even getting the basics right. Words like transit, peering, speed, bandwidth, capacity, etc. are being used interchangeably without any understanding of what they mean.
Naturally, many of these same people are also implying that because Netflix (NFLX) has to pay Comcast (CMCSA), consumers will foot the bill for this, as Netflix will have to charge more for their service. This could not be further from the truth. Those stating this have no clue how Netflix delivers their content today or what costs they already incur. If they did, they would know this is not a new cost to Netflix, it's simply paying a different provider, and it should be at a lower cost. It should actually be cheaper for Netflix to buy direct from Comcast, and they also get a service level agreement (SLA), which also improves quality and that's a good thing. Given that Netflix has many options to buy transit from many different transit providers, why would they pay more? They wouldn't.
Some are mad at this deal, as they say this will start a trend where content owners will need to pay multiple Internet service providers (ISPs) to have good video quality, which isn't true. The problem with that idea is that the vast majority of all content owners use third-party content delivery networks to get the content to ISPs and are not trying to build their own content delivery network (CDN) like Netflix has. Only Netflix, Microsoft (MSFT), Yahoo (YHOO), Apple (AAPL), Google (GOOG), and a handful of others have built or are building out their own CDNs. Every other content owner out there including MLB, CBS, FOX, Disney, Viacom, NFL, etc. all use third-party CDNs. So this has no impact on any of them as they aren't trying to place servers inside last-mile networks and use companies like Akamai, Level 3, Limelight and EdgeCast for content delivery.
Even worse, some want to imply that Sunday's announcement has to do with net neutrality, and Tech Crunch went as far to say that the deal "may be legally outside of the traditional net neutrality rules." May be? Are they serious? Commercial interconnect relationships, also referred to as paid peering agreements, have been around since the Internet started, and it's how the Internet works. Commercial interconnect deals have nothing to do with net neutrality. Implying otherwise shows a complete lack of regard in understanding how traffic is and has been exchanged across networks for the past 20 years. The media as a whole should stop trying to insinuate or imply that everything that happens between two networks comes down to net neutrality. It doesn't.
In the hopes of trying to educate the market, let's clear up a lot of the confusion many in the media have created. The first one is that consumers need more "speed" from Comcast or Verizon (VZ) to get better quality video streaming from Netflix. This is not the case. Netflix's videos are encoded at a certain level of quality, which requires the consumer to have a specific level of throughput, to get that quality. It has nothing to do with "speed." If you want to stream a 2Mbps video or a 4Mbps video from Netflix, you don't need more "speed," you need more throughput. Speed is the rate at which packets get from one location to another; throughput is the average rate of successful message delivery over a communication channel. Speed and throughput are not the same thing.
Next up are articles where it says that transit allows two networks to exchange "bandwidth," which is not accurate. Transit allows providers to exchange traffic, but bandwidth and traffic are not the same things. Bandwidth is simply the data rate measured in bits per second. Traffic is data in a network encapsulated in network packets.
Another statement I have seen people write about is saying that the deal focuses on the "two company's pipes." Netflix is not a network operator, they don't have any "pipes." They buy capacity from other network providers who have the pipes. So while this deal is about the interconnection between Comcast and Netflix, Comcast is the only one who actually owns the pipes. Netflix is simply leasing capacity from other network providers. In addition, Netflix does not own an "Open Connect Network." Open Connect is a program, not a network that Netflix "owns" as the servers caching and delivering Netflix's content are sitting inside the ISP networks, which isn't owned or operated by Netflix. Open Connect is just another CDN. It is most similar to Akamai, except Open Connect doesn't have SLAs with their customers.
Lately, many have been writing about transit with no real idea of just how many types of transit one can buy or how transit deals work. You can buy full transit, partial transit, select routes, on-net routes, etc., and ISPs will create a service and price around the customer request. Transit deals vary greatly, in size, type, price, and a host of other factors and are not a one-size-fits-all model. So when people write about "transit" without any definition, they are being too generic in its description. Many transit deals are alike, but transit relationships also vary greatly based on the region of the world you are buying transit in. CDNs like Netflix typically connect with many transit suppliers. This helps them route around problems and helps them avoid becoming a traffic problem by overloading any one path.
Another point not mentioned in all of these stories is all the different ways in which Netflix is currently streaming video. To date, a large percentage of Netflix's traffic, by my guess 50% or more in the U.S., hasn't been moved away from third-party CDNs and into the last mile. There are three different ways Netflix currently streams their videos. Via ISPs that are in their Open Connect Program, through third-party CDNs Level 3 and Limelight Networks, and via Netflix's own CDN where they lease network services and run their own servers. So most writing about Netflix don't even know the basics of how their content is delivered today or how CDN and transit providers are involved.
Sunday's news is very simple to understand. Netflix decided it made sense to pay Comcast for every port they use to connect to Comcast's network, like many other content owners and network providers have done. This is how the Internet works, and it's not about providing better access for one content owner over another; it simply comes down to Netflix making a business decision that it makes sense for them to deliver their content directly to Comcast, instead of through a third party. Tied into Netflix's decision is the fact that Comcast guarantees a certain level of quality to Netflix, via their SLA, which could be much better than Netflix was getting from a transit provider. While I don't know the price Comcast is charging Netflix, I can guarantee you it's at the fair market price for transit in the market today and Comcast is not overcharging Netflix like some have implied. Many are quick to want to argue that Netflix should not have to pay Comcast anything, but they are missing the point that Netflix is already paying someone who connects with Comcast. It's not a new cost to them.
This is how the Internet has grown since its inception. Senders and receivers of content have funded access, services, backbone, and growth costs across the Internet. Each may pay different costs per Mbps based on volume, competition, location, and many other factors. This is where being big and powerful helps negotiate a more favorable deal based on efficiencies you may be able to drive. If you get into picking and choosing that a really big CDN player gets bandwidth free because they are powerful, but a small CDN or content owner has to buy transit, that's not fair either. That is why companies have settlement-free interconnect policies, which are based on balanced and shared network investment. Commercial deals around interconnect help alleviate the bright lines between settlement-free interconnect (or peering) and a customer buying a retail product. Wholesale commercial deals take into account efficiencies and many other factors to drive a much lower unit cost.
Bottom line is this is good for Netflix, Comcast, and for consumers, and it has absolutely nothing to do with net neutrality.