Could the Netflix-Comcast deal actually improve net neutrality?

February 26, 2014: 7:51 AM ET

The real hurdle to net neutrality is broadband capacity, not the risk of preferential treatment.

By Sanjay Sanghoee


FORTUNE -- Netflix's (NFLX) deal this week with Comcast (CMCSA) has sparked fears that powerful Internet service providers could block or slow down access to content providers that won't pay a toll to reach consumers. However, the deal could actually be good for net neutrality, at least under the right conditions.

That's because the real hurdle to the principle that Internet service providers should allow users access to all content, regardless of the source, is not that they could potentially play favorites but rather that U.S. networks lack bandwidth. The World Economic Forum ranks the U.S. 35th in the world in broadband capacity even as sites like Netflix grow rapidly (as you can see in the graph below) and require more bandwidth.

netflix_graph copy

Bandwidth, which is essentially capacity, is a finite resource and impacts speed.  When Netflix users watch House of Cards in large numbers at the same time, they use up a large amount of network capacity, which can slow down traffic for other sites (think of broadband as a road and data packets as cars on that road which jostle with each other to reach their destination).  That hurts average users whether Netflix pays for delivery or not.

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Historically, Verizon (VZ), Comcast, and other providers have dealt with this by imposing usage-based payment plans, whereby users who take up more bandwidth (for example, by watching streaming video) pay for that privilege.  This does not make the net more neutral but it does provide some protection for average users from the data-hogging habits of a few.  But with Netflix alone accounting for nearly a third of all domestic Internet traffic, it should be clear that tiered payment plans alone cannot solve the problem of insufficient bandwidth.

In order for the net to be really neutral and for users to be able to access all sites with the same fidelity, we need an upgrade of our broadband infrastructure.  Network providers want sites that utilize a lot of network capacity to share in the cost of expanding that infrastructure.  That has failed to happen so far but the Netflix-Comcast deal could be a sign of a positive shift.  If content providers and distributors are willing to share the expense, our broadband capacity might get the boost it needs.

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Of course, this can only succeed if Comcast applies the money that it receives from delivery fees toward an upgrade of its network.  The same goes for Verizon, which is in talks with Netflix for a similar arrangement, and other network providers, since without their commitment to add infrastructure, smaller websites and users will wind up with the worst of all worlds.  Let's hope for the best.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator, and has an MBA from Columbia Business School. He is also the author of two thriller novels. Follow him @sanghoee

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