On Monday, Netflix (NASDAQ:NFLX) announced earnings and in their shareholder letter, said they oppose the proposed merger between Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC). While Netflix is entitled to that option, they should be arguing their point with facts, instead of making statements that aren't accurate.
Netflix says that "Comcast is already dominant enough to be able to capture unprecedented fees from transit providers and services such as Netflix", but that's not true. The definition of unprecedented is "never done or known before, novel, groundbreaking or revolutionary. There is nothing "unprecedented" about interconnection agreements. [If you want to know how the interconnection deal between Comcast and Netflix deal works, from a technical level, read my other post: Here's How The Comcast & Netflix Deal Is Structured, With Data & Numbers]
As Comcast rightly points out in their rebuttal to Netflix's statement, Akamai (NASDAQ:AKAM), Yahoo (NASDAQ:YHOO), Limelight (NASDAQ:LLNW), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) have similar agreements with companies like Verizon (NYSE:VZ), AT&T (NYSE:T), Level 3 (NYSE:LVLT), Sprint (NYSE:S), and Comcast. Interconnection deals have been taking place between ISPs and content portals since the late 90s. For Netflix to imply anything else is simply wrong, and it can't be argued with. If Netflix wants to argue that there would be fewer options for high-speed broadband, fine, but that's not what they are doing. They are intertwining the topic of customer choice for ISP providers with interconnection deals, when one has nothing to do with the other. This is about Netflix protecting their business and wanting to keep their costs down. In fact, in Netflix's letter, they even point this out saying the "long-term threat" is from ISP driving up "costs for everyone else". This is simply about what's best for Netflix's business, nothing else.
Netflix goes on to say that the "combined company would possess even more anticompetitive leverage to charge arbitrary interconnection tolls". When Netflix signed a multi-year interconnection deal with Comcast, it wasn't based on random choice or personal whim, which is the definition of arbitrary, it was based on metrics. All Netflix is looking to do is scare people by using words like "unprecedented" and "arbitrary", even though they are not accurate.
Netflix is quick to say paid interconnection deals are bad for large companies and small content owners, yet we don't hear any of these other companies backing Netflix up in their argument. How come Netflix isn't arguing their case with any other large companies? In Netflix's original blog post on this topic, they mention Google and Skype as companies who would benefit from interconnection agreements being regulated, yet neither Google nor Microsoft (NASDAQ:MSFT), which owns Skype, have publicly backed Netflix with any kind of statement. If not having interconnect relationships regulated is such a big "threat" to the Internet as Netflix says it is, why are they the only content owner complaining?
Netflix also calls out AT&T in their shareholder letter, saying that Netflix streaming on U-verse is poor-quality and that "it is free and easy for AT&T to interconnect directly with Netflix and quickly improve their customers' experience, should AT&T so desire." It's also easy for Netflix to connect to AT&T, in a paid model, just like the deal Akamai did with AT&T. When Akamai wanted to get their servers inside AT&T's network, they did a paid deal with them. Akamai didn't use the media and public opinion to try to get free access to AT&T, they paid as is customary when you are in the CDN business, which Netflix is, and you want to get deeper into an ISPs network. You don't see Akamai, the largest commercial CDN on the planet, who handles 20% of the world's total Web traffic, out in the media complaining about costs associated with running their business.
If Netflix does not like the business model of being a content delivery network and the costs associated with it, then they should not be in the business of operating their own CDN. While they like to make it sound like they don't have any choices and that Comcast has them in a corner, we know that's not accurate. Remember, Netflix used to deliver 100% of their video via companies like Akamai and Limelight Networks, who already have the necessary interconnection deals in place. There are other options in the market, and when Akamai and other commercial CDNs were delivering Netflix's content, you didn't see many complaints about poor-quality Netflix streaming. Netflix has multiple options in the market for delivering high-quality streaming with a good user experience.
On multiple occasions, and in Netflix's latest letter, they say that there is a threat from the largest ISPs "driving up profits for themselves". While ISPs like Comcast have a lot of profitable revenue, it's not from interconnection deals. For my last post on this topic, Comcast went on record to point out that less than .1% of their revenue comes from such deals.
In 2013, Comcast had revenue of $64.6B, and of that, all of their interconnection deals accounted for between $30M-$60M in total. If you want to argue that ISPs raise rates for their services too often, I won't argue with you, but that's not the debate. The fact is that the revenue that Comcast and other ISPs get from interconnections deals is not what's driving their business or contributing much to their bottom line. Netflix makes it sound like there is a lot of money at stake for the ISPs when it comes to interconnection deals, but let's not debate it, because in the case of Comcast, we know what the real numbers are.
Netflix didn't have to move away from third-party CDN providers, but they chose to, based on business decisions including cost and control. When their strategy changed and they decided to build out their own CDN, Netflix then had costs associated with that business decision, which they are unhappy with. But that's what this is about, a business decision made by Netflix for what's best for their business. This argument between Netflix and Comcast about interconnection deals has nothing to do with net neutrality. This isn't about "fighting for the Internet the world needs," like Netflix has said, it's about keeping their costs down. That's all it comes down to and it really is that simple. Anything else added to the conversation is simply a distraction to the topic at hand.
Disclosure: No positions