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AT&T, Netflix In Interconnection Talks

Verizon Also In Discussions With Video Streamer 2/25/2014 8:41 AM Eastern

Add AT&T to the list of major U.S. broadband service providers that’s in interconnection talks with Netflix.

“We’re in discussions with Netflix to establish a more direct connection between our networks, similar to agreements we have with others, so that AT&T broadband customers who use Netflix can enjoy an even better video experience,” AT&T said in a statement issued Monday,

The acknowledgement of those talks came a day after Comcast and Netflix announced a transit deal that will allow Netflix to connect to the Comcast network at various regional interconnection points around the country.

Also on Monday, Verizon Communications CEO Lowell McAdam told CNBC that the telco has been holding similar talks with Netflix for over a year, adding that “I would expect that we would” sign a deal with Netflix.

With Verizon and AT&T on a path toward interconnection, several other U.S. ISPs could follow suit with transit/interconnection deals that will result in improved streaming performance and offer an alternative to Open Connect, a Netflix program that relies on single-purpose caches installed at the edge of ISP networks.

Although Netflix offers Open Connect for free to ISPs, the option is not entirely cost-free for those ISPs, said Dan Rayburn, EVP for StreamingMedia.com and a principal analyst at Frost & Sullivan.  “There’s a direct cost to that,” he said, noting, for example, that ISPs must provide colocation space and power Netflix’s purpose-built appliances.  Among other tradeoffs, ISPs that use Open Connect also cede some control of their network to Netflix, he said.

Time Warner Cable, which is in the process of merging with Comcast, so far has resisted the Open Connect model and declined to comment on whether it is talking with Netflix about an interconnection agreement.  

Comcast and Netflix did not disclose the financial terms of their deal, but analysts have already guessed that the cost to Netflix is relatively marginal, at least in the short term, and that it will end up paying less in transit costs to Comcast than it is to Cogent Communications.

“Now they [Netflix] can bypass Cogent and get a cheaper rate,” Rayburn said.

According to Variety, Wedbush Securities estimates that Netflix is paying Comcast between $25 million and $50 million, versus the $400 million Comcast had been seeking, but predicted that payments to ISPs will grow in the coming years.

Despite some knee-jerk reactions to the contrary, most analysts acknowledge that the Comcast-Netflix deal, and perhaps the similar deals that are expected, have nothing to do with network neutrality, but represent the kind of commercial agreements that have long governed the Internet.

“Google and AOL have been doing it for years,” Rayburn said, citing just two of many examples. “Transit is the way the Internet works.”

“[I]n reality, the agreement between Comcast and Netflix is not especially momentous,” MoffettNathanson principal and senior analyst Craig Moffett wrote in a research note on Monday. “Edge providers like Comcast commonly receive payments from content providers like Google and Microsoft.  After all, that’s what networks do; they charge for transport.”

But not everyone sees it that way. Tim Wu, a professor at Columbia Law School and a longtime network neutrality advocate, argued in a column in The New Yorker that the deal between Netflix and Comcast “makes clear that Comcast, which recently proposed acquiring Time Warner Cable, has already accumulated too much power for the health of the Internet economy, and should not be allowed to accrete more.” He fears that it will “embolden Comcast to extract more tolls form any popular Web company that wants to reach its broadband customers and fears degradation of service.”

Hulu, a popular online video destination that is partially owned by Comcast, declined to comment when asked if it is working on interconnection deals with ISPs. Vimeo has not yet commented.

But based on sheer volume, Netflix is in most need of these kinds of deals. Bandwidth management firm Sandvine estimated last November that streaming via Netflix (31.62%) and YouTube (18.69%) represented more than 50% of all downstream traffic combined on North American fixed broadband networks. Further down the list, Amazon Video was responsible for just 1.61% of that downstream traffic, followed by Facebook (1.31%) and Hulu (1.29%), according to Sandvine.

September