Charging for Special Arrangements
There are many popular streaming video services, including Apple's television and movie rental and purchase services through iTunes, Amazon's Instant Video, Google Play Movies and TV, Hulu, and several others. But none are as popular, and account for as much prime time network traffic, as Netflix.
When you try to stream an episode of House of Cards from Netflix to your home computer or TV using your Comcast or Verizon broadband Internet access, and the connection seems a little bumpy, do you tend to blame Netflix or your home broadband Internet provider? How did you pick?
The broadband Internet providers and Netflix tell different versions of this story, and I'm sure each has a defensible position. But the "solution" they arrived at together seems to be an evolving business model in which Netflix pays broadband providers for network traffic handling that assures a better viewing experience for viewers. This particular arrangement is a fee-based non-transit network peering arrangement rather than an expedited service arrangement. But either way, Netflix is paying the bill. At some point, Netflix customers will have to pay that bill.
Netflix CEO Reed Hastings does not sound like this was the approach he wanted. In a Netflix blog post on March 20, Hastings said: "Without strong net neutrality, big ISPs can demand potentially escalating fees for the interconnection required to deliver high quality service. The big ISPs can make these demands — driving up costs and prices for everyone else — because of their market position."
More recently, rumors have begun to appear that Apple is interested in a different arrangement with broadband providers, but in the same general space. Apple, according to these rumors, wants assured high performance for their video content. Watch this space closely. We may be witnessing the start of a trend.
Broadband Internet providers are corporations with capabilities to sell, and the current and evolving legal and regulatory environment makes it possible for them to sell preferred access (whether through peering or "traffic management") to video providers such as Netflix (and maybe soon to Apple). Corporations have a responsibility to their shareholders to try to maximize revenue and such arrangements seem consistent with their business model within today's regulatory environment.
The question that I think is worth considering is whether Net Neutrality is being eroded in a dangerous way, resulting in an environment that is not friendly to start-up innovation and healthy competition. What becomes of the young, upstart company with the fresh new idea and technology? How can they break into the streaming video market? If they can't afford to pay for the arrangements that Netflix and Apple can pay, their service on the largest home broadband provider networks might not perform well. Netflix and Apple will pay for fast access to your TV, and the upstart company could well look slow by comparison and as a result their business may have a very hard time succeeding. Some might argue that that's how capitalism works, but I'd argue that a level playing field is a key to preserving a healthy environment that benefits us all. Without it, we all may miss out on the advantages of competition and innovation.
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