Netflix Deal With Comcast Serves Just One Master

(Originally published here.)

Netflix Inc. agreed to pay Comcast Corp. an undisclosed sum over the weekend to ensure faster and more reliable connections. This deal should be good news for millions of consumers, at least in the short term: According to Netflix, customers of the U.S.’s largest cable company have experienced a 27 percent reduction in throughput since October thanks in part to rising demand for super high definition video.

Investors seem satisfied too — Netflix’s shares rose today. Others are less sanguine. For example, Timothy B. Lee warns in the Washington Post that the deal “represents a fundamental shift in power in the Internet economy that threatens to undermine the competitive market structure that have served Internet users so well for the past two decades.”

What concerns people like Lee is that, in the future, large established companies will be able to afford faster connections than their smaller competitors, stifling innovation in an increasingly information-based economy. Regulations meant to prevent this could have the perverse effect of discouraging investment in additional broadband capacity. As Lee says, “regulating the terms of interconnection would be a difficult, error-prone process.” Another approach would be direct and indirect government subsidies, although that too has drawbacks.

Some context is helpful here. Although the technology of the Internet was invented in government labs and funded by taxpayer dollars, most of what exists today was built and is operated by private companies. The infrastructure of the Internet has two basic parts: The “backbone” of networks that move data across servers all over the world and the service providers that funnel data to individual customers. The deal between Netflix and Comcast is meant to address bottlenecks occurring at the point where Comcast’s network connects to networks used by Netflix. This is separate from the debate over net neutrality, which is supposed to prevent discrimination by Internet service-providers when they move information along the “last mile” from their data centers to customers.

As Dan Rayburn, an analyst at Frost & Sullivan wrote today on his blog, “this is not a new cost to Netflix, it’s simply paying a different provider.” He goes on to note that “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.”

Other companies, such as Google Inc., Facebook Inc. and Microsoft Corp. already pay to connect directly to the large Internet-service providers, which helps guarantee faster and smoother connections. (Rayburn’s entire post is worth reading for those interested in the technical details of the video-streaming business.)

If policy makers are concerned about the market power of the Internet-service providers, they should encourage the development of parallel networks to compete with the incumbents. Venture capitalist Marc Andreessen, who helped invent the web browser, articulated this position yesterday in a long series of tweets. Right now there is little incentive for companies to compete in each other’s markets — we don’t have multiple gas and water lines running into our homes, either. At the same time, they should be careful not to discourage investment by preventing the existing players from earning reasonable returns on new capacity.

A few local governmenbts have gotten electric utilities to install their own high-speed connections. Regulatory changes would also encourage Google Fiber to spread. Right now the service only gets deployed to cities that promise speedy permit approval and the ability to lease existing utility poles. (Of course, it isn’t hard to imagine a future where critics of market concentration warn about Google’s nefarious influence as a leading content creator and broadband distributor.)

Subsidies that encourage broadband firms to muscle in on each other’s markets may lower prices. The downside is that subsidies meant to encourage private companies to provide public goods often turn into boondoggles that redistribute wealth from the many to the few, whether it’s Solyndra or sports stadiums.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article: Matthew C. Klein at

To contact the editor responsible for this article: James Greiff at


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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