Comcast-Netflix Deal Plants A Flag In The Sand Of Net Neutrality

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Comcast ( CMCSA ) and Netflix ( NFLX ) recently announced a mutually beneficial interconnection agreement that will provide Comcast's U.S. broadband customers a high-quality Netflix video experience for years to come. The press release states that Netflix will not receive any preferential network treatment under the multi-year agreement. This is welcome news for Comcast, as it not only gets some monetary benefit out of Netflix, but also opens up the door for similar arrangements with other Internet-based services. The terms of the agreement between the two companies are not yet disclosed. Comcast has its own streaming service but, as part of its acquisition of NBCUniversal in 2011, it cannot give preferential streaming treatment to its own content over other video providers. The consent decree ends in 2018.

The agreement between Comcast and Netflix appears to be in response to complaints over the past few months over Comcast failing to provide adequate capacity and thus limiting data transfers between Netflix and its streaming customers. Netflix released data demonstrating that from October 2013 to January 2014, Netflix customers on Comcast experienced a 27% decline in streaming speeds during prime-time hours. Netflix would not want more customer complaints, especially with the release of the second season of its popular original programing series - House of Cards.

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This deal adds color to the dispute over net neutrality, which has been a hot topic of debate, especially after the news of Comcast-Time Warner Cable merger (Also See - What Does Time Warner Cable's Merger With Comcast Mean For The Industry? ). Net neutrality is more of a principle about the way Internet traffic is treated, specifically in the last mile to the customer's home. It states that Internet service providers (ISPs) and governments should treat all data on the Internet equally, not discriminating or charging differentially by user, content, site, platform, application, type of attached equipment, and modes of communication. Of late, there has been an extensive debate about bringing in a law for net neutrality. If there is no net neutrality, ISPs can have a tiered model where traffic will move faster for companies that can afford to pay a premium and others will be left out with slower speeds.

However, the agreement between Comcast and Netflix clearly states that there will be no preferential treatment for Netflix traffic, which accounts for close to 30% of Internet traffic in the U.S. Note that the agreement covers not the last mile to the viewer, but the interface between Netflix' and Comcast's systems, which are normally governed by so-called peering arrangements.  Netflix used to route its traffic through middlemen to broadband providers. But in recent months, traffic jams developed on some of its existing connections such as Cogent Communications, which was a primary route for the streaming provider into Comcast. With the growth in popularity of Netflix' service, in particular high-definition content, the volume of data outgrew service provider capacity to transmit it, requiring additional investment.  The specific arrangements have not been disclosed.  Under the new deal, however, Comcast will connect to Netflix' specialized servers at data centers operated by other companies, providing a better streaming experience to the end customers.

It appears that this deal will open a new stream of revenues for Comcast, thus providing a return on the capital investment required to boost capacity for Netflix' streaming. Observers note that it may serve as a precedent to other streaming content and service providers, or other services that involve heavy data traffic.   Moreover, it can be offered as a complimentary market-based solution in the debate over net neutrality, which has been reversed at the appellate level in the US but remains as an issue in dispute on both sides of the Atlantic.

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This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CMCSA , NFLX , TWC , AMZN

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