The Netflix/Comcast deal may help in the short run, but I fear for the long run

Much has been written about the recent deal between Netflix and Comcast. However, most writers have misunderstood the deal because of its complexity and others missed what I consider to be a dangerous implication in the long run. I will briefly explain what prompted the deal, what it entails, and why I am worried about the future.

Immediately after the deal was announced, many writers misrepresented it as one where Comcast forced Netflix to pay more in order to receive better service. This is not true. Dan Rayburn, who writes at StreamingMediaBlog, does a great job (http://blog.streamingmedia.com/2014/02/heres-comcast-netflix-deal-structured-numbers.html#disqus_thread) dispelling the false information. I will briefly summarize the deal, but for a lengthy explanation of the specifics, please consult Rayburn’s piece.

Consumers pay Internet Service Providers (ISPs), such as Comcast, to access the Internet. They also pay Netflix directly as a content service. Netflix has not, traditionally, sent its data directly to Comcast. Instead, it pays middlemen to do it, as most other companies do. These middlemen take the traffic and pump it into the ISPs. Comcast allows these middlemen to send some data for free, but specifies that if a limit is exceeded, it will charge a premium. One of the middlemen that is used by Netflix, named Cogent, refuses to pay Comcast, despite exceeding the limit. This refusal is the reason why consumers were experiencing quality of service issues.

The deal that was recently signed results in Netflix sending its traffic directly to Comcast, instead of using a middleman. This is not feasible for most companies as they do not have the resources required to make it cost-effective.

As Rayburn points out, this deal will decrease Netflix’s costs and make the quality better for consumers. So why am I fearful for the long run? Consumers pay Comcast and Netflix expecting a certain level of service. When that service is less than satisfactory (as it has been recently with Comcast), they will likely seek out a competitor. In a vibrant, competitive marketplace that is to be expected and encouraged. However, the broadband industry is anything but competitive and Netflix stands to lose much more than Comcast does. Netflix has many direct competitors (Amazon Prime, Hulu, Vudu, Verizon, etc.) and even traditional cable itself is a competitor, because anyone delivering entertainment content is. If Netflix stutters or lags, consumers will find something else to watch, including their cable provider's channels. However, if there is an issue with Comcast, leaving for a competitor is not easy, because there isn’t likely to be one available. According to Nilay Patel at The Verge, 70% of Americans have two choices for Internet: “cable broadband from a cable provider or DSL from a telephone provider. And since DSL isn’t nearly as fast as cable, and the cable companies are aggressive in bundling TV and internet packages together, it’s really only one choice. And that means the level of innovation from these providers has almost completely stagnated, even as prices have gone up.” (http://www.theverge.com/2014/2/25/5431382/the-internet-is-fucked)
This is why I am fearful. I fear that if we do not see a competitive marketplace for broadband providers soon, alternative means of watching content will falter. I fear that startups will hesitate to enter the space because of how risky it is. 

How do we foster more competition? It’s not going to be easy because of the pushback from the entrenched companies, but many suggest treating the Internet as a utility. Susan Crawford, a Visiting Professor at Harvard Law School, suggested on a recent podcast (http://hkspolicycast.org/post/77912174488/harvard-law-visiting-professor-susan-crawford) that we build on the model that worked well for Sweden. In Stockholm, the government built the fiber and then allowed private companies to use it while competing freely. It has kept prices down and speeds up, which is the opposite of what has happened in the United States. I think Crawford has a point. If we considered Internet access to be as important as electricity (which I believe it to be), then we could allow governments at the local, state and federal levels to lay the fiber themselves. This does not mean the government will be an ISP, rather, after the construction, it would hand off access to any company that wants to compete. Until that happens, we do have a glimmer of hope in Google. The Internet behemoth has started Google Fiber, a project aimed at bringing high speed access to cities at reasonable prices. It is admirable, but not large enough yet to call it a viable competitor to Comcast, Time Warner and Verizon. Maybe someday.