February 24, 2014 at 7:45 pm

Netflix, Comcast deal surprises some

The deal was announced Sunday. (Justin Sullivan / Getty Images)

Netflix Inc. has agreed to pay for more-direct access to Comcast Corp.’s broadband network to improve speed and reliability for its video-streaming customers, according to three people familiar with the matter.

The companies announced a multiyear agreement in a statement Sunday, without disclosing terms. Faced with complaints about quality and speed, Netflix agreed to pay Comcast millions of dollars annually to deliver its content more efficiently, said one of the people, who asked not to be identified because the terms are private.

Netflix, the world’s largest subscription video-streaming service, joins companies such as Google Inc. and Facebook Inc. that already pay Comcast for content-delivery network access. The agreement is a surprise because Netflix could have used the issue as leverage while Comcast attempts to acquire Time Warner Cable Inc., an industry researcher said.

“I would have thought Netflix would have held out with the Time Warner Cable deal looming,” Craig Moffett, founder of research firm MoffettNathanson LLC, said in an interview. “Netflix can ask for whatever it wants and has a reasonable shot at getting conditions put on the merger that could provide it with long-term benefit. On the other hand, that could be precisely what spurred this deal — that Comcast was willing to settle with Netflix for a relatively low price to make the Netflix problem go away ahead of the regulatory review.”

The agreement is part of an effort by broadband providers including Verizon Communications Inc. to collect millions in new fees from content providers who increasingly are using the Web networks to deliver movies, sports and live programs to televisions, tablets and computers.

Investments in the Web should be shared by its heaviest users, Lowell McAdam, chairman and chief executive officer of New York-based Verizon, said today on a conference call following the $130 billion acquisition of full control of the company’s mobile-phone unit. He expressed confidence Verizon would also reach an agreement with Netflix.

“We’re pleased to see that Netflix and Comcast had an arrangement,” McAdam said. “We’ve had discussions with Netflix ourselves and feel that the commercial markets can come to agreement on this to make sure that the investments keep flowing.”

Netflix declined to comment beyond the statement, said Jonathan Friedland, a spokesman for the Los Gatos, California- based company. Charlie Douglas, a spokesman for Comcast, declined to comment. Philadelphia-based Comcast has more than 20 million broadband subscribers and provides Internet service to about 23 percent of all U.S. households. Netflix has more than 44 million streaming customers worldwide.

Because so much traffic occurs during prime-time viewing hours, some Netflix users reported seeing grainy or jittery video. By connecting Netflix content directly to Comcast’s network, the new delivery method removes a middle layer, speeding the video to the end-user.

“The deal confirms that if you’re a video company that wants to get your stuff from point A to point B through a broadband pipe, you have to pay a tariff,” Michael Pachter, an analyst with Wedbush Securities in Los Angeles, said in an interview.

Netflix previously connected to Comcast and other broadband providers by paying companies such as Cogent Communications Group Inc., much like a consumer would pay a service provider to access the Internet. The new connections to Comcast will take place in data centers called open Internet exchanges that are run by Equinix Inc. and other companies around the world, one of the people said.

The agreement will deliver a better experience to customers “while also allowing for future growth in Netflix traffic,” the companies said in the statement.

The talks, which included phone conversations between Netflix CEO Reed Hastings and Comcast CEO Brian Roberts, occurred over the last year and were essentially concluded before Comcast’s surprise $45.2 billion bid to buy Time Warner Cable announced Feb. 13, one of the people said.

Neither side may have gotten everything it wanted, in part because of pending rules on so-called net neutrality. For example, Comcast declined to install Netflix content-caching servers called Open Connect in its own centers, one person said.

The agreement is a private business relationship between Comcast and Netflix — known as “peering” — and doesn’t run afoul of so-called net neutrality, the people said. The Federal Communications Commission plans to write rules that will forbid content blocking and ensure Internet providers treat Web traffic equally, FCC Chairman Tom Wheeler said last week.

Comcast, under terms of its deal to acquire NBCUniversal, signed a consent degree ending in 2018 in which it agreed not to give its own content preferential streaming treatment over other video providers.

Netflix “receives no preferential network treatment” under the terms of the contract, according to the statement.

The connections began late last week and will probably be completed in the next week, one of the people said.