Unfortunately, most consumers won’t realize that Netflix is trying to impose its costs on all Internet consumers to gain an anticompetitive price advantage against its over-the-top competitors.
At the Consumer Electronic Show two weeks ago, Netflix announced that it would block consumer access to high definition and 3D movies in its new “Super HD” (HD) service for customers of Internet service providers (ISPs) that Netflix disfavors. Netflix’s goal is to coerce ISPs into paying for a free Internet fast lane for Netflix content. If Netflix succeeds, it would harm Internet consumers and competition among video streaming providers. It would also fundamentally alter the economics and openness of the Internet,“where consumers make their own choices about what applications and services to use and are free to decide what content they want to access, create, or share with others.”
Ironically, Netflix’s strategy is a variant of the doomsday narrative spun by net neutrality
activists over the last decade. Their narrative assumes ISPs will use their gatekeeper control to block their customers from accessing Internet content distributed by competitors. Of course, ISPs have never blocked consumer access to competitive Internet content. Now that the FCC has distorted the Internet marketplace through the adoption of asymmetric net neutrality rules, Netflix, the dominant streaming video provider, has decided to block consumer access to its content.
This may not seem like a big deal given the relatively limited HD content currently available on Netflix. But that’s about to change in a very big way. Netflix recently announced a new multi-year licensing agreement that makes it the “exclusive American subscription TV service for first run live-action and animated features from the Walt Disney Studios .” In addition to Disney-branded content (e.g.,The Lion King ), the deal includes content produced by Pixar (e.g., Brave ), Lucasfilm (e.g., Star Wars), and Marvel (e.g., The Avengers ). Netflix also announced a multi-year deal
with Turner Broadcasting and Warner Bros. that includes the Cartoon Network and exclusive
distribution rights to TNT’s television series Dallas. As an analyst recently told Ars Technica, “
These movies, if you’ve got young kids—you’ve got to have Netflix.”
Netflix has decided to use this new market power to force ISPs to pay for its own Internet fast lane. In classic double-speak, Netflix calls its fast lane the “ Netflix Open Connect ” content delivery network (CDN). Though Netflix uses the word “open” to describe its CDN, it is not part of the open Internet. It is only “open” to Netflix for the delivery of its content, and it is only “open” to ISPs who connect to it on terms dictated by Netflix.
The costs of the ordinary CDNs (e.g., Level 3 and Limelight ) that deliver Netflix are borne by Netflix and incorporated into the price of its retail service. Netflix pays these CDNs to deliver content to Netflix subscribers, and the CDNs pay the costs of delivering Netflix content on the Internet. With this model, the additional costs of delivering Netflix content (due to its desire for distributed content servers) are ultimately borne only by Netflix subscribers.
With its “Open Connect” model, Netflix is withholding content from the customers of ISPs that decline to accede to its demands. Though the details of its demands are unknown, it appears Netflix is requiring that ISPs “peer” with them or pay for the installation of Netflix equipment inside their networks as well as the ongoing costs of operating that equipment.
Netflix’s model is inconsistent with standard Internet peering arrangements, harmful to consumers, and blatantly anticompetitive. By shifting its costs to ISPs, Netflix is distributing the costs of delivering its service across all Internet consumers. ISPs that agree to pay the installation and ongoing operational costs of hosting Netflix equipment inside their networks would have every incentive to pass these costs on to their subscribers as higher rates for Internet access. It would be one thing if ISPs were able to raise Internet access rates only for Netflix subscribers. Due to the FCC’s net neutrality rules, however, an ISP would likely be required to increase its rates for all of its subscribers to cover the additional costs imposed by Netflix – including its subscribers who don’t use the Netflix service. The result: ISP customers who subscribe to competitive streaming video providers would unwittingly be paying for the delivery of Netflix service as well, and Netflix would have a significant price advantage over its competitors.
Theoretically, streaming video competitors could mimic Netflix and try to force ISPs to cover the costs of private fast lanes for them as well. In reality, the combination of exclusive content arrangements, first mover advantages, and asymmetric net neutrality regulation enjoyed by Netflix make it unlikely that a new competitor could mimic Netflix’s strategy. Netflix admits it is the “
world’s leading Internet subscription service for enjoying TV shows and movies,” and that its traffic
accounts for more than 30 percent of peak Internet traffic on U.S. networks. According to Dan Rayburn at Streaming Media:
He also notes that the average family of four likely has ten Netflix enabled devices in their home
today – something that “can be done by others, but it takes time, a lot of money and lots of development.”
The available evidence indicates Netflix is shamelessly leveraging its market power and its subscribers to cajole ISPs into paying for its private fast lane at the ultimate expense of all Internet consumers and its competitors. When I inquired about its “Super HD” service on the Netflix website, the website replied in ominous red text: “Your Internet Provider is not configured for Super HD yet.” (Screenshot available here .) In a subdued, friendly gray, it said:
Super HD requires that your Internet Provider is part of the Netflix Open Connect network. Please contact your Internet Provider to request that they join the Netflix Open Connect network so you can get Super HD.
Neither my ISP nor the open Internet is preventing Netflix from allowing me to access its HD content. Netflix is choosing to block me from accessing its HD content because my ISP hasn’t agreed to host Netflix equipment for free and Netflix doesn’t want to pay another CDN to deliver HD content to my ISP.
Unfortunately, most consumers won’t realize that Netflix is trying to impose its costs on all Internet consumers to gain an anticompetitive price advantage against its over-the-top competitors. If most consumers end up blaming ISPs for Netflix’s choice, I expect Netflix will increase its demands along with its leverage as it secures exclusive access to even more “must have” content. I wouldn’t be surprised if Netflix attempts to graft the “basic tier” model used in traditional video subscription services on to the Internet.
Think Netflix doesn’t have enough muscle to bully ISPs? Think again. Although Netflix won’t disclose the full list of ISPs that have succumbed to its pressure tactics, Cablevision and Google Fiber in the U.S. and a host of global ISPs (including Virgin Media, British Telecom, Telmex, Telus, TDC, and GVT ) have already agreed to install a “free” Netflix fast lane in their networks. The revenue and global scale provided by these deals combined with the asymmetric limitations of the net neutrality rules will make it even harder for the remaining ISPs in the U.S. to resist Netflix’s demands.
When the FCC considered adopting net neutrality rules, Commissioner Michael Copps warned of the potential for unintended consequences that attend asymmetric regulation: “ In particular, we need to recognize that the gatekeepers of today may not be the gatekeepers of tomorrow.” Copps believed his “job [was] not so much to mediate among giants as it [was] to protect consumers.” Now that it is the Internet gatekeeper of Star Wars and other iconic films, what rule will stop Netflix from demanding additional payments from ISPs if net neutrality rules prevent ISPs from recovering the additional costs only from Netflix subscribers?
You mention that ISPs must incur a ‘cost’ in connecting to Open Connect. What exactly are these costs? From what I would think, a dedicated Netflix CDN would actually reduce load on the network to some degree due to fewer router hops.
what the hell?
This is a peering issue brought on by ISP’s, not by netflix.
This isn’t the right approach by netflix to fix the issue, though.
So what? I want Netflix to be the biggest company on the block. Their product is far superior to Hulu, which forces consumers to watch commercials and whose narrow collection has a decidedly political spin that I really don’t want to subscribe to. Netflix, on the other hand, doesn’t hassle me with commercials, and has a much wider selection that includes a diverse range of products. If they kill Hulu in the crib, I will bake a cake.
The details are unclear, but it appears Netflix wants ISPs to pay to host Netflix servers and to pay Netflix’s third-party CDN costs and/or treat Netflix as a Tier 1 peer.
This seems like a disingenuous article. Do the ISPs incur any cost for the CDNs Netflix already partners with? Won’t they incur fewer costs if the majority of Netflix traffic originates from within their network? That should end up improving access, even for non-Netflix subscribers.
Drawing a comparison between how Netflix as a company that operates on the internet and the ISPs is unfair, they are not the same companies, not in the same business, and not subject to the same rules.
Lastly, this line reads like a blatant example of misdirection: “Of course, ISPs have never blocked consumer access to competitive Internet content.”
Sounds to me like they’re doing exactly what Google and Akamai do and just distributing content engines. This is actually a great thing has it relieves congestion on the Internet core and reduces ISPs upstream bills (thus actually reducing costs for consumers). I think the author of this article has too little information about the agreements to make the conclusions he makes. I help manage a fairly large ISP and we have content engines provided to us by both Google and Akamai. We just have to provide space, power, and connectivity to our network and get the advantage of not having to upgrade our upstream bandwidth (which is currently around 10Gig).
If it means forcing internet providers to update their infrastructure to allow more bandwidth for people outside of major cities then I will gladly pay it. It’s sad they’ll just pocket the money regardless.
So you admittedly have no idea what the cost or requirements are, yet claim its clearly uncompetitive and goes against net neutrality? Netflix claims repeatedly that it’s free to ISP’s.
That was a lot of big words with what appears to be very little basic research.
So you’re criticizing Netflix for attempting to vertically integrate (from just content provider to content provider + CDN), while at the same time defending the ISPs without bothering to notice that they are by and large already vertically integrated content providers as well?
Given the current regulatory environment, and considering that existing CDNs may not be equipped to handle the new traffic Netflix wants to push over them, this is an entirely reasonable action by Netflix to forestall the inevitable cries of “bloody murder” when Netflix rolls out the “Super HD” content.
If the ISPs don’t want to participate, then their subscribers don’t get the premium content, but they can still use the same Netflix service they’ve been using. Netflix isn’t applying any unfair coercion here; they are merely negotiating for better standing. If you want to criticize the regulators, then do so, but don’t make one party into the villain when that clearly is not the case.
You wrote: “Netflix doesn’t want to pay another CDN to deliver HD content to my ISP.”
That’s disingenuous. Netflix built its own CDN after Comcast forced Level 3 to pay it CDN fees for carrying Netflix traffic in 2010 rather than using a peering arrangement.
Netflix decided to build its own CDN rather than continue paying ISPs a fee. Both Comcast and AT&T have been caught subverting the “open” Internet when it suits them, by offering services and products that don’t count against bandwidth caps. What Netflix has done is build its own delivery network, make that network available for free, and say “If you want to carry our premium service, this is what you use.” If this comes down to a hosting cost issue, I’m certain that’ll be hammered out.
Let’s keep in mind that my ISP already gets paid. I pay it for my service. Furthermore, the cost to deliver a GB of data across the United States has continued falling even as the cost consumers pay for that GB of data has remained flat (wired) or jumped (wireless). The majority of US communities have 1-2 ISPs, and the buildout of high-speed network capacity in this country has generally plateaued. Verizon, for example, stopped bringing FiOS to new markets years ago.
Netflix wants the freedom not to be nickle-and-dimed by companies with 1-2 competitors who have proven willing to distort the concept of the “open Internet” every time it favors their own bottom line, and scream bloody murder about the unfair burden placed on them every time they might have to actually compete.
“Appears Netflix wants”?
It seems like excoriating Netflix here is premature if the details aren’t known.
If Netflix is asking ISPs to host Netflix systems in the POPs where they host other CDN systems (and you can see the dozens of CDNs here: http://www.cedexis.com/country-reports/), that’s a sketchy request, but frankly, I’ve always viewed the model of ISPs charging CDN providers to host CDN gear as the ISPs gouging CDNs because they have a captive audience/monopoly market. ISPs benefit from hosting CDN equipment as much as CDNs benefit from hosting it there; or more. (If you do the math on the costs associated with hosting N rack units of CDN gear, and the switch ports/etc associated with getting content from it; those are dwarfed by the cost of bandwidth.) In fact, the cost disparity is probably enough that the cost of hosting CDN gear is less than the cost for peering to deliver STANDARD Netflix movies; so the provider saves a lot of capacity on their lines and can actually remove congestion, saving money that other customers benefit from.
The Tier 1 comment doesn’t make much sense, as most of the consumer ISPs aren’t Tier 1 networks themselves; AT&T is, and CenturyLink is, so DSL from them would fit that bill, but many are not (including TW & Comcast). That’s irrelevant anyhow; any two parties can come to a settlement-free peering agreement. Tier 1 just means a network doesn’t pay overt settlement fees. That doesn’t preclude them from arranging mutually beneficial peering (although Netflix may be too tightly coupled to AWS to independently arrange network peering).
Fred, you are a idiot who is spreading FUD. I am guessing you watch a lot of Fox News? In your world I would not even be able to access Netflix for streaming because my ISP would only give me premium bandwidth to the services they provide. In response to “Netflix, the dominant streaming video provider, has decided to block consumer access to its content.”, do you have any idea how much bandwidth is required to even stream at all? Also, if they were blocking it as you described then we would just find another provider(regardless how you position netflix as a mighty giant, amazon could easily take them out). Also, please use sources, I would love to verify your statments about Netflix “Forcing” the ISPs to install “private fast lanes”. If this is true, then you know what WILL happen? We(the consumer) will move onto another service. Just look at Blockbuster, they screwed their customers for years with limited choices and high prices now they are closing their doors. The same thing will happen to Netflix. Why not focus on fixing the problem with ISPs who charge $70 a month for 16Mbit of bandwidth, or ISPs who refuse to install new infastructure because they are a local monopoly? You want to know the real reason they are setting standards for SuperHD? Because they want the time from someone selecting a video and it actually playing to be seconds not minutes.
What is needed is for current netflix customers to drop their subscription as many did when netflix attempted to charge a separate fee for dvd and for network delivery. Their policy changed rapidly after the customers sent that clear message. I will probably drop netflix just to send that message if they continue with this policy. Sadly though, most customers will probably not realize the issue and boycott.
Netflix is trying to force ISPs to peer with them. The large ISPs out there have peering policies setup so that even the largest companies out there can not get peering with them. There is a monopoly in the Tier 1 ISP market and they will not let anyone else in to the club.
Actually, Fred, many of the details are quite clear if you simply read Netflix’s FAQs regarding Open Connect.
Not only would you have been enlightened, but your article would have been much more accurate and factual too.
Case in point: “By shifting its costs to ISPs, Netflix is distributing the costs of delivering its service across all Internet consumers. ISPs that agree to pay the installation and ongoing operational costs of hosting Netflix equipment inside their networks would have every incentive to pass these costs on to their subscribers as higher rates for Internet access.”
To help jumpstart you on that part of journalism where you seek out facts, note that *Netflix pays* “the installation and ongoing operational costs of hosting Netflix equipment inside their networks”, not the ISP. Netflix pays for the device (including a spare), ships to the customer, and fixes them when they break.
Geez, man. At least *try* to research the facts next time. This piece shows a complete lack of even attempting to find out the truth.
Do you get paid for these articles that you write? I can make stuff up too — where do I apply?
If the details are unclear, how can you be quoted as an expert, as Fox News has? If “Federal regulation prohibits ISPs from raising prices only for Netflix subscribers,” which regulations are those?
If I pay for tiered pricing, paying either for bitrate or total transfers, how will I share the burden with someone who upgrades in order to be able to watch Netflix video?
Most of my traffic is netflix.
As well, Comcast is the reason for all of this.
They have shifted it so they are the CDN for 90% of domestic video delivery as well as other cable and satellite providers. They did this to provide users with the most profitable service possible. Therein lies the conundrum with Comcast. They are an ISP who also has a dog in the content fight. Their focus is not on providing the best Internet service, it’s providing the easiest way for consumers to buy their content. It’s why we need google fiber now! The focus is on the service, which inevitably leads to prosperity for the whole Internet.
Hulu is delivered directly from your TV provider. (watermarks of your local channels intact) Netflix is delivered from TV provider’s CDN.
Netflix should be a Tier 1 peer. It’s got 33% of domestic Internet traffic.
If Netflix is already up to 30% of network traffic, just think how much that will increase with HD. I can’t imagine requiring an ISP to put a Netflix device in their rack would bother them much, given how much it reduces the load on their network. They are probably thanking Netflix for not killing them with HD content without a suitable setup.
No, it’s pretty quite clear if you can read. Netflix will deploy content distribution nodes on the ISPs networks so BOTH the ISP AND Netflix will reduce the amount of (costly) traffic traversing through their networks. The ISP lowers their costs FOR ALL NETFLIX CONTENT (NOT JUST SUPER HD) and allows their subscribers to receive a higher quality Netflix product as well. This lowers operating costs for both Netflix and the ISP.
Why would an ISP not want to partner with Netflix? Well, I guess if an INTERNET SERVICE PROVIDER also ran an entertainment company that competes with Netflix for NON-INTERNET TV services, they would be worried about providing a better service for their competition.
If you look at the Netflix SuperHD page, it says this if your provider participates in the CDN:
“Your Internet Provider is part of the Open Connect network, a free partnership with Netflix. Netflix will automatically play movies and TV shows in Super HD on a supported device if your connection is fast enough.”
The Open Connect network is free to participate in. Netflix ships the free hardware to the ISP. The caching engines save the service provider bandwidth and give their customers a better experience for Netflix content. It is a win/win for all parties involved.
It would seem to make sense for Netflix to restrict extremely high bitrate content to providers that participate in the free Open Connect CDN. Netflix subscribers using providers without the CDN may experience suboptimal video as the bitrate is adjusted downwards to compensate for network congestion outside of the service provider.
Finally, not only does Netflix provide free access/hardware for the CDN, but they also provide free peering at several major POPs.
I’m at a loss to understand how Netflix ends up being painted as the “bad guy” in this situation.
For those who asked, here is some additional information on costs and sources:
The post linked to the Netflix page were you can view its “Open Connect Appliance Guide” (v.2.4). Here is a direct link to the PDF: https://netflix.hs.llnwd.net/e1/us/layout/signup/deviceinfo/OpenConnectDeploymentGuide-v2.4a.pdf.
The “Netflix Appliance Guide” states:
“Open Connect appliances are typically deployed in conjunction with peering with the Netflix Open Connect network at common Internet Exchange locations. The percentage of traffic served via peering can vary substantially, depending on the manner in which appliances are deployed within an ISP network. For extensive ISP deployments, which include sufficient capacity to store and serve the entire Netflix catalog, peering is only required to ingest new content. For other types of deployments, peering can accommodate appliance fill traffic, as well as client access to very “long tail” content which is not cached locally. For ISPs who do not choose to peer with the Netflix network, content will be filled from any of several CDN and transit networks, and Netflix will not be responsible for any costs associated with appliance fill traffic.”
This statement by Netflix indicates that, if an ISP wishes to participate in its “Open Connect” network, the ISP must treat Netflix as a “peer.” What is unclear is whether Netflix means “Tier 1″ peer. If so, and assuming there is a significant traffic imbalance, that means Netflix is leveraging its exclusive content rights to obtain Tier 1 peering status, which would enable it to exchange its traffic for free rather than pay for the traffic imbalance. It also indicates that ISPs who choose not to peer with Netflix must pay the costs of Netflix’s third-party CDN and transit networks. It does not appear that either of these payment arrangements is typical of current Internet peering, CDN, or transit practices.
I based my conclusions directly on Netflix’s own statements, including that “Netflix will not be responsible for any costs associated with appliance fill traffic.” I also consulted several sources of information regarding past and current Internet peering and transit arrangements, but did not discuss them in detail because I considered them beyond the scope of this blog post.
Regarding the CDN portion of the “Open Connect” network, the “Netflix Appliance Guide” states:
“After planning is complete, Netflix will arrange to ship appliances directly to your datacenter locations identified for deployment during the planning process. . . . Netflix ships the appliance to your designated location ready to deploy. You provide space, power and a 10 Gbps optical network connection.”
It appears that the configuration and ongoing operating costs of the ISP also include “traffic routing to a single appliance or a cluster of appliances, as well as tiering, failover and redundancy among multiple sets of appliances and peered connections to the Netflix network.”
There is more at stake here than the direct capex and opex costs ISPs would incur in providing space, power, and connectivity (including redundancy) for Netflix’s appliances. There are also opportunity costs and increased risk. An ISP who agrees to this arrangement is also sharing the risks inherent in Netflix’s business plan. An ISP who incurs capital costs to accommodate Netflix’s new business plan may not be able to recover them if Netflix changes its business plan, declares bankruptcy, the FCC changes its rules, etc.
Netflix manages the failover/redundancy.
The ISP just advertises their routes to the appliance(s). There is little to no operational cost to maintaining this as the provider probably uses the same prefix list to advertise routes upstream.
What risk are you referring to? You provide Netflix 10GE ports, rack space and power. In return, they save you a significant amount of bandwidth by caching their content on your network. If their business fails, you send the servers back to them. If you have enough traffic coming from Netflix to justify participating in the CDN, then you probably already have 10GE ports available to participate in the program without additional capital investment.
This CDN architecture isn’t new to anyone but Netflix. Akamai has been doing this for a very long time and a slightly larger company, Google, also does it. Sane service providers jump at the opportunity to participate in such programs. Why would a service provider want to pay for bandwidth they don’t have to?
Pingback: Chilean in Chains: Net Neutrality Does Not Mean Internet Freedom | Communications Liberty and Innovation Project
Pingback: Chilean in Chains: Net Neutrality Does Not Mean Internet Freedom
Pingback: Chilean in Chains: Net Neutrality Does Not Mean Internet Freedom « Internet Freedom Coalition