Comcast gets paid by Netflix and might still want money from Cogent

Comcast's success in extracting payments from Netflix won't end its dispute with Cogent, a network operator that distributes Netflix video and other traffic, Cogent's CEO said.

Cogent operates one of several networks that Netflix uses to distribute video across the Internet. With Netflix now paying Comcast for a direct connection to that ISP's network, Cogent's role in passing traffic from Netflix to Comcast will be reduced or potentially eliminated.

But just because Netflix traffic will now flow directly from Netflix to Comcast doesn't mean that Comcast will drop its demand for payment from Cogent.

"They want everybody who they can possibly extract a payment from to pay them, even though the traffic that is reaching their customers has been paid for by their customers," Cogent Communications CEO Dave Schaeffer told Ars today.

Comcast and other ISPs such as Verizon have been demanding money from Cogent and similar companies with which they have traditionally exchanged traffic without payment, saying they should be compensated for accepting large amounts of Netflix traffic. Level 3, one of these network operators, already agreed to pay Comcast "under protest" after a dispute in 2010.

Netflix's plan is to eventually send all of its traffic intended for Comcast subscribers through the direct connections with Comcast, a Netflix source told Ars. Schaeffer is doubtful that will happen, at least initially. "My guess is Netflix will send as much as they can to us because we're giving them better pricing," he said.

Even if zero Netflix traffic flowed between Cogent and Comcast, Schaeffer doesn't expect Comcast to drop its payment demands.

"For other customers, yes, obviously not for Netflix because there would be no Netflix traffic," Schaeffer said. "They would look to extract a payment from us for other customers who are sending traffic to the customers of Comcast."

Cogent has a big stable of IP transit customers in addition to Netflix, including YouTube owner Google, Yahoo, Microsoft and its subsidiary Skype, and eBay, the company said. Netflix is the Internet's biggest traffic driver in North America, though, accounting for more than 30 percent of peak downstream traffic.

A Comcast spokesperson declined to provide any comment to Ars.

Netflix isn't the first Web company to pay broadband providers for direct connections to their networks. "Google Inc., Amazon.com Inc. and Yahoo Inc. already pay for such access to broadband providers like Comcast," a Los Angeles Times story noted.

Only the largest content providers could justify the cost of direct connections with consumer ISPs, Schaeffer said. Smaller content providers will continue to send most of their traffic through Cogent and other IP transit providers and possibly see poor performance. Schaeffer has accused Comcast and other ISPs of refusing to upgrade interconnections with Cogent as a negotiating tactic.

Comcast is seeking approval for a purchase of Time Warner Cable that would extend its already considerable market power.

"The new startups will be relegated to a lower quality of service than what Netflix is buying, because the monopolist, being the access provider, is unwilling to upgrade the interconnection capacity," Schaeffer said.

Cogent has argued that connections between itself and ISPs should follow a "bill and keep model" in which no payments change hands. Content providers already pay Cogent and similar companies for transit, an agreement to distribute traffic to the rest of the Internet, and Internet users pay ISPs for access to the Internet at large, he noted.

"In a competitive market, [Netflix] should be able to cut us out and get the best solution," he said. But in Netflix's deal with Comcast, "they're buying a product that is not as robust as transit. They are buying connectivity to only one network, and they're paying more for it. Those are typically indications of an abuse of market power."

Verizon and Time Warner Cable are also demanding payment from Cogent in exchange for upgrading peering connections, Schaeffer said. He claims that Verizon "wants a price that is about 10 times the market price for transit."

The Netflix/Comcast deal won't have a major financial impact on Cogent, Schaeffer told investors at a JP Morgan event yesterday. "Today about four percent of the traffic exiting our network goes to Comcast," Schaeffer said. "No one customer accounts for more 1.7 percent of revenue."

Verizon and AT&T keep their hands out

Netflix is also negotiating with Verizon and AT&T, which each want payments from the video company. Netflix has attempted to establish direct connections with ISPs without payment, and in some cases it has been able to place its video caches inside ISP networks.

Frontier, British Telecom, Clearwire, Bell Canada, Virgin, Cablevision, and Google Fiber are among those who already have direct connections with Netflix through the video provider's Open Connect content delivery network and caching system.

Cable provider RCN, which has Netflix caches in its data centers, doesn't regret not demanding payment, RCN VP of Network Services Peter Jacoby told Ars.

"We’re still very happy with the Open Connect system as our customers enjoy Netflix service that has been shown to be far beyond the current capabilities of our competitors," Jacoby wrote in an e-mail. "Making service bad for our customers is not an option for us and it is definitely not a negotiating strategy. We will always talk to Netflix about making service better for our mutual customers."

Jacoby noted that neither Netflix nor Comcast confirmed that any money is changing hands in their new peering deal. "Comcast can use their scale in peering/interconnection negotiations just as they likely do in their negotiations with programmers on the video side," he wrote. "And yet RCN’s Internet service is still better according to the Netflix Boston area rankings and PC Magazine."

The Netflix/Comcast deal is a good thing, Sandvine cofounder and CTO Don Bowman told Ars. The two companies' "interests are aligned" now, and a more direct path from Netflix to subscribers' homes will lower latency and provide a better streaming experience, he said. Sandvine makes equipment that helps consumer broadband providers such as Comcast manage network congestion.

Some advocates of network neutrality, the concept that Internet service providers should treat all traffic equally, argued that a lack of competition and regulation in US broadband will make it easy for ISPs to demand additional payments while threatening to degrade traffic.

Tim Wu, a professor who coined the phrase "network neutrality," warned in The New Yorker that Netflix paying Comcast "sets a bad precedent—it will embolden Comcast to extract more tolls from any popular Web company that wants to reach its broadband customers and fears degradation of service."

While terms of the Netflix/Comcast deal are unknown, "it does show that the duopoly that many American consumers are facing for broadband can be harmful in the long run, because quality of services can degrade over time, without the consumer being able to vote with their feet and therefore for the market to receive a correcting signal," Rudolf van der Berg, an economist and policy analyst for OECD, told Ars via e-mail. Van der Berg examined controversies related to online video and Internet traffic exchange in a recent report.

The Netflix/Comcast deal "sends the signal that buying transit, paying for your traffic, is not good enough anymore," he said. "This could lead to a long-term deterioration of the Internet’s successful model of traffic exchange."