Market Insight

Comcast and Netflix sign deal for transit, not carriage

February 25, 2014

Dan Cryan Dan Cryan Executive Director – Research and Analysis, IHS Markit

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Comcast and Netflix have signed a deal for ‘interconnection’. No terms of the multi-year deal have been disclosed except for the fact that the companies have made it clear that the agreement has been developed over ‘many months’  and that under the deal Netflix traffic receives no preferential treatment at a network level.

Our Take

While the terms of the deal remain unknown, we believe that this agreement is best thought of as a ‘transit deal’ which sees a direct connection between Netflix’s CDN (content delivery network) and Comcast’s network (trace route data has started to show such a direct connection). Transit deals are very common, can come in multiple flavours (e.g. full or partial transit, on-net, etc.) and form a key part of the data-plumbing of the internet for so-called tier-2 ISPs and CDNs who often pay for data to move on and off other networks. As a CDN, Netflix was likely to already be connecting with multiple transit providers even before the deal with Comcast as this allows it to choose the optimum route to deliver to customers around the world.

Conceptually at least, this puts the Comcast deal a long way away from TV ‘carriage deals’ which see money change hands in the traditional pay TV business. In the traditional TV business a carriage fee is typically paid for the redistribution of a copyrighted signal (these fees can either be paid by the operator for carrying the channel or, in some cases, by the channel for being carried by the operator). By contrast, a transit agreement is, generically speaking, about the movement of undifferentiated data, and Netflix was clear to point out that it would be receiving no special treatment at a network level.

Some of the more thoughtful coverage to emerge suggests that the fees Netflix will be paying are actually very low and cover little more than the cost of the networking equipment and associated operational costs. Importantly for Netflix this may actually represent a cost saving, as before the deal with Comcast the company is likely to have been paying third parties for its interconnection to the Comcast network, either as an implied cost covered in deals with third party CDNs or directly for traffic delivered by its own CDN. Instead, rather than any new money changing hands, it appears that both Comcast and Netflix will to benefit from a greater number of ‘interconnection points’ which will make it easier to manage the demand on and off Comcast’s network. Simplistically speaking: at a crowded party it is easier for people to come and go if, instead of funneling everyone through the front door, they come in through the front, back and patio doors.

Importantly, there are plenty of alternative ways for Netflix to connect to Comcast’s network using traditional interconnect points. As a result, even though use of traditional interconnects has been coming under increasing pressure, we believe that the deal is unlikely to have any dramatic effect on Netflix’s cost structure or result in appreciably increased charges that the streaming giant must pass on to consumers in the near to medium term.

Geography
USA
Organization
Comcast Netflix
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