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TECHNOLOGY

Netflix's Deals With ISPs, A Nail in Net Neutrality's Coffin

Netflix is buying connection points to major broadband networks, doing away with the middlemen you depend on.

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In the past week, Netflix has made agreements with AT&T, Comcast, and Verizon to connect directly to their broadband networks.

While these deals seem to have very little to do with the Net Neutrality regulations currently being formulated by the Federal Communications Commission, they are actually connected. In order to get to the networks operated by the big broadband providers, Netflix has had to rely on third party network connections that are ungoverned by the FCC. And it's here where a new battle is brewing, because these middlemen, which make up the backbone of the Internet, and which many small businesses also depend on for access, are now competing head-on with enormous providers like Comcast and Verizon. 

In other words, Netflix's deals may not overtly challenge Net Neutrality, but the prospects for preserving an open Internet going forward don't look good.

"Disputes like this hurt the open Internet," Craig Aaron, president and chief executive of Free Press, whose Save the Internet campaign lobbies to maintain net neutrality, wrote on the company's website Monday. "They hurt consumers. And they'll become par for the course if [Internet service providers] are allowed to get even bigger and operate without the Federal Communications Commission stepping in."

Unlike you, Netflix is no little fish. In fact, some estimates say that it accounts for 30 percent of all Internet traffic.

Traditionally content providers such as Netflix or Yahoo have connected to broadband providers through intermediate networks, known as content delivery networks (CDNs), which transmit information in large, undifferentiated bundles to Internet service providers (ISPs), such as Verizon, who then funnel it to end customers.

By inking a deal with Comcast and other broadband providers for a direct connection, Netflix cuts out the need for those companies. In so doing, it strengthens the power of Verizon and Comcast, and diminishes the power, and ultimately the need, for backbone providers whose competing services keep connection prices down.

In fact, some ISPs, such as Verizon, already function as backbone providers through acquisitions. In 2006, Verizon acquired MCI, which it operates primarily as part of the Internet backbone. And that puts them in direct competition with the CDNs. For some time, Verizon has been caught up in a dispute with Cogent, Netflix's CDN, over the amount of traffic it sends over its network and Verizon's desire for it to pay more for its load.

Now that Verizon and Netflix are in a conversation of their own over traffic, it's unclear what will happen to its relationship with Cogent.

Nothing to Fear

Not everyone agrees that the Netflix deals spell trouble. Dan Rayburn, principle analyst for Frost & Sullivan, in New York, says this is just the latest variation of how companies connect to ISPs.

"This is the way the Internet has worked for the last 20 years," Rayburn says. "Networks are connected via transit, and you buy [transit] from multiple providers for competitive prices and different levels of quality."

Netflix is signing deals now, Rayburn says, because its Open Connect initiative, through which it hoped to place its own servers within the facilities of last mile broadband providers, was never accepted by Comcast and Verizon. (By contrast, providers British Telecom, Clearwire, Bell Canada, Virgin, Cablevision, and Google Fiber, among others, are all participants.)

The immediate impact on small business owners will be minimal or non-existent, Rayburn says.

But if the long term trend holds, and consolidation continues, entrepreneurs who still depend on these middlemen for access, experts say, may face higher prices and unfair competition to get to the last mile.

As Timothy Lee wrote recently in a Washington Post article:

"The deal will also transform the debate over network neutrality regulation. Officially, Comcast's deal with Netflix is about interconnection, not traffic discrimination. But it's hard to see a practical difference between this deal and the kind of tiered access that network neutrality advocates have long feared." 

IMAGE: Getty Images
Last updated: Feb 25, 2014

JEREMY QUITTNER is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.
@JeremyQuittner




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