Are Netflix users ripping off the rest of us?

Netflix Corporate Headquarters

NEW YORK (CNNMoney) — Netflix CEO Reed Hastings is hopping mad at the country’s biggest Internet service providers. But they’ve got a bone to pick with him as well.

Hastings sounded off Thursday on the likes of Verizon, Comcast and others, accusing them of “sacrific[ing] the interests of their own customers” in demanding fees to ensure quick delivery of content from Netflix and other data-intensive services.

The dispute flared up earlier this year following news that Netflix streaming speeds for customers of major ISPs were slowing, as these firms attempted to extract a fee from Netflix in exchange for connecting directly to their networks and resolving the issue.

Netflix announced an agreement with Comcast last month under which it will indeed pay for a connection, and has been in talks with Verizon as well.

Hastings said his company was engaging in these talks “reluctantly.” He accused the ISPs of abusing their market power and short-changing customers.

But the ISPs tell a very different story. They point to the fact that Netflix generates a massive amount of data consumption — around a third of traffic online during peak hours — while sticking them with the ever-increasing delivery costs.

The National Cable and Telecommunications Association says just one percent of broadband subscribers — primarily heavy streaming-video users — consume nearly 40% of bandwidth going into homes.

Other big tech companies, including Microsoft, Google and Facebook, already have paid-connection deals with big ISPs. Comcast vice president David Cohen said in response to Hastings that these arrangements “have been an essential part of the growth of the Internet for two decades.”

Dan Rayburn, an industry analyst at Frost & Sullivan, says it’s not clear that the ISPs are to blame for customers’ lagging Netflix speeds. In a blog post Friday, he noted that Netflix has the option of rerouting the traffic it sends to ISPs when congestion occurs at one connection point.

The heart of the problem is that high-speed Internet networks are extremely expensive to deploy. There aren’t many companies with the resources to do it, and there isn’t enough competition in most regions to push ISPs to quickly upgrade their infrastructure.

Paid-connection deals like the one between Comcast and Netflix are part of the way the broadband industry wants to address this issue. But Hastings says this cost-sharing doesn’t make sense if the ISPs aren’t also willing to share subscription revenue.

“When an ISP sells a consumer a 10 or 50 megabits-per-second Internet package, the consumer should get that rate, no matter where the data is coming from,” Hastings wrote in his blog post.

ISPs have accused Netflix of “dumping” data onto their networks, a characterization that Hastings rejected.

“Netflix isn’t ‘dumping’ data; it’s satisfying requests made by ISP customers who pay a lot of money for high speed Internet,” Hastings wrote. “If this kind of leverage is effective against Netflix, which is pretty large, imagine the plight of smaller services today and in the future.”

Going forward, broadband providers would like to move to a tiered pricing structure for customers depending on how much data they consume, similar to those offered by mobile carriers.

“[I]t’s unfair to ask lighter users to subsidize super-user activity,” the NCTA says.

But part of that formula will likely involve letting content providers subsidize consumer data consumption that goes toward their services. AT&T announced this kind of “sponsored data” program earlier this year for the mobile Web. The worry with this system is that it favors established companies that can pay up for speedy delivery of their content, putting smaller firms at a disadvantage and potentially stifling innovation.

“On a tiered Internet controlled by the phone and cable companies, only their own content and services — or those offered by corporate partners that pony up enough ‘protection money’ — will enjoy life in the fast lane,” the advocacy group Free Press says.

6 comments

  • troy

    wow.Fact is this has nothing to do with just netflix.Verizon and comcast slow streaming to lots of video sites in order to promote their own over priced video services.Verizon has a on demand service and if you think they don’t give priority to that then you are just silly.To blame a company like netflix who hasn’t had a price increase in years is ballsy of them at best.Just wait until you have to pay these isp’s and have to pay for each video you want to stream on top of that.Verizon and comcast are killing the internet and won’t be happy until every dime made goes into their pocket.They realized years ago people were cutting off their cable and watching online,just a matter of time before they wanted money from that.

    • trishaann92

      I couldn’t agree more! We recently cut our losses with comcast due to issues with them offering us deals and then trying to make us pay more and switched back to online streaming to save thst money. They are all money hungry a-holes.

    • athynz

      Exactly! The ISPs are grasping at straws here and trying to shift the blame in an attempt to woo public opinion. However Verizon had made billions in profits over the last several years AND has gotten tax breaks on top of that. I’d love to see a breakdown – a real breakdown – of how much bandwidth that Netflix, Hulu, and the rest use.

      What’s even more amusing is that this is the exact same argument used with cellular data – that streaming is being used by the 1% and consumes 40% of the bandwidth – and they never released any sort of real data on that claim either.

  • Brianna Lin

    The way NetFlix expects internet providers to provide free, fast internet service for their company is akin to the poor, unemployed, and lazy expecting the US government to provide them with free healthcare.

    Why should people who don’t use netflix or other video streaming services have to pay for an expensive internet connection to subsidize the high costs and stresses of Netflix? My Time Warner cable/internet connection here in NYC costs $170/month. It’s outrageous.

    This is just like car insurance too. Why should the legally driving residents of the US with valid insurance have to pay extra money to essentially pay for the uninsured and/or illegal residents? When I was in school in Indiana, I paid $25/month for car insurance (from 4AutoInsuranceQuote)… moved to NYC after graduating, and am essentially having to pay much more to make up for all the illegals and drains on society.

    The country doesn’t make sense. People keep thinking they deserve what they don’t work for / pay for.

    • wtfreally??

      Did you really compare internet service to healthcare? And you put the poor, unemployed, and lazy in the same boat? Wow.

  • Jen

    Brianna you are an idiot. Comparing apples to oranges is absolutely ridiculous… Insurance premiums are calculated with a little more detail than ” illegals and drains on society” by the way.

    Netflix is a 3rd party site that has nothing to do with how a customer and their ISP interracts. I pay for my internet and I can use it anyway I see fit. If ISP’s are so concerned about heavy streamers then they need to figure out a way to tier usage the same way they provide tiered speed plans.

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