Netflix: paying its share or suffering from a bottleneck not of itself?



Netflix’s business is, by design, heavily dependent on the satisfactory performance of internet service providers (ISPs). The video-streaming company would not exist without the internet and requires significant amounts of bandwidth for its customers to utilize the service.

At peak times, Netflix has taken up to 30 percent—that’s right, nearly one-third—of total internet bandwidth. While Netflix may not have the quantity of users that wows like Facebook’s 1 billion-plus mark, they certainly can boast the greatest single drain on the internet’s resources. ISPs are happy to see the increase. It means security for their future revenue and provides lucrative opportunities, like the recent deal between Netflix and Comcast.

Netflix and Comcast recently agreed to optimize Netflix’s streaming capabilities so that Netflix’s customers encounter fewer problems streaming videos. The move is surprising, although not unprecedented. Businesses heavily dependent on quality network connections have brokered deals with ISPs before to their advantage.

While on the surface it may appear Netflix is solely losing and Comcast is walking away richer for doing hardly anything, consider the strategic implications for Netflix. Because a deal like this had to take place to improve network performance, a large barrier to entry has arisen that other firms must face if they want to compete with Netflix on a performance level. AmazonPrime video, HBO, Hulu, and other similar services are now at a distinct disadvantage.

Certainly, Comcast is greatly benefitting from a financial standpoint as the actual work they need to do for Netflix is minimal. To be clear, though, all Comcast is doing is eliminating some third-party servers to provide a more direct connection from Netflix to Netflix’s customers—they are not technically “speeding up” Netflix’s streaming. Aside from the compensation they will receive, Comcast has tremendously increased the potential for future deals like this one.

ISPs are starting to realize that they hold all of the cards. If they do not break, companies will be forced to acquiesce to their wishes. Competition should, however, exclude that possibility. Verizon, AT&T, Time Warner, Charter, and other ISPs will compete outright to try to obtain unique deals from streaming services.

If a trend is firmly established, ISPs and content providers alike could find themselves in grave danger. ISPs could lose customers to those who have deals in place with content providers and content providers could lose customers to other content providers who have increased internet performance because of their deals.