Netflix Inc. NFLX -0.63% has agreed to pay Comcast Corp. CMCSA -1.37% to ensure Netflix movies and TV shows stream smoothly to Comcast customers, a landmark agreement that could set a precedent for Netflix's dealings with other broadband providers, people familiar with the situation said.
In exchange for payment, Netflix will get direct access to Comcast's broadband network, the people said. The multiyear deal comes just 10 days after Comcast agreed to buy Time Warner Cable Inc., TWC -0.79% which if approved would establish Comcast as by far the dominant provider of broadband in the U.S., serving 30 million households.For months Netflix and Comcast have been in a standoff over Netflix's request that Comcast connect to Netflix's video distribution network free of charge. But Comcast wanted to be paid for connecting to Netflix's specialized servers due to the heavy load of traffic Netflix would send into the cable operator's network. Under the deal, Netflix won't be able to place its servers inside Comcast's data centers, which Netflix had wanted. Instead, Comcast will connect to Netflix's servers at data centers operated by other companies.Netflix Chief Executive Reed Hastings decided to strike the deal after Netflix saw a deterioration in streaming speeds for Comcast subscribers. According to Netflix data published in January, the average speeds of Netflix's prime-time streams to Comcast subscribers had dropped 27% since October. Mr. Hastings didn't want streaming speeds to deteriorate further and become a bigger issue for customers, the people said.During this period, Netflix was using Internet middlemen Cogent Communications CCOI -0.10% as a "primary" route into Comcast, a person familiar with the matter has said. That connection was starting to become overwhelmed with Netflix traffic, congesting traffic and leading to slower Netflix streams for Comcast Internet users, people familiar with the matter said.At the same time, Comcast presented Netflix with more attractive deal terms than the operator had been offering, the people said. The deal spans several years. Netflix was aiming for a long-term deal to make sure its projected traffic growth wouldn't put it at a disadvantage, one of the people said. The connection is a so-called "paid peering" deal, which connects Netflix's network to Comcast's directly. Netflix was previously using several middlemen to access Comcast's network.Mr. Hastings and Comcast CEO Brian Roberts have met on-and-off in recent months to discuss a possible deal and the two came to a framework for an agreement at a meeting at the Consumer Electronics Show in January. Final details were worked out over the past two days, one of the people said.The deal could force Netflix's hand in its standoff with other major U.S. broadband providers, including AT&T Inc., T -1.15% Verizon Communications Inc. VZ -1.77% and Time Warner Cable Inc.—all of whom have also refused to connect with Netflix's servers without compensation. Netflix's streams with Verizon in particular have gotten worse in recent months.Netflix has little room to pay more to transmit its TV shows and movies. In a February regulatory filing, Netflix said that if providers don't interconnect with its servers, its ability to deliver streaming video, its business and operating results could be "adversely affected" due to increased costs.The deal is the latest sign that broadband providers are gaining leverage in their dealings with content companies. Over the past several years, technology companies like Microsoft Corp. MSFT +0.61% , Facebook Inc. FB -1.49% and Google Inc. GOOG -0.03% have also started paying major broadband providers for direct connections to their networks that would provide faster and smoother access.
This is extortion.
