Who Really Benefits From Netflix's Deal to Pay Comcast?

Netflix agrees to pay Comcast for faster Internet streaming. The deal marks a turning point in the relationship between cable companies and content providers.

Feb 24, 2014 at 4:07PM

Customers rely on Netflix (NASDAQ:NFLX) for fast and convenient video streaming. However, the company's ability to ensure a smooth customer experience has come under pressure recently amid slowing streaming speeds. As a result, Netflix inked a deal with Comcast (NASDAQ:CMCSA) on Sunday that will let Netflix servers directly link with Comcast's broadband network, thus guaranteeing fast, reliable Netflix service for Comcast customers. 

The agreement marks a turning point in the relationship between content distributors such as Netflix and Internet suppliers. However, the deal could have far-reaching implications for Netflix. Let's take a closer look at what it means for the video streaming giant going forward, and who really benefits from this deal.

Cutting out the middleman
With as many as 33 million paying subscribers today, Netflix has grown into a streaming powerhouse. In fact, the company now accounts for roughly one-third of all Internet traffic during peak times, according to Sandvine Research. As the volume of online video streaming continues to grow, Internet providers including Comcast and Verizon (NYSE:VZ) have been pushing for content suppliers such as Netflix to help pay for the cost of upgrading broadband capabilities. 

Netflix has avoided such deals in the past by directing its video content to Internet providers through online middlemen like Cogent Communications (NASDAQ:CCOI). For example, up to this point, Netflix was using Cogent Communications as a "'primary' route into Comcast," according to The Wall Street Journal. However, its recent pact with Comcast proves that Netflix has outgrown Cogent. Not surprisingly, shares of Cogent have fallen more than 6% on the news today. Meanwhile, Netflix stock hit a fresh high of $445.75 in midday trading. 

Netflix Comcast Deal

Let's not forget that Netflix was already paying someone (Cogent) to carry its content through to Internet service providers like Comcast. The difference now is that Netflix is paying Comcast directly. Neither company disclosed the pricing of this deal. Nevertheless, Comcast and other broadband providers such as Verizon and AT&T are the clear winners here.

A media power play
This deal puts a lot of power back in the hands of Comcast, particularly as Comcast will connect to Netflix's servers at third-party data centers under the terms of the agreement. Netflix had originally hoped to get its servers inside Comcast's data centers, which would've given Comcast less control over the traffic. Importantly, the hookup also sets the stage for similar deals between Netflix and other major Internet Service Providers, or ISPs. Now that Comcast and Netflix have found common ground, it's possible that a Netflix-Verizon deal will soon follow. A similar agreement with Verizon would be well timed for the telecom giant.

Last month, Verizon celebrated a victory over the Federal Communications Commission regarding net neutrality. The ruling could make it easier for Verizon and other ISPs to charge companies like Netflix for using their networks to send large amounts of data to end users. This should give Verizon added muscle in its negotiations with Netflix. Verizon CEO Lowell McAdam confirmed on CNBC today that Verizon is, in fact, in talks with Netflix and has been for some time now. 

Ultimately, these deals are a big win for Netflix and the major Internet providers, while the middlemen or smaller companies like Cogent have the most to lose. In the long run, this should help Netflix grab new subscribers as its buffering times decrease and customers enjoy a better overall streaming experience.

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Tamara Rutter owns shares of Netflix. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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