Netflix (NASDAQ:NFLX) signed a high-speed connection deal with Comcast (NASDAQ:CMCSA), and now, it has signed another one with Verizon Communications (NYSE:VZ). At the same time, Netflix CEO Reed Hastings, and content delivery veep Ken Florance complained loudly about the need to pay "toll fees" just to reach its customers.
Some might call it disingenuous or downright dishonest to do both of these things at the same time. Not me... and here's why.
Paying these fees is like taking your medicine, or obeying a court order. Netflix had no choice but to take this bitter pill, even as it grated against every fiber of the company's open networking principles.
The proof is in the pudding. Netflix subscribers using Verizon and Comcast connections showed steep declines in their average connection speeds for months, despite selling broadband plans with ample bandwidth to handle Netflix streams.
When Comcast got its toll fees and promised to connect to Netflix in a more efficient manner, network speeds jumped more than 50% higher overnight. In the case of Comcast, it's pretty obvious where the bottleneck was -- and that an interconnection agreement removed it.
It's not yet clear that the Verizon agreement will have the same effect, but keep an eye on the Netflix Speed Index for clues. The next update should arrive in a couple of weeks, and the company might make some comments about Verizon speeds at that time. Don't expect a huge spike in Verizon's speed rating until the mid-June update, because Verizon only signed this agreement a couple of days before the end of April. The connection improvement would have to be huge, indeed, if it had the power to move the month-long average speeds significantly.
Medicine is really the best metaphor I can think of for Netflix's high-speed deals. Keep in mind that Comcast's and Verizon's Netflix users could have reached a similar result simply by putting the Netflix Open Connect content delivery platform inside each company's data centers. Netflix provides the service and required hardware for free, and then manages the data flows in a much more efficient manner.
Using Open Connect, Comcast et al would end up with lighter loads on their Internet backbone connections -- but they'd miss out on those direct connection fees from Netflix.
So, Netflix takes its bitter medicine for now, complaining about every foul-tasting pill, while looking for long-term workarounds in some interesting places. These interconnect deals might not be long for this world.