Who Should Pay for Netflix?

Posted by: Jim Cicconi on March 21, 2014 at 4:08 pm

I saw Reed Hastings’ blog yesterday from Netflix asserting in rather dramatic fashion (with diagrams) that ISPs should build facilities (he said provide, but those facilities have to be built) to accept all of Netflix’s content – indeed all of the content on the Internet – without charge.  Failure to do so, according to Mr. Hastings, was a violation of “strong net neutrality rules” and bad public policy.  I thought it might be helpful to unpack those assertions so we could get right down to the core of Netflix’s rather radical proposition — that people who don’t subscribe to Netflix should nonetheless pay for Netflix. Here are some undisputed facts upon which everyone should agree.

First, let’s all accept the fact that the advent of streaming video is driving bandwidth consumption by consumers to record levels.  Increased bandwidth consumption and faster broadband networks like our Gigapower service in Austin, Texas (and soon Dallas) are requiring all service providers to drive more fiber into their networks to create the capacity necessary to deliver those services to consumers, whether the service providers are delivering a wireless or a wireline product.  This phenomenon was at the heart of our Project VIP investment announcement in November 2012 and it is true of companies like Cogent, Level 3 and CDNs like Netflix as well.

Second, we should accept that companies must build additional capacity to handle this traffic.  If Netflix was delivering, for example, 10 Terabytes of data in 2012 and increased demand causes them to deliver 20 Terabytes of data in 2013, they will have to build, or hire someone to build, the capacity necessary to handle that increased volume of traffic.  That increase in traffic from Netflix is, by the way, not only the result of a likely increase in online viewing by existing subscribers, but also due to an increase in Netflix’s customer base (it announced a 33% increase in subscribers from 2012 to 2013 – good for Netflix).

Third, if Netflix is delivering that increased volume of traffic to, say, AT&T, we should accept the fact that AT&T must be ready to build additional ports and transport capacity to accept the new volume of capacity as a consequence of Netflix’s good business fortune.  And I think we can all accept the fact that business service costs are ultimately borne by consumers.

Mr. Hastings blog post then really comes down to which consumers should pay for the additional bandwidth being delivered to Netflix’s customers.  In the current structure, the increased cost of building that capacity is ultimately borne by Netflix subscribers.  It is a cost of doing business that gets incorporated into Netflix’s subscription rate.   In Netflix’s view, that’s unfair.  In its view, those additional costs, caused by Netflix’s increasing subscriber counts and service usage, should be borne by all broadband subscribers – not just those who sign up for and use Netflix service.

When Netflix delivered its movies by mail, the cost of delivery was included in the price their customer paid.  It would’ve been neither right nor legal for Netflix to demand a customer’s neighbors pay the cost of delivering his movie.  Yet that’s effectively what Mr. Hastings is demanding here, and in rather self-righteous fashion.  Netflix may now be using an Internet connection instead of the Postal Service, but the same principle applies.  If there’s a cost of delivering Mr. Hastings’s movies at the quality level he desires – and there is – then it should be borne by Netflix and recovered in the price of its service.  That’s how every other form of commerce works in our country.  It’s simply not fair for Mr. Hastings to demand that ISPs provide him with zero delivery costs – at the high quality he demands – for free.  Nor is it fair that other Internet users, who couldn’t care less about Netflix, be forced to subsidize the high costs and stresses its service places on all broadband networks.

As we all know, there is no free lunch, and there’s also no cost-free delivery of streaming movies.  Someone has to pay that cost.  Mr. Hastings’ arrogant proposition is that everyone else should pay but Netflix.  That may be a nice deal if he can get it.  But it’s not how the Internet, or telecommunication for that matter, has ever worked.

Comments (272)

I already pay around 60+ bucks just for Internet and modem for 18Mbps speed. I stream Youtube and Netflix for max of 10-20 hrs a week. I don’t play online games or other streaming. But it takes ever to load and which isn’t a problem when I was a comcast customer. My new location, Uverse is the only option for the Internet. It is very unfair to charge Netflix for good streaming.

Dhana Kumar April 21, 2014 at 4:35 pm

Yes, AT&T should provide/build/will into existence facilities for its customers to access the internet, the entire internet, in exchange for monthly subscription fees from those same customers. That’s how the whole thing works and it’s not a remotely unreasonable demand. The fact that, thanks to services like Netflix, more users want to take advantage of your services and consume greater amounts of bandwidth is not a problem that entitles you to compensation from Netflix.

MZ April 21, 2014 at 6:34 pm

In recent months I’ve had more problems with my Netflix stream on Uverse than ever before. My AT&T Uverse connection is up to around $75 a month. You already are getting paid to deliver Internet service by the consumers. You are attempting to double dip and I hope the FCC will step up and enforce Net Neutrality to protect consumers.

Jamie Dolan April 22, 2014 at 9:11 am

I recently upgraded my Uverse subscription to receive “UP” to 12 Mbps only to get a mere 10 to 15% improvement in network performance which is not enough to have a good Netflix experience. But according to AT&T I have to pay extra money to Netflix in order to recieve real HD video. Well, no way it will happen. I hope Google fiber is rolled out soon in my Kansas City neighborhood to be able to dump this greedy, underperforming, arrogant AT&T.

Polomark April 23, 2014 at 1:59 am

The analogy by this Mr.Cicconi is total rubbish.

When Netflix sends DVDs by email, they have to cover the cost of mail delivery because I do not pay a monthly fee to goes towards USPS mailing service.

In case of the internet, I already pay AT&T for unlimited internet delivery…yet they’re still complaining that Netflix has to cover the costs of data delivery?

Then why the hell am I paying AT&T for monthly ‘internet access’??!

Stay greedy AT&T cause it looks like you’ve even convinced the FCC that the internet should no longer be free and open.

America..the land of the free and home of the brave is neither of that these days. Thx AT&T but please don’t us any more favors.

Ronny Varghese April 24, 2014 at 1:15 pm

If I pay FPL (Florida Power and Light) or any other power company, they do not dictate how much power I use or what I use that power for.

Although with power I am paying a variable amount of money for a variable amount of power, the same argument can be made for internet service (where I am paying a set amount of money for a set amount of bandwidth).

If I pay AT&T or any other ISP, they do not dictate how much bandwidth I use or what I use that bandwidth for.

AT&T and Comcast seem to be of the opinion that because their infrastructure is unable to handle the demand of providing the service they charge their customer for, someone else should foot the bill. This mentality is ludicrous.

It would be like the local gas station telling the gas company that supplies them that *they* need to pay additional pumps because they have an influx of drivers. In reality, the gas station has an influx of drivers, so should therefore pay for additional pumps, or loose customer.

Rob Frawley April 25, 2014 at 12:01 am

If I pay FPL (Florida Power and Light) or any other power company, they do not dictate how much power I use or what I use that power for.

It would be ridiculous for a power company to tell me I can’t use the new LCD TV I bought, or to try and extort fees from different TV providers to allow them to receive power at my house.

Now, the ISP model is slightly different in that they have a max-bandwidth cap with a fixed price, (versus the variable usage/variable price model of power) but the same statement can be said:

If I pay AT&T or any other ISP, they do not dictate how much bandwidth I use or what I use that bandwidth for.

AT&T, Comcast, and Verizon are trying to make it okay to tell me I can’t use a specific web service, and/or extort fees from different web services to allow them to send data to my house.

Rob Frawley April 25, 2014 at 12:19 am

(comment from above split due to length)

It’s insanity, and could be fixed if ISPs were regarded as “utilities” just as phone, water, and power are. Instead, we have an FCC chair that is incapable of accepting responsibility to fix this problem and/or under too much pressure from lobbyist paid for by the ISPs.

AT&T, Comcast, and Verizon seem to think that because their network is congested due to Netflix subscribers, the blame should fall on the content distributors, when in reality, if Comcast cannot provide the services their customers paid for, a connection speed as advertised that can access the internet, *they* are the ones who need to foot the bill and upgrade their infrastructure.

Period.

Rob April 25, 2014 at 12:20 am

Your analogy of neighbors paying for one’s mail service is shaky at best.

I currently pay you a certain sum of money for access to up to 6 Mbps of internet access. Your concern should not be what that content is, whether file access to the cloud, web traffic, video streaming, online gaming, or email access. YOUR CONCERN should be insuring that you have the capacity to provide the bandwidth which I am paying for. If you can’t do that, and feel that you must whine about it, then perhaps I have made a very poor choice in using you for an ISP.

Shane Robinson April 25, 2014 at 2:50 am

To suggest that netflix should pay the freight for delivering streaming media is to suggest that someone sending an email should pay postage. That’s just not how the internet economics functions. Consumers and businesses pay for access to the last mile and they subsidize the cost of the backend/trunk. Everyone pays for what they use. (the only caveat would be if netflix was using consumers network as a CDN which is improper use and as a consumer I’m not sharing my bandwidth for that)

richard bucker April 25, 2014 at 9:27 am

What’s the big deal? We all pay to have channels on that we never watch. Another pet peeve of mine is that Direct TV (maybe Verizon) and the NFL lock us out from watching our favorite teams. When will we have access to our favorite teams. I don’t like the teams in my area at all.

WM MITCHELL April 25, 2014 at 11:33 am

Perhaps you could compete for new subscribers in other markets for increased revenue instead of running mob style protection rackets on the companies who drive customers to your internet service offerings. Any thinking person can see that you want to charge both the content providers and the content users for the honor of sharing information on your toll-road. I hope the internet get classed as a utility soon, and regulated as such.

Jeremy Benjacob-Fuller April 25, 2014 at 4:34 pm

“Netflix may now be using an Internet connection instead of the Postal Service, but the same principle applies. If there’s a cost of delivering Mr. Hastings’s movies at the quality level he desires – and there is – then it should be borne by Netflix and recovered in the price of its service. ” Wow sounds like they are going to try and raise the prices for customers of companies that have any type of electronic delivery so they can get a fat fee. This is also worrying because AT&T might decide to start charging their customers a fee for subscribing to Netflix or another service. One of the reasons I pay for the top internet plan is because of Netflix. This makes me consider switching from AT&T. I don’t want to support a greedy or immoral company.

Lauren Schaper April 25, 2014 at 11:19 pm

All this talk from Ciccini is just basically executive double talk in order to obtain more money from his customers. As mentioned earlier, your company has an agreement with me to provide 6Mbps service and it should not be concerned with the source of that content. What are you going to do if suddenly Gmail is flooded with new customers or YouTube? Are you going to try to charge them fees as well?

With my 6Mbps service, I am lucky if I get 1Mbps Netflix streaming at primetime. So I think what I’ll do is pay of my bill this month. Would that be ok, Mr. Cicconi? It seems to fit your business model rather well. I don’t think your board would be to happy with you, though!

Oh well, I’m sure more people will just do what I just did ten minutes ago . . . Call Comcast, sign up with them and drop your sad excuse for an ISP.

Mark May 1, 2014 at 9:50 am

Dear Mr. Cicconi,

I am a customer of your service (not by choice, certainly), I already pay you a not insignificant amount every month for unfettered access to the internet. It is not the case that your company has to “accept all of Netflix’s content – indeed all of the content on the Internet – without charge”, you are already charging me, and all of your other customers for this. As a result, U-verse revenues go up every quarter, and in 3Q13 those revenues were up 28.1%, your total subscribers were up by 10 million, and your annualized revenue stream for U-verse is $12 billion. Netflix’s popularity is at least in part responsible for some of this growth, but that is not enough for you, is it. I can guarantee to you that if I ever have the option for Google fiber, or any other broadband service, I will drop AT&T like a hot rock, and it is your greed that will be the number one reason.

Mark Laramore May 6, 2014 at 5:08 pm

The problem with the statements made here, are that your customers have already payed you for the service to exist and be good. By subscribing to a service with an explicit capacity and bandwidth, one would expect to receive the content at the performance provided by service. NOT at the performance allowed by the amount of money the content provider has given you. If delivery is an issue, create a higher-price tier (which you have already done) and profit off of that (which you already are!).

Stop playing the middleman and just be happy there is one more reason to subscribe to your service. End of story.

Tommy Tier3 May 24, 2014 at 11:54 pm

LOL, if you cannot keep up with demand then you should not take peoples money. The notion that netflix has to pay you in order to provide a service that you already bill your customers for is extortion and it should be illegal. By throttling netflix you are only hurting your customers and they like me will leave. Sounds like you (not netflix) has a problem, and it is sad that netflix is forced to cought it up or else.

Raymond Delie June 5, 2014 at 3:47 pm

You annoy me. Subscribers pay for a service to have internet access and they can get so much data per month. Why does it matter where that data is coming from? We paid you already. If we want to stream netflix all day long we should be allowed to. If we want Hulu or Amazon streaming we should be allowed to also.

You limit my ability to stream my services so you can try to get more money to pay for your upgrades is pathetic. NO ONE will agree with your moronic stance on making content providers pay more. If it wasn’t for NETFLIX and services like that, people wouldn’t need broadband internet in the first place IDIOT.

T Nguyen June 5, 2014 at 4:10 pm

Who pays for Netflix traffic to be on your network? I do, when I pay my cable bill every month.

You’ve oversold your product, and now you’re trying to cast off blame. It’d be like if delta sold 500 tickets to a 100 seat plane to Florida and then tried to blame Disney World for “crowding up its planes.”

David Harvey June 5, 2014 at 4:51 pm

If I prepurchase (subscribe) 1000 kWh from the electric company each month, they shouldn’t feel like they can charge me more because I actually use all 1000 kWh. Netflix isn’t asking AT&T to deliver broadband content a zero cost, *I* am demanding that AT&T do this because it’s what I’m paying for.

Robcosystems June 7, 2014 at 11:19 am

Well tomorrow is the last day of UVerse for me. Comments like this AT&T executive made show the company has absolutely no clue. Of course Comcast is probably not much better but it’s the only other choice where I live. I’m done with TV too, only Netflix, Amazon Prime and local antenna from now on.

Mike Proctor June 9, 2014 at 9:19 am

Jim Cicconi… you need to get a clue. The problem isn’t with Netflix, its with your own company.

I purposely bumped up to a level of broadband service that your employees ‘claimed’ was good for streaming media (and I specifically named Netflix as an example). AT&T UVerse is simply not delivering what I pay for. When I can go to ANY streaming service and it works perfectly well vs Netflix, something tells me that AT&T is doing something that is bottlenecking the service.

Telling another service that they should increase their rates is the cowards way out. Remember its the customers that help you get a salary!

I’ve already killed my AT&T wireless. I’m only on UVerse because its my only ISP option. If I had a choice, I wouldn’t we commenting!

Derek Newton July 21, 2014 at 3:54 pm

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