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.