handshakeComcast and Netflix confirmed yesterday that they have reached an interconnection agreement – and although the companies did not provide details, sources familiar with the matter told the Wall Street Journal that the agreement calls for Netflix to pay Comcast for traffic sent to Comcast customers.

Netflix had hoped to achieve agreements with major broadband providers that would allow the company to exchange traffic with the providers at no charge – and according to news reports, it was successful in achieving such agreements with some smaller broadband providers, including Cablevision, but other major providers including AT&T, Verizon and Time Warner have refused to make such agreements. Those companies argued that because Netflix sends more traffic to the broadband providers’ end user customers than they receive from the end users, Netflix should pay for traffic exchange. Those payments would help pay for the cost of network upgrades as Netflix traffic levels continue to climb and are consistent with how other traffic imbalances are treated, the broadband providers said.

A source familiar with the matter told Telecompetitor that the new agreement calls for Netflix and Comcast to interconnect at about a dozen third-party data centers and that Netflix would put storage servers in those data centers. Netflix originally hoped to get broadband providers to agree to exchange traffic for free by putting specialized storage servers in or near broadband provider points of presence (POPs) to store popular content, thereby minimizing the amount of traffic that would have to traverse long distances to reach end users.  But major broadband providers didn’t see that as a solution to the traffic imbalance issue and did not want to set a precedent of allowing content providers to put servers in their POPs. Additionally some providers, including Verizon, are accustomed to getting paid for providing content storage capability to website operators.

Events timeline
The Netflix/ Comcast news could be viewed as the logical result of several recent events.

In mid-January, an appeals court ruled that the FCC did not establish that it had the proper authority when it imposed Open Internet (a.k.a. Net Neutrality) guidelines that prevented broadband providers from charging content providers extra for superior connectivity to end users. This was a victory for broadband providers who argued that those guidelines were not needed.

Jump ahead to last week when the Wall Street Journal reported that certain broadband providers were not upgrading connections to network operators that delivered Netflix traffic when traffic on those connections rises to the point where a bandwidth upgrade would normally be made. This was causing some end users to experience degraded Netflix performance, the WSJ said.

I don’t think it’s a coincidence that this news came to light just a few weeks after the appeals court ruling. Although Open Internet guidelines only pertain to the “last mile” connection to end users, the major network operators may have held off on a showdown with Netflix until the ruling was made. The broadband providers probably didn’t press the point sooner because to do so might have weakened their chances of gaining a favorable ruling on the Open Internet challenge.

The Netflix/ Comcast news, coming just days after the Wall Street Journal report, suggests that public perception was that any problems with Netflix were caused by Netflix and not by the broadband provider. This is a logical conclusion if an end user’s network connection works fine with other websites. And now that the precedent with Comcast has been set, there is a strong possibility that Netflix will make similar deals with the other major broadband providers in order to address real or potential public perception problems.