Comcast-Netflix Debate Illustrates Implications of Comcast-TWC Merger

Comcast is in the process of acquiring Time Warner Cable which if successful, will create a massive vertically integrated media company with dominant positions in cable TV distribution and broadband access. The merger will face significant regulatory scrutiny and Comcast is doing their best to manage that process. Not everyone is supportive of this merger, and the detractors go well beyond traditional consumer advocate groups who dislike large service provider mergers like this. You can add Netflix to the opposition, as that company recently published some opposition themes in an investor newsletter, much to the irritation of Comcast.

“The combined company would possess even more anti-competitive leverage to charge arbitrary interconnection tolls for access to their customers. For this reason, Netflix opposes this merger,” said Netflix CEO Reed Hastings and CFO David Wells in the investor letter. They are referencing the recent Netflix-Comcast interconnection deal that the two companies entered into to improve Netflix performance for Comcast customers. The deal appears to be working in one respect, with Comcast’s latest ISP rating by Netflix seeing dramatic improvement over the pre-interconnection timeframe.

Regardless, Netflix appears to be positioning itself as a major voice against the Comcast-TWC merger. Senator Al Franken (D-MN) has indicated he intends to invite Netflix’s participation in the regulatory approval debate and Netflix confirmed they intend to take him up on his offer.

Needless to say, Comcast isn’t pleased. In a blog post, Comcast offers a lengthy rebuttal.

“Netflix is free to express its opinions.  But they should be factually based.  And Netflix should be transparent that its opinion is not about protecting the consumer or about Net Neutrality.  Rather, it’s about improving Netflix’s business model by shifting costs that it has always borne to all users of the Internet and not just to Netflix customers,” said Jennifer Khoury, Comcast Senior Vice President, Corporate and Digital Communications in the blog post.

Comcast believes Netflix is purposely confusing net neutrality and interconnection issues. The cable provider argues that their recent interconnection deal with Netflix is no different from the many interconnection deals that the country’s largest ISPs, and most other ISPs, enter into regularly. “There is nothing unprecedented about our agreement with Netflix.  It’s very similar to agreements that companies like Akamai, Yahoo, Limelight, and Google have with companies like Verizon, AT&T, Level 3, Sprint, and Comcast.  Comcast alone has thousands of these transit relationships,” said Khoury.

Netflix would prefer to not have to establish interconnection deals with ISPs if they could avoid it, and raising opposition to the Comcast-TWC deal demonstrates market influence and power, potentially helping their negotiation position. Comcast and other ISPs have long despised Netflix’s impact on their network, with many equating Netflix to getting a “free ride.” Depending on your perspective, there are valid arguments on both sides highlighted by this Comcast-Netflix debate.

This high profile spat demonstrates the significant implications of the Comcast-TWC merger, which include not only broadband access, but how content gets distributed. I suspect we’ll see more entrants into this debate with increasing fireworks.