Verizon-Netflix Dispute: Is Netflix Using Direct Connections or Not?

There’s a very interesting statement in the letter that Verizon sent to Netflix yesterday demanding Netflix cease and desist from what Verizon said were false claims about Verizon’s network. Verizon sent the letter when Netflix reportedly told its customers that sub-optimal image quality on Netflix content sent to Verizon broadband customers was the result of issues with Verizon’s network.

Netflix reportedly displayed a message on Verizon customer screens saying that the Verizon network was crowded and that as a result Netflix would be streaming content to Verizon customers at a lower image quality than usual.

“Netflix has the ability to directly connect to every broadband network in America should it choose to do so,” wrote Verizon in the letter to Netflix. “Instead… Netflix relies on a panoply of content-distribution and other middle-man networks to reach its customers, trying to lower its costs as much as possible.”

Parsing the Verizon-Netflix Dispute
Verizon stops short of saying that Netflix is using the middle-man networks to reach Verizon instead of connecting directly to Verizon, but that certainly seems to be the implication. Netflix did not immediately respond to an inquiry from Telecompetitor asking if it was using intermediate networks to deliver content to Verizon.

If this isn’t true, it would appear that Verizon is simply attempting to confuse the issue.

If it is true, it would suggest that Netflix is not using the direct connections to Verizon’s network that the two companies negotiated recently. Netflix has been cutting deals with broadband providers to install servers near the edge of the broadband providers’ networks at geographically disperse points around the U.S. The servers give Netflix the ability to store popular content close to end users, thereby enhancing streaming quality by minimizing the amount of content that has to travel long distances to reach end users.

Netflix says some smaller providers have agreed to exchange traffic with Netflix at no charge. But the agreement the company reached with Verizon reportedly calls for Netflix to pay Verizon for delivering content from the Netflix servers to Verizon broadband customers. Netflix also reportedly has reached a similar agreement with Comcast.
Large broadband providers like Verizon and Comcast argue that such payments are in keeping with typical Internet traffic exchange policies, which require Network Operator A to pay Network Operator B if Network Operator A sends more traffic to Operator B than it receives from Operator B.

With Verizon being paid by Netflix, there would appear to be little or no reason for Verizon to provide inadequate connections to Netflix.

Verizon critics say the company views Netflix as a competitor to its own video service and that it wants to put Netflix at a competitive disadvantage. But that assertion doesn’t match Verizon CEO Lowell McAdam’s recent statement that it would be “fine” for customers to shift from FiOS video to offerings such as Netflix.

“The more traffic into the home, the better for us because we’ve got the technology that’s future-proof. We’re in the best position to capitalize on high-volume traffic going into the home,” said McAdam at a recent investor conference.

What Could Be Happening
At the time Netflix made the agreements with Comcast and Verizon, it did so begrudgingly, arguing that it shouldn’t have to pay for the traffic exchange and that the direct connections would improve Netflix viewing quality for Verizon customers.

Verizon’s letter seems to imply that Netflix is not sending traffic through the direct-to-Verizon connections established in the agreement – at least not all traffic — but instead is sending at least some of the traffic through third-party network operators. If those network operators are handing off the traffic to Verizon, traditional Internet traffic exchange agreements would call for them to pay Verizon for any excess traffic sent to Verizon in comparison with what Verizon sends in the other direction.

Netflix potentially could save some money by using a third-party network operator to do the hand-off to Verizon, but that approach could also slow traffic if there are traffic or cost disputes between Verizon and the third-party network operator.

If there are third-party network operators involved, another possibility is that Netflix has simply enlisted the third-party operators to carry traffic from Netflix’s point of origin to the Netflix servers at the edge of Verizon’s network, leaving Netflix responsible for the payments to Verizon. If there were a dispute between Netflix and the third-party operator, there is a possibility that the communications link provided by the third-party operator could be congested — which ultimately could impact the traffic handed from the third-party operator to Verizon.

Verizon’s Demands
Whatever is occurring, Verizon argues in its letter to Netflix that the statements made by Netflix potentially are harmful to Verizon. Those statements “could cause a customer to think that any attempted viewing of video, whether it be Hulu, YouTube or other sites, would yield a similarly ‘crowded’ experience, and he or she may then choose to alter or cease their use of the Verizon network.”

The letter goes on to demand that Netflix provide Verizon with any evidence to support its claims about Verizon network congestion within five days, along with a list of all Netflix customers on the Verizon network to whom Netflix has delivered such messages.