The news feeds are buzzing about a potential deal that will enable Apple to locate its own servers on Comcast premises. This comes hot on the heels of the announcement of a similar deal being worked on by Netflix and Comcast.
These are big players with deep pockets, so there’s clearly a lot going on. What are these agreements about and why are they happening now?
Let’s start by turning the clock back to January 14th of this year. That day, the US Court of Appeals struck down the FCC’s net neutrality rules, which required ISPs like Comcast, Time Warner Cable and Verizon to treat all Internet traffic equally. The FCC has said that they will not appeal this ruling to the Supreme Court, but instead they will try to rewrite the rules.
While we wait to see what comes of those revisions, we are left with a landmark ruling. The decision re-establishes the position that ISPs are not “common carriers” (think public utilities like electricity or, perhaps more relevant, telephone service), so they are exempt from net neutrality regulations.
There are sound arguments on both sides of this issue. Internet video providers like Hulu and Netflix need an unimpeded mechanism to deliver their content to consumers and provide a good quality of service. These are vital, growing companies that are often held up as examples of the kind of economic growth for which the Internet is the medium.
Cable companies argue that those services utilize a disproportionate amount of bandwidth and infrastructure and therefore should have to pay for their use of those resources. There is some support for that claim. According to one study, Netflix alone is responsible for almost 33% of the Internet’s bandwidth usage. The court’s ruling means that the cable companies have the right to request payment for providing this service.
So, far things seem pretty straight-forward, right?
Of course there’s more to this story. For example, there’s the fact that when Comcast purchased NBCUniversal, they agreed to abide by net neutrality rules until 2018.
In order to understand this we need to go a bit deeper into how content moves. Specifically, you need to know the difference between net-neutrality and peering.
You can think of net neutrality as treating all content flowing to consumers as being the same. Peering, on the other hand, is the practice of creating connections between separate networks on the internet and allowing the exchange of bits in both directions. This is usually handled without a fee because the traffic is balanced – both sides have equal value in the peering.
Right now, Netflix, Youtube, Apple and other streaming media services deliver content to ISPs like Comcast through services called CDNs (Content Delivery Networks). You may have heard of Akamai, Level3 or Limelight, three of the biggest CDNs. When CDNs deliver content to an ISP, we have a situation called one-sided peering, i.e., almost all the bits are flowing in one direction. In this scenario, Verizon, Comcast and other ISPs have very little information that they need to send back to the CDN. Since there is no in-kind data carriage in the relationship, the ISPs charge the CDNs for the one-sided peering services. The CDNs need to pass the costs along to customers like Netflix, Youtube and Apple.
What we see in the deals like Comcast-Apple and Comcast-Netflix are:
1) attempts to improve quality by shortening the path between their content servers and consumers
2) save money by routing traffic around the CDNs, eliminating their cost and solving the peering problem at the same time.
In theory, locating content servers in Comcast’s data centers accomplishes both goals.
But there is another wrinkle to this story.
In mid-February, Comcast announced its intention to purchase Time Warner Cable. Of all the deals on the table for Comcast, this is the big one. If completed, it would significantly boost Comcast market share from 21.7MM cable homes to 32.9MM (less 3MM they would shed) and its broadband subscribers from 20.6MM to 31.7MM.
There are many pushing the FCC and FTC to kill the deal arguing that it would place too much market power in one firm and reduce competition. Comcast points out that there would effectively be no change in the competitive landscape, as it does not compete with Time Warner Cable in any markets. The debate over this deal is getting a lot of consumer, media and FCC attention.
Comcast is clearly eager for its purchase of TWC to go through. With the TWC buyout in the spotlight, both Netflix and Apple see an opportunity to gain a little leverage in their own negotiations with Comcast. Ultimately Comcast knows it’s in the driver’s seat, but appearing to be cooperative in these relatively smaller, but high profile deals with content providers, has potential benefits for its other ambitions.
So both sides see this as their best opportunity to get a deal done, while of course, continuing to pummel each other in the courts, in the press and on their blogs.