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The next Netflix will suffer thanks to Comcast deal

Netflix Inc. may appear to be the big loser now that it has agreed to pay an annual fee to ensure faster video streaming of its service to customers of Comcast Corp., the U.S. cable giant. But don't judge so fast. The real losers may be companies that don't exist yet.

The Netflix-Comcast deal looks likely to be a harbinger of a two-tier internet, where telcos collect big bucks for allowing premium data speeds to flow between established properties, while small startups who can't afford to pay are forced into a much more crowded data pipeline.

While Comcast's demand for cash seems like a brazen money grab, the deal actually enhances the appeal of Netflix's service. And such payments have been part of the net's smooth functioning for years. ISPs like Comcast and big internet content providers like Facebook Inc. were generally pretty happy to work out smallish deals allowing, say, Facebook's data to flow more directly – and by extension, quickly – to Comcast's customers. You may have noticed that a site like loads more quickly than, say, the website of Malaysian radio station Radio 988 FM. (OK, maybe you haven't.) But that's no accident, nor is it solely a function of physical distance.

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The internet, contrary to popular belief, is not run by any central authority. Picture the internet as a continent like North America. Each country (server) has its own rules about who can enter and exit their land, and some countries are friendlier to their neighbours than others. But there's no single authority that governs all the countries and negotiates the rules of passage through their individual borders. If Comcast decided that it didn't want to pass data from Netflix's servers (ie. movies) to Comcast's customers, it could cut Netflix off entirely, or make crossing the border full of bureaucratic hassles that would slow the process down. With prime-time Netflix content speeds on Comcast reportedly down as much as 27 per cent from October to January, they seem to have chosen the latter option.

Just like many countrys' visa agreements, Google has "peering" agreements with ISPs such as Comcast, or Bell and Rogers, speeding up the time it takes for data to go from Google's servers, to Canadian ISPs, to your internet device. But the rise of bandwidth-hungry streaming video has swelled the size of the deals to the point where smaller players may not be able to compete – especially if they're competing with the ISPs themselves. Until recently, peering agreements were generally settled among network engineers with little fanfare, but that was before cord-cutting threatened to smash cable companies' monopolies on broadcasting video content.

Netflix is upending a lot of business models, including those of telcos such as Comcast and Time Warner Cable Inc. Those two firms' impending merger may have played a role in Netflix's decision to pay up for faster service – fewer competitors to play off each other in negotiations means the popular movie-streaming upstart has less leverage. There's also the need for funds to upgrade the internet's infrastructure in general, which no single ISP is particularly eager to take the lead on, especially since it might speed the shrinking of their cable business – the faster and more reliable services like Netflix get, the more likely Comcast customers are to cancel their cable.

The problems with companies like Comcast extracting extravagant rents from firms such as Netflix and Facebook are obvious. Not only does Comcast get paid twice – once by the content provider and once by its customers – it can instigate a bidding war for bandwidth among huge companies, and choke off speeds for the rest, including entrepreneurial ventures. From a company like Nest (recently acquired by Google) selling internet-enabled thermostats to Apple's Find My iPhone app that uses the internet to locate a lost or stolen device, there are plenty of useful products that depend on the internet. And while internet providers ought to be compensated for the cost of running and upgrading their part of the network, a two-tier internet could restrict innovation by small companies and academics, at a time when the race toward digital innovations has never been more important, or competitive.

The Federal Communications Commission in the U.S. has been steadily working toward establishing rules to protect what chairman Tom Wheeler and others call the Open Internet. Canada should consider following suit – not to protect the profit margins of firms like Netflix, but to make sure the next Netflix has a chance to flourish.

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