Broadband Cable Association of Pennsylvania


February 19, 2014

Netflix Inc. subscribers have seen a lot more spinning wheels lately as they wait for videos to load, thanks to a standoff deep in the Internet. The online-video service has been at odds with Verizon Communications Inc. and other broadband providers for months over how much Netflix streaming content they will carry without being paid additional fees.

Now the long simmering conflict has heated up and is slowing Netflix, in particular, on Verizon's fiber-optic FiOS service, where Netflix says its average prime-time speeds dropped by 14% last month. The slowdown comes as Netflix is rolling out the new season of its Emmy-winning series "House of Cards."

The dispute involves the plumbing behind parts of the Internet that are invisible to consumers. As more people stream movies and television, that infrastructure is getting strained, intensifying the debate over who should pay for upgrades needed to satisfy America's online-video habit. Those considerations likely will play a role as federal regulators weigh the merger of Comcast Corp. and Time Warner Cable Inc., two of the country's largest broadband providers.

Netflix wants broadband companies to hook up to its new video-distribution network without paying them fees for carrying its traffic. But the biggest U.S. providers-Verizon, Comcast, Time Warner Cable and AT&T Inc. -have resisted, insisting on compensation. Until the standoff gets resolved, the bulk of Netflix's traffic continues to flow across Internet intermediaries, including low-cost carrier Cogent Communications Group Inc. People familiar with Cogent's and Netflix's thinking say the cable and telephone companies are delaying upgrading existing connections. Executives at major broadband providers, meanwhile, privately blame the traffic jam on Netflix's refusal to distribute its traffic more efficiently. Netflix said it carefully plans its routing to make sure customers have the best experience possible. Verizon said it treats all Internet traffic equally. Neither side is budging, people familiar with the matter said, leading to growing congestion.

The bottleneck has made Netflix unwatchable for Jen Zellinger, an information-technology manager from Carney, Md., who signed up for the service last month. She couldn't play an episode of "Breaking Bad" without it stopping, she said, even after her family upgraded their FiOS Internet service to a faster, more expensive package. "We tried a couple other shows, and it didn't seem to make any difference," she said. Mrs. Zellinger said she plans to drop her Netflix service soon if the picture doesn't improve, though she will likely hold on to her upgraded FiOS subscription. She and her husband thought about watching "House of Cards," but she said they probably will skip it. "We'd be interested in getting to that if we could actually pull up the show," she said.

Netflix acknowledges the sluggish performance, though spokesman Joris Evers said that "generally our members are able to watch Netflix, albeit perhaps at a lower quality and with potentially some startup delays at the busiest times of day." Verizon has a policy of requiring payments from networks that dump more data into its pipes than they carry in return. "When one party's getting all the benefit and the other's carrying all the cost, issues will arise," said Craig Silliman, Verizon's head of public policy and government affairs.

The Internet has historically been built on arrangements in which big networks agree to swap each other's traffic without charge, based on the assumption that it will all even out over time. But, America's heavy use of video services like Netflix and Inc., as well as expanded online offerings from TV channels like ESPN, is making these old arrangements less tenable. Netflix's carriers send far more traffic to broadband providers' networks than they take back, sometimes accounting for a third of all North American peak Internet traffic, according to Internet traffic-management company Sandvine Corp. Much of that traffic has flowed via Cogent's network, and it has jumped recently. Within the past four to six months, Netflix traffic through Cogent's connections to one major broadband provider has at least quadrupled, one person familiar with the matter said.

Over the past three months, starting around the time Netflix made super-high-definition video available to all its subscribers, the average speeds of the company's prime-time video streams have slowed for Verizon, AT&T, Time Warner Cable and Comcast subscribers, according to Netflix's data. "I do believe the problem is getting worse," Cogent Chief Executive Dave Schaeffer said in an interview. Either side could take steps to relieve some of the congestion, according to Sandvine technology chief Don Bowman. Verizon could hook up more connections to better handle the traffic coming from Cogent. Netflix could also route video around the jam by distributing it to other Verizon access points. Verizon spokeswoman Linda Laughlin dismissed the notion that either network is involved in a standoff. "To us, this is routine business," she said. "It's not like we don't talk to each other. We're talking to each other all the time."

The pendulum has been swinging toward the carriers in such disputes. In recent years several big Web companies, including Google Inc., Microsoft Corp. and Facebook Inc., have begun paying major U.S. broadband providers for direct connections that bring faster and smoother access into their networks. Netflix, so far, has held out. Last month, a court ruled in favor of Verizon's suit to block the Federal Communications Commission's "net neutrality" rules.

While the business disputes between Verizon and Netflix at the heart of the Internet aren't governed by those rules, which require equal treatment of traffic flowing along the "last mile" to customers, the ruling made clear carriers like Verizon face few limits on the terms they can seek at the negotiating table. Netflix is already eyeing the coming federal review of Comcast's acquisition of Time Warner Cable as an opportunity to push for new requirements on traffic-swapping deals, people familiar with the matter have said. Regardless of which side gives in, "it's going to cost people money," said Sandvine's Mr. Bowman. "They're just waiting to see who blinks first." Wall Street Journal

My (Los Angeles Times) colleague Joe Flint reported this morning that SportsNet LA, the new channel that the Dodgers own but Time Warner Cable manages, hasn't struck retransmission deals yet with the pay-TV operators serving most Angelenos.

The problem, according to Flint's piece, is that TWC is demanding large per-subscriber fees for the channel, which will be the main source of the vast majority of Dodger telecasts. Rival pay-TV operators aren't wild about the idea of having to pay more than $4 per customer, per month for a channel whose sole programming will be Dodgers games and features. My hunch is that this dispute will end just like the one over the Lakers' channel TWC introduced last year: Most pay-TV companies will come to terms with TWC to carry the channel, although Dish Network may pass on it, as it did with the Lakers. That's because the obvious solution to the problem wouldn't actually work, and SportsNet LA has more leverage than programmers do.

The aforementioned obvious solution is for the DirecTVs of the world to carry SportsNet LA on an a la carte basis, which would give non-Dodgers fans the option not to receive or pay for the channel. Some pay-TV operators touted that alternative in Flint's story, but TWC all but ruled it out as an option. Many consumer advocates and some lawmakers like the a la carte approach because it lets pay-TV subscribers pay just for the channels they watch. Networks and cable operators (most of whom operate at least some networks, especially those that carry local sports broadcasts) oppose it, however, because it would drastically change the economics of the pay-TV business. Instead of the current jumble of cross-subsidies that spreads money from popular channels to new and niche ones, an a la carte system would force every channel to pay its own way. Only those with the largest or most dedicated (and free-spending) audiences would survive.

That's how markets work, though, so I have trouble seeing why that would be a bad thing. Yet I also see immediately why it wouldn't work for SportsNet LA. TWC agreed to pay a king's ransom to SportsNet LA every year based on the current economics of the business - the assumption that all subscribers will pay for the channel, regardless of whether they have any interest in baseball. And those fees have already been factored in to the price the Dodgers' owners paid for the franchise, as well as the 1-percenter salaries they've doled out to the likes of Clayton Kershaw.

If SportsNet had to get by just with the fees from those who chose to subscribe, it would have to charge significantly more per month. I don't think a rabid Dodgers fan would balk at paying $120 or more per year for SportsNet, but I'm not sure there are enough of them to make the numbers work. Nor does TWC really want to find out. Once the a la carte horse is out of the barn, it's easy to see how pressure from consumers would lead policymakers to demand a la carte treatment for other types of programming as well.

Which brings us back to leverage. Dodgers fans who want to watch the games at home have only one choice: SportsNet. Major League Baseball sells an online service that streams games, but it blacks out all Dodger games for Web users in Southern California - home and away. So there's no "over the top" TV solution. The only alternative, short of going to a sports bar that has TWC, is to listen to games on the radio (which, I must confess, I do). That's the same kind of bargaining power that helped TWC sell a new and pricey Lakers channel to rival pay-TV operators last fall, when the team seemed poised for mediocrity. With the Dodgers gearing up for another pennant run, it's safe to predict that TWC will be able to repeat that feat of salesmanship with SportsNet LA. Los Angeles Times

Governor Corbett on Tuesday nominated Public Utility Chairman Robert F. Powelson of Kennett Square for another five-year term. Powelson, a Republican who previously served as the president of the Chester County Chamber of Business and Industry, was appointed by former Gov. Rendell in 2008 for an unfinished PUC term and again in 2009 for a full term. Corbett named him chairman in 2011. His current term expires in April. His reappointment requires Senate approval. The PUC is comprised of five full-time members who serve staggered terms. No more than three can be from one political party. Philadelphia Inquirer