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June 6, 2014

Netflix Inc. stood behind its move to name and shame services like Verizon Communications Inc. for allegedly sluggish online videos, even after the broadband provider threatened legal action over the claims. Verizon General Counsel Randal Milch sent Netflix a cease-and-desist letter Thursday, after the streaming-video company posted blunt messages on subscribers' computer screens blaming Verizon when certain shows stalled out. "The Verizon network is crowded right now," said one of the messages, which a subscriber reposted on Twitter. Netflix said its system had sent messages to subscribers of other broadband companies as well.

"Netflix's false accusations have the potential to harm the Verizon brand in the marketplace," Verizon's letter said, adding that many factors affect customers' Internet performance, including Netflix's own choices about how to manage its network. The letter demanded evidence of Netflix's claims and warned Verizon could "pursue legal remedies" otherwise. Netflix stood behind the messages. "We are trying to provide more transparency," spokesman Joris Evers said. "Verizon is trying to shut down that discussion."

The dispute is another sign of the increasingly contentious world of Internet transit amid debates between Web content producers and big broadband companies over who should bear the cost of shuttling massive amounts of digital traffic. It is especially noteworthy given Netflix struck a deal with Verizon about a month ago to link the companies' networks and ease the flow of Netflix's videos. Netflix will pay for the hookups, an agreement it said it reached reluctantly because Verizon wasn't allowing other low-cost routes into its network to expand.

The connections are just getting set up. Data from network research firm Renesys show the two networks already set up a test connection to carry video in the Dallas area, but major networks typically need links in dozens of cities to deliver traffic effectively. Verizon said it plans to fulfill the terms of its agreement with Netflix over the next few months. "We are working on the first 13 cities, and we do plan to have everything done in 2014," said Verizon spokesman Bob Elek. "All of this kerfuffle that is going on isn't affecting that."

Netflix earlier this year also agreed to pay Comcast Corp., the nation's largest broadband provider, for a similar direct connection into its network after months of their shared customers seeing poor streaming quality. Netflix says it is testing ways to let its subscribers know "how their Netflix experience is being affected by congestion on their broadband provider's network." It says such notices aren't limited to Verizon customers and that it is testing the notifications for "a couple hundred thousand" people across several other U.S. broadband providers as well.

The notices, which Netflix started showing to customers early last month, only appear to customers streaming via computers—not through other devices such as Blu-ray players, gaming consoles or Internet-connected TVs. Netflix says it sends the messages when a customer's streaming runs into high congestion, drops to a low average bitrate and results in a high percentage of video buffering. Netflix says it may modify its methodology as it continues the test. "There is no basis for Netflix to assert that issues with respect to playback of any particular video session are attributable solely to the Verizon network," Verizon's letter said. Wall Street Journal; more from Bloomberg

The big broadcast TV networks are moving to get paid for commercials that viewers see even if it is a week after they originally air, a development with major implications for the roughly $70 billion TV advertising marketplace. In a major shift, all the major networks—NBC, ABC, Fox and CBS—have reached agreements with a major media-buyer, GroupM, to change how audiences are counted for the purposes of advertising deals, people familiar with the matter say. Under the pacts, deals for prime-time TV shows will be based on seven days of commercial viewing after shows air, a system known as "C7," the people say. Under the current "C3" model that has been the standard for several years, advertisers pay based on three days of commercial viewing.

The networks, angling to boost ratings and revenue, have been advocating a switch to C7, arguing that viewers are increasingly watching shows on DVR and video-on-demand several days after their air. There is some evidence to back up their claims. ABC's "Modern Family" gets a nearly 11% increase in commercial ratings when seven days of delayed viewing are counted, compared with three days of viewing, while CBS's "The Big Bang Theory" gets an 8.1% bump, according to data from TiVo. Fox has highlighted how shows like "Sleepy Hollow" and "The Mindy Project" would benefit from a shift to C7. "With so much of our audience choosing to watch on their own schedule, our business needs to evolve as well," Toby Byrne, Fox's ad sales chief, said during the company's annual presentation of coming shows to advertisers last month. "For our business today and for tomorrow, we need to have a meaningful discussion about C7." NBC is controlled by Comcast Corp. , ABC is a unit of Walt Disney Co. , CBS is a unit of CBS Corp., Fox-parent 21st Century Fox and Wall Street Journal-owner News Corp were part of the same company until last year.

Though a smattering of C7 deals have already happened in the past year with individual marketers, the industry was waiting for a major media buyer like GroupM to jump in and give the changeover some real momentum. GroupM, a unit of WPP PLC, is the same firm that instigated the last major shift in the TV advertising business, when it moved from using live ratings to C3 for its dealings with networks. Citing data from the research firm RECMA, GroupM says it represents 25% of the U.S. TV ad market.

Still, it is unlikely that the entire advertising market will follow GroupM's lead this time around. For many marketers there is little incentive to move away from the "C3" standard: viewers are already watching their TV ads after the third day, so moving to C7 means paying for what they are now effectively getting free. Some marketers, meanwhile, have time-sensitive ads—like movie studios promoting new releases and retailers hawking holiday sales events. They have little interest in running a spot for more than three days. Several media buyers say they are resisting changing to C7 now, in part because they believe they have the upper hand in ad negotiations with the major networks, most of which are struggling with ratings declines. "Did someone really agree to pay for C7 in a buyer's market? Really?" veteran ad buyer John Muszynski tweeted after reports of the GroupM deal surfaced in Variety and Advertising Age.

Broadcast networks are in the process of selling the bulk of their inventory for the TV season starting in September through their annual "upfront" negotiations with advertisers. The pace of deal-making in this year's upfront process has been slow and many ad buyers have yet to make ad commitments. Magna Global, a research and ad-buying unit of Interpublic Group of Cos., predicts that spending on broadcast TV ads is expected to drop by between 2% and 3% this year while money going to cable channels could rise between 4% and 5%.

Broadcasters may not see a huge payoff immediately from a switch-over to C7, since they will likely have to cut prices for their ads to encourage ad-buyers to make the transition, industry experts say. Indeed, as part of the agreements with broadcasters, GroupM's clients will be given a discount on the prices they pay for ad time in this upfront, according to people familiar with the matter. "Ultimately I do see the business going onto a C7 metric," Rino Scanzoni, chief investment officer at GroupM, told The Wall Street Journal in May. "It's a matter of working out the economics initially to make the transition one that's acceptable to both sides."

New York regulators plan to take public comments at upcoming hearings on the planned merger between Time Warner Cable and Comcast. The Public Service Commission says it will determine whether the union is in the best interest of New York customers and the state. Hearings are planned June 16 in Buffalo, June 18 in Albany and June 19 in New York City. Both companies provide digital cable television, broadband internet and VoIP telephone services. Time Warner Cable has roughly 2.6 million subscribers in New York, and Comcast 23,000. The merger deal, announced in February, is currently undergoing a federal review. The companies must receive the state's approval, federal approval and approval in the other states where they operate. Associated Press

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