Charter Communications provides the highest-performance broadband in the United States for streaming Netflix, CEO Reed Hastings, along with CFO David Wells, wrote in a letter to shareholders discussing Q4 2010 and full year results (see Netflix Tops 20 Million Subscribers).
Hastings and Wells, who said Netflix will post other ISP performance statistics on Thursday, discussed bandwidth issues facing his company, now that Netflix is heavily dependent on last-mile networks for its service. They said the FCC’s network neutrality rules are “a step in the right direction” but that they don’t explicitly address access to an ISP’s network.
“Delivering Internet video in scale creates costs for both Netflix and for ISPs. We think the cost sharing between Internet video suppliers and ISPs should be that we have to haul the bits to the various regional front-doors that the ISPs operate, and that they then carry the bits the last mile to the consumer who has requested them, with each side paying its own costs,” the execs said.
That’s an allusion to the current situation with Level 3 Communications, which is a primary CDN for Netflix. Level 3 is currently in a standoff with Comcast over interconnection fees — the MSO says Level 3 should pay standard CDN rates, while Level 3 says any fees for delivering content to a broadband provider represents a toll that is barred under the FCC’s network neutrality rules (see Level 3 May Test FCC ‘Open Internet’ Rules In Comcast Fight).
According to Hastings and Wells, charging Netflix’s CDN partners “to let in the bits their customers have requested from us… is inappropriate.”
At the same time, they added, content providers like Netflix and ESPN3 should not be able to block access to certain ISPs “unless those ISPs pay the content provider.”
“Hopefully, we can get broad voluntary agreement on this open, regional, no-charges, interchange model,” the Netflix execs said.
Hastings and Wells also addressed the report by Sandvine that at peak times Netflix subscribers in the U.S. represent 20% of peak downstream last-mile Internet traffic (see Netflix Accounts For 20% Of Peak U.S. Internet Bandwidth: Study). “This may or may not be accurate, but it should be noted that because we pay for the data to be delivered to regional ISP front doors, little of this traffic goes over the Internet or ISP backbone networks, thereby minimizing ISP costs, avoiding congestion, and improving performance for end-using consumers,” they wrote.
Finally Hastings and Wells discussed usage-based pricing models for wired broadband providers, calling it “an independent negative issue.”
“We hope this doesn’t happen, and will do what we can to promote the unlimited-up-to-a-large-cap model,” they said.
While ISPs have large fixed costs to build and maintain their last-mile networks, their cost to deliver a marginal 1 Gigabyte — which is about an hour of viewing on Netflix — “is less than a penny, and falling, so there is no reason that pay-per-gigabyte is economically necessary,” Hastings and Wells said.