Comcast Deal Won’t Harm Netflix’s Business Model

But Transit Deal ‘Is An Acknowledgment Here That Not All ISPs Are Created Equally,’ Netflix CFO David Wells Says

While acknowledging that Netflix’s new transit deal with Comcast will result in some new incremental costs, those costs won’t be enough to alter the video streaming giant’s economic models, Netflix CFO David Well said Monday at the Morgan Stanley Technology, Media & Telecom Conference in  San Francisco.

“The deal, in terms of the cost…it was incremental, but it wasn’t incremental to the point where we’re changing [guidance],” he said, noting earlier that Netflix is sticking with “our guidance on 400 basis points year-on-year margin improvement for the U.S. streaming business. So you are hearing me confirm that nothing has changed there.”

He said it was important for Netflix to do the deal because it ensured that Netflix subs who get broadband from Comcast will get a good experience over the long-term, noting that there were “some choke points around peak usage times” before Netflix inked the deal.

“I think we’re somewhat caught in the middle in terms of being very oriented towards a long-term subscriber high quality of experience, and protecting the innovation on that front, down the road in terms of HD and other high quality high bandwidth uses of entertainment, but being mindful of the environment we’re in today,” he said.

Netflix has held similar interconnection deal discussions with Verizon Communication and AT&T, but don’t expect Netflix to stray from its preferred option – Open Connect, Netflix’s private content delivery network/program that relies on caches installed on the edge of ISP networks.

The Comcast deal “is an acknowledgment here that not all ISPs are created equally,” Well said. “We’re not going to be interested in doing something that’s going to meaningfully change the economics for us on that, but we are interest in doing things that, for the right set of economics, improve that subscriber experience long-term.”

We [Netflix], he said, “still philosophically believe that the consumer is still best served in an environment where a content provider like [us]…doesn’t pay an ISP.”

Netflix and Comcast have not disclosed the financial terms of their deal, which lets Netflix connect its servers directly to the Comcast backbone, but Dan Rayburn,  the executive vice president of and a principal analyst at Frost & Sullivan, offered a “rough estimate” of what Netflix is likely paying.

In a blog post last week, Rayburn estimated that the deal will cost Netflix about $12 million per year, if Netflix needs roughly 3 Tbps of capacity from Comcast to start, and was paying less than 50 cents per megabit per second  -- near the bottom of recent transit pricing that he’s come across.

“Their [Netflix’s] price will be special and they have a multi-year contract and a lot of variables,” Rayburn explained.

Rayburn also pointed out that Comcast has previously noted that less than 1% of its total revenues came from these commercial interconnect deals in 2013. “That means that for all of last year, Comcast got paid between $30M-$60M, which included all of the similar deals they have with Google, AOL and others. So the idea that Netflix would be larger than all of those deals combined makes no sense.”

According to Variety, Wedbush Securities estimated last week that Netflix is paying Comcast between $25 million and $50 million, and suggesting that Comcast had been seeking about $400 million.