Netflix's War On Mass Culture
(By Tim Wu, New Republic, 04 December 2013)
Given all
the faces you see glued to computers, tablets, and cell phones, you might think
that people watch much less television than they used to. You would be wrong.
According to Nielsen, Americans on average consume nearly five hours of TV
every day, a number that has actually gone up since the 1990s. That works out
to about 34 hours a week and almost 1,800 hours per year, more than the average
French person spends working. The vast majority of that time is still spent in
front of a standard television, watching live or prescheduled programming. Two
decades into the Internet revolution, despite economic challenges and cosmetic
upgrades, the ancient regime survives, remaining both the nation’s dominant
medium and one of its most immutable.
And that’s
why what Netflix is trying to do is so audacious. For the past two years, the
Silicon Valley company has been making a major push into original programming,
putting out an ambitious slate of shows that have cost Netflix, which had
profits of $17 million in 2012, hundreds of millions of dollars. Because of the
relative quality of some of those series, such as “House of Cards” (a multiple
Emmy winner) and “Orange Is the New Black,” they’ve been widely interpreted as
part of an attempt to become another HBO. Because every episode of every show
is made available to watch right away, they’re also seen as simply a new twist
in on-demand viewing. But in fact the company has embarked upon a venture more
radical than any before it. It may even be more radical than Netflix itself
realizes.
History has
shown that minor changes in viewing patterns can have enormous cultural
spillovers. CNN can average as few as 400,000 viewers at any given moment—but
imagine what the country might be like if cable news had never come along.
Netflix’s gambit, aped by Amazon Studios and other imitators, is to replace the
traditional TV model with one dictated by the behaviors and values of the
Internet generation. Instead of feeding a collective identity with broadly
appealing content, the streamers imagine a culture united by shared tastes
rather than arbitrary time slots. Pursuing a strategy that runs counter to many
of Hollywood’s most deep-seated hierarchies and norms, Netflix seeks nothing
less than to reprogram Americans themselves. What will happen to our mass
culture if it succeeds? Vladimir Nabokov
believed that humanity’s highest yearning ought to be to leave behind any
desire to be up-to-date, to be unconcerned with what is happening now. As he
put it in his notes to Pale Fire: “Time without consciousness—lower animal
world; time with consciousness—man; consciousness without time—some still
higher state.”
The business
of entertainment has not generally shared Nabokov’s view. It values timeliness
above all, creating a hierarchy so fundamental that it resembles natural law:
New is better than old, live trumps prerecorded, original episodes always beat
reruns. That’s overwhelmingly obvious in sports and news, and accounts for the
manufactured ephemerality of reality and talent shows. Yet it is also implicit
in dramas and sitcoms, with their premieres, finite seasons, and finales. The
rule holds fast for film as well. From its opening weekend in major theaters, through
nearly two years of “release windows,” a movie drifts downward through
airlines, hotels, DVDs, cable and network television, and the Internet,
decaying in perceived worth.
The desire
to be current is in some sense human nature. But when it comes to viewing
choices, it also arises from the specific history and revenue model of the
entertainment business. In its early years, television was necessarily live,
for the technology of broadcasting preceded effective and cheap recording
technologies. The first popular shows, like “Amos ‘n’ Andy,” were short serial
dramas designed to keep audiences on a fixed daily schedule, each episode
ending with some aspect of the plot unresolved. If you missed an installment,
you missed it forever and might lose the big story in the bargain.
In normal
markets, the most popular products aren’t necessarily the most profitable
(think Louis Vuitton). But on network television, where the prices charged for
advertising depend on ratings, comparative popularity matters a lot. If some
sense of newness or urgency can get viewers from the desired demographic to
tune in to one channel rather than another, that can make the difference
between success or failure. The upshot is a business whose highest ambition is
to get enormous groups of people watching the same thing at the same time:
“event television.”
Atop this
eventocracy are productions like the Super Bowl or the Oscars, which by
managing to grab much of the nation therefore command the highest ad rates,
about $4 million and $2 million, respectively. That compares with the $77,000
per spot that “30 Rock,” a smart but under-watched series, commanded at the end
of its run. The premium on audience size orients creative decisions toward an
ideal embodied by a Jay Leno monologue, avoidant of controversy or anything too
weird or challenging. TV shows, in the words of economist Harold Vogel, are
“scheduled interruptions of marketing bulletins.” And television itself, as
Walter Lippmann, a founder of this magazine, put it, has long been “the
creature, the servant, and indeed the prostitute, of merchandising.”
The
Internet—while it has its own desires for attention—has always been a different
animal. One way or another, it tends to thwart efforts to gather lots of users
at the same time and same virtual place. The first “YouTube Music Awards,”
stuffed with celebrities, attracted 220,000 live viewers, compared with more
than ten million for MTV’s version. During the men’s 100-meter-dash final at
the London Olympics, Web viewers groaned as NBC’s Web video lapsed into “buffer
mode.”
Online,
people are far more loyal to their interests and obsessions than an externally
imposed schedule. While they may end up seeing the same stuff as other viewers,
it happens incrementally, through recommendation algorithms and personal
endorsements relayed over Twitter feeds, Facebook posts, and e-mails. New
content is like snowfall, some of it melting away, some of it sticking and
gradually accumulating. The YouTube Music Awards may have been a bust as a live
show, but within two weeks, the production had racked up 3.5 million views.
When I spoke
with Netflix CEO Reed Hastings in August, I noticed a subtle but significant
shift in nomenclature: He had begun to refer to the company not as a tech
start-up or a new media venture, but instead as a “network.” To claim that
mantle is not a trivial thing. The National Broadcasting Corporation (NBC)
pioneered our understanding of what the concept means back in 1926, when it
partnered with AT&T to create the first lasting national broadcast network.
Until then, American home entertainment had been necessarily local—radio
stations, technologically, only reached their host city or community. The
founding idea of NBC was to offer a single, higher-quality product to the whole
country. It was an idea of a piece with the late 1920s and 1930s, before
fascism became unfashionable and nationalism was all the rage. A mighty and
unifying medium fit with an era during which Fortune would praise Benito
Mussolini as presenting “the virtue of force and centralized government acting
without conflict for the whole nation at once.” The national network was an
effective way to put people on a common daily cultural diet.
Claiming
network status was also a bold move for Netflix just based on its track record
alone; not so long ago, it was a struggling DVD rental company whose cachet
came from its distinctive red envelopes and pretty good website. One wonders
how much the shift really was planned, a question on which Hastings and chief
content officer Ted Sarandos disagree. “When I met Reed in 1999,” Sarandos told
me, “part of our first conversations were about the potential for original
programming.” Hastings demurs, calling that “generous.” “What was planned all
along was really just the evolution to streaming,” he says, “and thus the name
of the company: Netflix, not DVDbymail.com.”
Netflix’s
transition from delivering movies and TV shows through the U.S. Postal Service
to beaming them over high-speed connections began in 2007 and is a well-known
story. Less known is how Netflix found its way into the content business, a
risky move that has embarrassed many tech firms. In the ’90s, Panasonic, a
capable-enough maker of camcorders, acquired a precursor to Universal, only to
have to jettison the entertainment studio a few year later. Around the same
time, Microsoft, then at its most flush, blew billions creating content that
for the most part vanished so fast that not even a Bing search could find it
today.
But Netflix,
without grabbing many headlines, had actually spent a long time preparing for
its current chapter. While it is headquartered in Silicon Valley, the company
opened an office in Beverly Hills in 2002, a bid to achieve a certain
California bilingualism. Sarandos, who has overseen that southern outpost,
spent his formative years working in a strip-mall video-rental shop and is
upbeat and easy to talk to. He is a fluent Southern Californian, unlike
Hastings, who’s known for his impatience with slow or muddy thinkers. Throughout the early 2000s, Sarandos
experimented with small content deals. Once, while attending a software
convention, he ran into a guy named Stu Pollard who had self-financed a
romantic comedy named Nice Guys Sleep Alone, the many extra copies of which he
now had stored in his garage. “He gave
me his movie, and he said, ‘I’ve got ten thousand of these if you’re
interested,’ ” Sarandos recalls. He watched the film, decided it wasn’t
terrible, or at least “on par with a lot of the romantic comedies we were
distributing.” Sarandos agreed to take 500 discs, pursuant to a revenue share,
creating what might be called the first Netflix semi-exclusive.
Sarandos’s
acquisitions budget, originally $100,000 a year, swelled as Netflix became a regular
at Sundance and other film festivals. Under the name Red Envelope
Entertainment, Netflix bought the rights to independent films such as Born into
Brothels, a 2004 documentary about the children of Calcutta prostitutes (it won
an Academy Award), and Super High Me, a documentary about the effects of
smoking weed heavily for a month (sperm count and verbal SAT scores both went
up; math scores suffered). When it acquired these films, Netflix added them to
its own catalogue but did not keep the content entirely for itself, instead
trying to distribute it as widely as possible. For Super High Me, that included
sponsoring viewing parties for stoners. In
2008, after acquiring about 115 films, Netflix folded Red Envelope and let go
of several employees. Sarandos, at the time, gave good reasons for Netflix’s
retreat. “The best role we play,” he said, “is connecting the film to the
audience, not as a financier, not as a producer, not as an outside distributor
or marketer.” It was the statement of a tech company sobering up.
Yet just a
few years later, Netflix abruptly reversed course again. The company had
finally passed 20 million subscribers. To thrive over the long term, it would
need many more. At the same time, it now had enough scale to try a different
way of using new content to lure them. “When a big company does a little bit of
music, or a little bit of video, and it’s not essential to their future, it’s
almost assured that they won’t do it well,” says Hastings. “It’s a dabble.” To
make its first major original series, Netflix shelled out $100 million. It
would not be dabbling.
In 2011,
when independent studio Media Rights Capital shopped the American remake of a
modestly successful British political drama named “House of Cards,” Netflix
didn’t bother to attend its presentation to the networks. Instead, Sarandos got
in touch with David Fincher, the Oscar-winning director of The Social Network,
who’d been tapped to make the show. “We want the series,” Sarandos told him,
“and I’m going to pitch you on why you should sell it to us.” Aware of the
challenge of convincing a famous auteur to bring his talents to a medium more
commonly known for cat videos, Netflix promised a lot: Fincher, though he’d
never directed a TV series before, would enjoy enormous creative control. And
rather than putting the show through the normal pilot process, the company
would commit to two 13-episode seasons up front. It was nearly as aggressive
with “Orange Is the New Black,” ordering a second season of the show—a
subversive drama set in a women’s prison, featuring a notably motley
cast—before the first was even available.
If those
were big gambles, they were also calculated ones. Whatever it calls itself,
Netflix still has tech-company DNA; its game, in part, is data. Much more so than
a network that reaches viewers through a third-party cable operator like
Comcast or Time Warner, it knows what its customers actually like and how they
behave. To the consternation of entertainment reporters, Netflix never reveals
just what its numbers say (or anything resembling ratings), but Sarandos says
its process for “House of Cards” worked roughly like this: “We read lots of
data to figure out how popular Kevin Spacey was over his entire output of
movies. How many people actually highly rate four or five of them?” Then his
team did the same for David Fincher. If you liked The Social Network, The
Curious Case of Benjamin Button, and Fight Club, “you’re probably a Fincher
fan—you probably don’t know it, but you are,” he says. Once the company has a
sense of how many fans are out there, it can “more accurately predict the
absolute market size for a show.” And when you can do that, you don’t have to
worry about pandering to, or offending, the masses.
Right now,
American viewers are averaging only about 45 minutes of Internet-streaming
video per week, a blip in comparison with total television intake. Given that
audiences trained for decades to respond to event-driven television, how
realistic is it to expect more viewers to shift from traditional TV? John
Steinbeck offered one answer: “It’s a hard thing to leave any deeply routined
life, even if you hate it.” Any historian of consumer technology would add that
machines change much faster than people.
Television in particular moves so slowly that the last time the concept
of the network really came up for grabs was the late ’70s. That’s when Ted
Turner (the Turner Broadcasting System), Pat Robertson (the Christian Broadcast
Network), and the founders of HBO successfully used satellites to begin to beam
programming to cable subscribers. The ensuing frenzy resulted in the launch of
a dozen networks, including ESPN, MTV, CNN, Discovery, and Bravo. Most of those
channels are still around, not necessarily because of the strength of their
programming, but because the reigning content hierarchy has been so entrenched.
Netflix
believes it has a powerful factor in its favor as it tries to change viewers’
habits. “Human beings like control,” says Sarandos. “To make all of America do
the same thing at the same time is enormously inefficient, ridiculously
expensive, and most of the time, not a very satisfying experience.” There is a
freedom achieved when your options extend beyond that night’s offerings and the
limited selection of past episodes that networks make available on demand.
Specifically, it’s the freedom to only watch television you really enjoy. The
crude novelty factor that compels people to try “Whitney” or “Smash” ultimately
yields a lot of disappointed and frustrated viewers. An old episode of “Freaks and
Geeks” or “The West Wing” might in fact be more worth your time—a message
Netflix has pressed in a recent ad campaign promoting its collections of
classic series and cult hits. Eventually—or so goes the strategy—people won’t
be able to imagine having their options defined by a programming grid. Not
coincidentally, Netflix has been vying with Amazon to become the premiere
source of streaming series for young children, for whom having to wait for new
episodes of their favorite shows to air is unfathomable.
While
Netflix’s first few original series have been aimed at connoisseurs of high- or
at least upper-middle-brow fare, its philosophy might be best captured by its
co-production of “Derek,” a show that skews toward less sophisticated
sensibilities. “Derek”is a Ricky Gervais sitcom revolving around the staff and
residents of a small nursing home in England. The show, to put it mildly, does
not have the usual indicia of widespread appeal. It might be described as the
opposite of “Baywatch”—the setting is bleak, the stars ugly and often annoying,
the dialogue sometimes incomprehensible to American ears.
And then
there’s Gervais himself. He did serve for three years as the host of the Golden
Globes, a paragon of event programming and water-cooler culture. Yet in that
role, he was deemed a failure, his humor too edgy and offensive. Selling the
masses on a series featuring Gervais playing the part of a weird man with
greasy hair who likes hamster videos would be a losing proposition—but that’s
not what Netflix is doing. To the company, it doesn’t matter if you’ve never
heard of the show, or even know anyone who has. All that matters is that it
wins the approval of Gervais loyalists, whom, the data must show, are a large
enough Netflix population to justify the investment. Similarly, the names Luke
Cage and Jessica Jones may mean nothing to you, but they do to comic-book fans,
which is why Netflix just worked out a deal to create series based on them and
two other Marvel superheroes.
Netflix’s
transformation would of course be impossible without the path blazed by premium
cable. HBO pioneered the subscription-fee model (though it collects from cable
companies rather than directly from consumers) and its success made possible
the specialized programming on other premium networks, like AMC and the rest.
The DVD box set gave hard-core enthusiasts the first taste of the binge-viewing
that is a Netflix trademark. The company’s achievement is to bring it all
together and target the entire TV-watching population—not just a few selected
die-hards, but every individual based on his or her own interests and
obsessions.
And from
that a picture of the not-too-distant TV future emerges. What remains of live
programming is reserved for sports programming, breaking news stories, talent
contests, and the big awards shows. Nearly all scripted shows become streaming
shows, whether they are produced or aggregated by Netflix or Amazon, CBS or a
(finally unbundled) HBO—or even an unexpected entrant such as Target, which
recently launched a Netflix competitor. The new networks compete based on their
ability to make the right original programming decisions and secure the best
old shows, as well as the prescience of their recommendation engines. But
ultimately they’re all just selling access to piles of content to be perused at
the viewer’s desire. Oddly enough, it’s a vision that actually makes television
a lot more like the rest of retail. Or, more specifically, not unlike the
old-style video-rental stores where Sarandos started his career, but
super-sized for a new era.
Through the
sheer number of hours watched and the dictation of evening routines—not to
mention the way people orient entire rooms around the shiny screens placed at
the center of their homes—network television played a singular role in creating
American mass culture over the last 60 years. It now does the same in
sustaining its vestiges. In the absence of a generation-defining genre—the rock
of the 1960s, the rap of the 1990s—today’s pop hits flit through radio dials
and iTunes playlists, catchy but ephemeral. Blockbuster movies and books are
few these days, and the windows during which they command widespread attention
brief. But television, despite the fragmenting influence of the Web and
proliferating cable channels, continues to bind us more than any other medium.
That’s why, should Netflix and the other streamers even partially succeed at
redefining the network as we know it, the effects will be so profound.
If modern
American popular culture was built on a central pillar of mainstream
entertainment flanked by smaller subcultures, what stands to replace it is a
very different infrastructure, one comprising islands of fandom. With no
standard daily cultural diet, we’ll tilt even more from a country united by
shows like “I Love Lucy” or “Friends” toward one where people claim more
personalized allegiances, such as to the particular bunch of viewers who are
obsessed with “Game of Thrones” or who somehow find Ricky Gervais unfailingly
hysterical, as opposed to painfully offensive.
The
baby-boomer intellectuals who lament the erosion of shared values are right:
Something will be lost in the transition. At the water cooler or wedding
reception or cocktail party or kid’s soccer game, conversations that were once
a venue for mutual experiences will become even more strained as chatter about
last night’s overtime thriller or “Seinfeld” shenanigans is replaced by
grasping for common ground. (“Have you heard of ‘The Defenders’? Yeah? What
episode are you on?”) At a deeper level, a country already polarized by the
echo chambers of ideologically driven journalism and social media will find
itself with even less to agree on.
But it’s not
all cause for dismay. Community lost can be community gained, and as mass
culture weakens, it creates openings for the cohorts that can otherwise get
crowded out. When you meet someone with the same particular passions and
sensibility, the sense of connection can be profound. Smaller communities of
fans, forged from shared perspectives, offer a more genuine sense of belonging
than a national identity born of geographical happenstance.
Whether a
future based fundamentally on fandom is superior in any objective sense is
impossible to say. But it’s worth keeping in mind that the whole idea of one
great entertainment medium that unites the country isn’t really that old a
tradition, particularly American, nor necessarily noble. We may come to
remember it as a twentieth-century quirk, born of particular business models
and an obsession with national unity indelibly tied to darker projects. The
whole ideal of “forging one people” is not entirely benevolent and has always
been at odds with a country meant to be the home of the free. Certainly, a culture where niche supplants
mass hews closer to the original vision of the Americas, of a new continent
truly open to whatever diverse and eccentric groups showed up. The United
States was once, almost by definition, a place without a dominant national
identity. As it revolutionizes television, Netflix is merely helping to return
us to that past.
http://www.newrepublic.com/article/115687/netflixs-war-mass-culture?wpisrc=nl_lunchln
Netflix
Takes On Hollywood With Original Shows
(By Cecilia Kang,
Washington Post, 02 February 2013)
Tech giant
Netflix is going Hollywood. As the dominant paid provider of streaming online
videos, it now sees making its own videos as the key to its future. This big bet — and an expensive one — turns
the ever-evolving company into a chief rival of HBO and major television
networks. Chief executive Reed Hastings
was in Washington last week to promote Netflix’ s $100 million Web-only series
“House of Cards,” starring Kevin Spacey. He dropped by The Washington Post to
talk about the future of television entertainment and the tensions
he’ll have to sort out with his biggest frenemies — networks and the telecom
providers that deliver Internet services like his to homes.
The company is
regaining
steam on Wall Street after a stock freefall last year, following the
embarrassing mistake of prematurely canceling its DVD mail-order business.
Hastings changed his mind and announced that the company will keep that service
for at least a decade, he says now — or as long as the Postal Service survives.
Here’s an edited version of the discussion:
What’s in
store for the next couple of years? Will you look more like NBC Universal or
YouTube?
We want more
members, more content and to serve more countries. The people at YouTube have
that space figured out; it’s all ad supported. For us, we will license more
movies, television shows and create more original content.
Why do
you do original content? For buzz?
For
subscriber enjoyment and the buzz. If there is more buzz, more people join.
But it
seems awfully high-risk.
That’s how
you differentiate. With on-demand, you can have doubles and not a home run. But
networks can’t. That’s why they have to do pilots and pay for overhead. We
don’t. We have incredible shows for the Hindi community and other audiences.
The whole notion of what is a hit is different. We are about figure out what
people are passionate about. We aren’t trying to program to the lowest common
denominator. Linear TV has had a one-to-many broadcast, whether its NBC or HBO.
We have more creative latitude.
What will
the the market look like in five years?
Linear TV
today will be like landline telephone. You’ll still have it. Many people will
pay for it but won’t use it very much. The most communication will go to the
mobile phone. Electronics will get better. There will be an iPhone 9 or iPhone
10, and it will be impossibly thin and have amazing resolution, and we’ll have
incredible bandwidth.
We’ll have
4K TVs that will be cheap and have large screens. You will control your TV with
your smartphone. So the smartphone will be the remote control for your car,
give you diagnostics. It will open your house, and it will be your remote
control for your life, too. You’ll buy channels like Netflix, Hulu and others
on that remote control phone. And whatever screen, whether upstairs, downstairs
or in a hotel, will recognize you from your mobile phone-centricity.
Who will
own the
pipes for Internet connections?
For
residential, cable will have their own, fiber will have theirs, too. There will
be radio stacks and different providers. The question is how much speed will
there be and how much competition.
Do you
think we will get detached from the monopoly cable provider?
Billing and
bundling will be tricky. I don’t know to what degree the bundle will break up.
More likely than not. HBO in the Nordics is competing as a stand-alone [offering].
The question is if the [cable providers] can handle the disruption.
Will your
move into content push those changes?
I don’t
think so. But we are becoming more like HBO faster than they are becoming like
us. We were an Internet company, and then we became a content company. Maybe in
the long run, there will be two great companies battling it out, and that’s
fine. That’s good for everyone.
Talk
about your relationship with the telecom ISPs. What are pain points in that
business relationship ?
Right now,
it’s not really painful at all. The customer experience is great. You click and
you watch. In the long term, there is potential conflict because we’re
capitalist and they’re capitalist and everyone wants to expand their profit
pool.
ESPN and HBO get a percentage of
total cable cost. Cable costs 70 bucks and ESPN gets like 6 bucks of that.
So we look at it and say, “Hey, there’s a $60
ISP bill that is hugely profitable for ISPs. Maybe we should get a part of that
because [consumers] are getting broadband to get Netflix.”
They say, “One-third of our bits, our costs,
are Netflix, and so Netflix should pay part of our costs.”
There will be some battle around there. Our
basic view is that there is a safe medium that avoids all the [television]
carriage battles that we’ve had over 15 years.
What are
you doing to that safe medium?
We have Open
Connect, how we connect to their networks. It’s servers that have all our
discs. We bring the servers and connect them to their networks. We have to
carry the bits to where they want, to each metro area, at our cost. The ISPs
carry them. And we don’t charge them, and they don’t charge us.
Are they
happy?
Small ISPs
are thrilled. But the big guys, they are used to better deals than that and
they don’t want smaller guys to have the same deal.
Consumers want a change in their cable
relationship. No one is mad at the equipment makers. They don’t say Samsung is
doing things wrong. It has nothing to do with the electronics. It has to do
with service side. What’s hard is that businesses are interlocked between
cable, satellite and long-term contracts [with networks]. They sign up for 10
years for ABC stuff and ESPN.
But we are
changing that. We signed a deal with Disney where movies like Pixar and Lucas
Films will only be available on the first pay window on Netflix starting in
2016.
Does it
make sense to move in Apple’s direction and become a gateway for how users get
video content — through a set-top box?
Consumers
want a box with multiple services. They want Hulu and YouTube and ESPN. We’re
trying to be like Google Maps, on every device.
What’s
your relationship like with Amazon?
Great. We
are doing great work with Amazon Web services. We compete on the retail side,
bidding against each other for NBC and ABC and other networks. Competition is
healthy. Different providers will have different content.
Will you
every advertise on Netflix?
No. Our
position is like HBO, to be a commercial-free network.
Why not?
You already have a ton of information about users. You could target ads to them,
too.
It depends
on what you are trying to attract. Part of our proposition, like HBO, is to
differentiate ourselves in a way so that we’re worth paying for. Being
commercial-free is part of that proposition.
How much
longer will you keep mailing DVDs?
It depends
on how quickly the Postal Service has problems. Taxpayers soon will be bailing
out the post office to a huge number. So we’ll stay in that business for at
least a decade, because people still need the post office to deliver Social
Security checks, medicine, etc.
Will you
take user-generated content? Sports?
Don’t think
so. YouTube is already so good at it, and it’s not part of our brand. Same
thing with sports; we don’t think we will do that. Movies, TV shows are the
main places we are focusing and adding more content and getting better. Knowing
that you are in middle of a series and going home to watch the next episode of
“Lost” or “Mad Men”is a good feeling. We want you to feel that all the time.
What do
you need from Washington?
There is this
ISP battle stuff. In an ideal case, we need nothing at all because it will all
be worked out commercially. AT&T and Comcast in particular are very
sophisticated with their regulatory mechanism. Yes, we compete with them on the
video side. but we are also one of the main reasons people get broadband.
What
makes you think you are driving broadband adoption?
In peak
traffic on a Friday, 30 percent of it is Netflix.
But ISPs
could say you gobble up so much bandwidth because your service is so
bandwidth-intensive.
We don’t
gobble anything. Their users choose to watch us. They sell a service to their
members, and their members are using it.
What has
surprised you the most about Washington?
How hard
immigration is. In 1998, I worked hard on H-1B visas, and it’s been a long and
hard-fought battle. I’m optimistic something will pass this year.
Comcast’s
Deal With Netflix Makes Network Neutrality Obsolete
By Timothy B. Lee, Washington
Post, 23 February 2014)
(Paul Sakuma / AP)
For the past
two decades, the Internet has operated as an unregulated, competitive free
market. Given the tendency of networked industries to lapse into monopoly—think
of AT&T's 70-year hold over telephone service, for example—that's a minor
miracle. But recent developments are putting the Internet's decentralized
architecture in danger. In recent
months, the nation's largest residential Internet service providers have been
demanding payment to deliver Netflix traffic to their own customers. On Sunday,
the Wall Street Journal reported that Netflix
has agreed to the demands of the nation's largest broadband provider,
Comcast. The change represents a fundamental shift in power in the Internet
economy that threatens to undermine the competitive market structure that have
served Internet users so well for the past two decades.
The deal will also transform the debate over network
neutrality regulation. Officially, Comcast's deal with Netflix is about
interconnection, not traffic discrimination. But it's hard to see a practical
difference between this deal and the kind of tiered access that network
neutrality advocates have long feared. Network neutrality advocates are going
to have to go back to the drawing board.
The classic Internet
To understand what's going on, it's helpful to review the
structure of the "classic" Internet.
This is is an idealized depiction of how the
"classic" Internet of the late 1990s worked.
Backbone Provider B provides Internet service to Yahoo,
carrying traffic to users around the world. Provider B connects with other
companies, such as Backbone Provider A. The residential ISP on the right is a
customer of Backbone provider A, and it, in turn, offers Internet access to
individual households. The red arrows indicate who pays whom for service. Because the two backbone providers are roughly
the same size, they engage in what's called "settlement-free
peering": They exchange traffic with each other with no money changing
hands. A big advantage of this industry
structure is that the backbone market is competitive. If Backbone Provider B
overcharges Yahoo for connectivity, Yahoo can switch to another backbone
provider. I've only drawn two backbone companies, but in the real world there
were a number of them competing with one another. The fact that the largest
backbone providers engage in settlement-free peering ensures that every
computer on the Internet can reach every other computer. Competition among
backbone providers helps keep prices down and service quality up.
This industry structure has another virtue, too: Network
neutrality is protected by default. Traffic from Yahoo comes to the residential
ISP in a big bundle along with traffic from lots of other Web sites. As I
argued in a 2008
paper for the Cato Institute, that makes non-discrimination the default and
gives residential ISPs limited leverage over distant Web sites. If the
residential ISP wanted to discriminate against Yahoo traffic, it would need to
make an explicit decision to block or degrade it, which would likely trigger a
customer backlash. That has allowed network neutrality to thrive in the 1990s
and 2000s even though there was no formal network neutrality regulations until
2010.
But the Internet is changing. One sign of that change is the
just-announced deal between Comcast and Netflix. Another is Ars Technica's
recent story
about a dispute between the backbone provider Cogent and Verizon. Netflix is a
Cogent customer. Surging Netflix traffic has been overwhelming the links
between Cogent and Verizon. Cogent has asked for those links to be upgraded,
but according to Cogent, Verizon has demanded payment for upgrading the links.
(When Ars asked Verizon for comment, a spokesman declined to comment on the
specifics of the negotiation.)
We can depict the dispute like this: In this version of the Internet, two big things have
changed. First, Netflix is really big. The video streaming site now accounts for
about 30 percent of all traffic on the Internet. Second, Verizon acquired
the formerly independent backbone provider MCI in 2006, helping to turn itself
into a major backbone provider in its own right. Those changes matter for Cogent's
negotiations with Verizon. In the first chart, Backbone Provider A's leverage
was limited by the fact that Backbone Provider B could always connect directly
to the residential ISP, potentially costing A a customer. That gave A a strong
incentive to keep its network fast and its interconnection terms reasonable. The negotiation between Cogent and Verizon is
different. Verizon plays the role of both backbone provider and residential
ISP. That puts Verizon in a much stronger negotiating position, because Cogent
doesn't have any practical way to route around Verizon. If Cogent wants to
reach Verizon's customers, it needs to cut a deal with Verizon.
The FCC's dilemma
The fact that Netflix agreed to pay Comcast suggests that
Cogent will likely lose its fight with Verizon as well. And as Cogent's chief
executive Dave Schaeffer told Ars, "once you pay it's like blackmail,
they've got you, there's nowhere else to go. They'll just keep raising the
price in a market where prices [for transit] are falling." Indeed, in the long run, this development
threatens the survival of independent backbone companies like Cogent. If it
becomes industry practice for backbone providers to pay residential ISPs,
companies like Cogent will become mere resellers of access to the networks of
large broadband companies. Or they may be cut out of the loop altogether, as
large customers such as Netflix cut deals directly with broadband providers
such as Comcast.
Cutting out the middleman might make the Internet more
efficient, but it will also make it less competitive. Cogent has many
competitors. Verizon's FiOS service does not. If companies like Cogent are
squeezed out of business, it will make these already powerful network owners
even more powerful. It would also
transform the network neutrality debate. As I mentioned before, the
conventional network neutrality debate implicitly assumes that residential ISPs
receive Internet traffic from one big pipe. Network neutrality advocates want
rules prohibiting ISPs from divvying this pipe up into fast and slow lanes
based on business considerations. But in
a world where Netflix and Yahoo connect directly to residential ISPs, every
Internet company will have its own separate pipe. And policing whether
different pipes are equally good is a much harder problem than requiring that
all of the traffic in a single pipe be treated the same. If it wanted to ensure
a level playing field, the FCC would be forced to become intimately involved in
interconnection disputes, overseeing who Verizon interconnects with, how fast
the connections are and how much they can charge to do it.
At this point, the FCC doesn't have any good options.
Regulating the terms of interconnection would be a difficult, error-prone
process. Trying to reverse the decade-old mergers that allowed America's
broadband market to become so concentrated in the first place would be even
more so. But the growing power of residential broadband providers will put
growing pressure on the FCC to do something to prevent the abuse of that power.
One clear lesson, though, is that further industry consolidation
can only make the situation worse. The more concentrated the broadband market
becomes, the more leverage broadband providers like Comcast and Verizon will
have over backbone providers like Cogent. That gives the FCC a good reason to
be skeptical of Comcast's proposed acquisition of its largest rival, Time
Warner Cable. Blocking that transaction could save the agency larger headaches
in the future.
Comcast And Netflix Make A Deal To
End Traffic Jam
(By Jennifer Saba, Reuters, 23 February 2014)
Comcast Corp
customers are about to get improved streaming service from Netflix after the
two companies announced on Sunday an agreement to give Netflix a direct
connection to the broadband provider. This
agreement means that Netflix will deliver its movies and TV programs to
Comcast's broadband network as opposed through third party providers, giving
viewers faster streaming speeds for watching movies and TV programs. The deal could also mean that other broadband
providers like Verizon and AT&T will have to strike a similar arrangements,
known in the industry as interconnect agreements.
The companies said in a joint statement that they have been "working
collaboratively over many months" to strike a multi-year agreement. The
terms were not disclosed and Netflix will not receive preferential network
treatment, the companies said. With more
than 44 million subscribers throughout the world, Netflix has been making an
effort to connect directly with broadband Internet providers. It has struck
similar deals with Cablevision and Cox. The
announcement comes as Comcast prepares to acquire Time Warner Cable for $45
billion, a deal that will draw the scrutiny of U.S. antitrust enforcers. The combined company would have a near 30
percent share of the U.S. pay television market, as well as be the major
provider of broadband Internet access. At
the same time, Federal regulators are wrestling with an issue known as
"Net neutrality" concerning broadband providers and whether they can
slow down traffic to some particular websites or applications, potentially
forcing content providers to pay for faster Web service. The Federal Communications Commission said
last week it plans to rewrite the rules after a U.S. court struck down the
commission's previous version.
