Why Netflix is paying Comcast for faster Web access

The wound wasn't mortal, but it was significant. Netflix (NFLX) made the news this time not for the success of its "House of Cards" drama, but because it agreed to pay -- millions annually, according to Bloomberg -- for faster access to Comcast's (CMCSA) networks.

Why has Netflix joined Google (GOOG) and Facebook (FB) in paying Comcast for a ticket to the fast lane? Because the video-streamer had to. Its streaming speeds had been getting worse for customers using Comcast cable or Verizon (VZ) FiOS fiber optic service. The results were a far drop from when Comcast and Verizon were at the top of the Netflix speed ratings, and that meant the popular video service was taking a hit. (Will an agreement with Verizon be announced, or simply fly under the radar?)

The Netflix-Comcast deal shows one aspect of the lack of open Internet standards. Open Internet, also known as net neutrality, is a principle under which the companies that own the big data networks that enable the Internet have to provide equal access to all individuals and companies without giving preference.

 The idea derives from the legal concept of a so-called common carrier. These were traditionally companies that offered to the general public transportation of people or goods. A common carrier could not give priorities to one set of customers at the expense of another and could not refuse to do business with someone.

In 1934, the U.S. government extended the concept to telecommunications companies. The danger was that private companies could develop communications systems that would not interact, reducing the potential for telephone, radio, and TV. Would you want phone service that wouldn't enable calls to all parts of the country or a TV set that could receive signals only from certain broadcast companies?

However, for a variety of reasons, cable services were never included as a type of common carrier. That was when they carried only TV programming, not Internet traffic. Now, one could argue that the most important capabilities of cable and telecommunications companies are Internet connectivity. Both senders and receivers already pay for the volumes of traffic they use. The new access fees are additional ways for the carriers to make money off Internet activity that companies and consumers already pay for.

The result is a division between businesses willing and able to pay for preferred access to customers and those that either will not or cannot.

A balkanized Internet, where perhaps you could reach MSN but not Yahoo, or Netflix but not YouTube, is of limited use and has an impact on consumers. That's why the Federal Communications Commission tried to put open Internet rules into place -- rules that were ultimately overturned by a federal appeals court, and why the FCC will take another stab at rules that might pass judicial muster.

In the meantime, Internet service providers are free to manage their networks and charge the fees that they choose. Under that scenario, there are some clear winners and losers.

Losers:
  • Small Internet companies -- Carriers are free to demand greater pay for better speeds to customers. Small companies without the funding of a massive start-up or established giant might find themselves left out in the digital cold.

  • Industry innovation -- Google, YouTube, Facebook and Twitter (TWTR) were all start-ups. Only so many will attract the initial investment rounds that could sustain the fees that carriers might charge for high-bandwidth traffic. That could potentially limit overall innovation in the industry.

  • Big Internet companies -- These are the initial targets for the carriers because they have the deepest pockets. Although they already pay for their Internet traffic, they would have to pay more to reach customers. That means smaller returns for the companies and their investors.

  • Consumers -- Although they won't know it, consumers could well miss out on potential new services from upstarts that are effectively slowed enough to make them uncompetitive.
Winners:
  • Carriers -- They can make more money and use the fees to give their own home-grown services a competitive advantage.

  • Consumers -- Although consumers lose when it comes to future variety, they'll gain some opportunities to get services underwritten by vendors, much as AT&T is now trying to do with subsidized access to high-volume data offerings that won't count against the customer's account limits.

  • Big Internet companies -- Yes, more winners and losers in one. The massive revenues of a Google or Facebook can sustain the additional fees. By paying them, and by underwriting consumer access to some types of services, the companies know they make it more difficult for innovative start-ups to disrupt business as usual and become the new giants, just as the current giants once did to the former industry rulers.
  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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