So as I posted last week, I need to explain why Netflix is a problem for the ISPs. Most of what I think the ISPs complain about is jealousy. But Netflix is different.
Let me take Apple iTunes as the counter-example. ISPs complain that Apple is making a lot of money by having built a service that utilizes their network. The bulk of what iTunes does is file download. This is a model that has been around a very long time. The same is true for the App Store. Apple may be doing a much higher volume of transactions, but there is really nothing new. The Apps that are downloaded are a different matter and Netflix is one of them. The ISPs have tried to create their own App Stores, but consumers have seen no value to it. So when an ISP rails that companies like Apple are making money off their networks, I have no sympathy. Without companies like Apple, consumers have no need to buy big broadband pipes. These pipes are what is driving service provider revenue.
There is another problem here and one that is more subtle. We talk about Apple and Google, but many Internet Content companies have lost their shirts. You can’t compare all the money invested in all the companies, pick the winners and complain. When you are a product company like Apple, you have the opportunity to make a profit if you build a good profit. If you are an ISP, you will make money off your network. The question for an ISP is NOT will I make money, its WHEN will I make money.
But again Netflix is different. As of the Q413 report, Netflix has over 44M members. The service that is offered online is a streaming video service. If you recall last week, I talked about how streaming and particular video streaming puts pressure on the network. This pressure is NOT in the Access Network. The pressure is on the regional and metro networks. As I said last week, we take those portions of the network as free. The reason for that is the price model given to us by the ISPs. No consumer today sees the value in spending a dime more for a better metro or regional network. Most of them don’t know that it exists.
There is a second problem. If you remember the money exchange model with Telephone Companies, they paid each other for carrying traffic. If one way called the other more, then cash was actually settled. In the Internet world, there is no way to pay for traffic Asymmetry in most contracts. Traffic Symmetry was assumed. That again puts pressure on Regional and Metropolitan networks of ISPs.
It is this combination that is causing ISPs to dislike Netflix and try to find a way to bill them more. I do feel a bit of sympathy here for the ISPs. The ISPs are now trying to take this a step further and trying to create models in which one bit is worth more than another. They have taken some steps in that direction and that is where we will go next time.
Have a great weekend!
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