Uneasy detente on the set-top

You had to figure something was up between Comcast and Netflix back in July when the cable operator quietly settled its two-year long peering dispute with Level 3 Communications. The added traffic Level 3 had begun sending Comcast’s way after landing a chunk of the Netflix CDN business in 2010 had been the primary casus belli between the erstwhile peering partners so it was a good bet that Netflix probably played a role in settling the dispute as well.

Thanks to the Wall Street Journal this morning we now know something was indeed up.  Comcast and Netflix are in talks about adding the Netflix streaming app to Comcast’s new X1 set-top boxes, allowing Comcast subscribers to access Netflix content directly through their cable box without having to switch inputs. Netflix is also apparently in similar talks with other U.S. cable providers, according to the Journal, and recently launched its app on systems in the U.K. in partnership with Virgin Media.

A telling detail in the Journal report was the news that talks with some cable providers have gotten hung up over Netflix’s insistence that the operators also agree to interconnect with its proprietary Open Connect CDN service. As I noted in a post back in January, Netflix began rolling out Open Connect partly as a reaction to the Level 3-Comcast dispute as a way to gain control over its own last-mile quality of service and to preclude the possibility that cable-based ISPs could use network peering points as a point of leverage against the streaming service in the inevitable future negotiations over carriage. The fact that some operators are apparently balking over that deal point tells you just how important they believe that leverage to be.

So what do the operators get out of the deal? Why make it easier for their subscribers to watch Netflix by putting the app on their box? At least three reasons:

1) Their subscribers are going to watch Netflix anyway, and cable ISPs have begun to grok that forcing users to switch inputs to find the content they want simply makes it harder to lure them back to Input 1. It’s the same reason some operators are apparently open to daisy-chaining with Microsoft’s Xbox One.

2) The more over-the-top video a household watches the more likely it is to pay for higher broadband speeds. For most cable ISPs, that’s now a higher margin business than their video business.

3) Heightened regulatory scrutiny. Even if Verizon wins its court challenge to the FCC”s net neutrality rules, recent controversies such as CBS’s retransmission dispute with Time Warner Cable have attracted the attention of Congress, the FCC and anti-trust authorities at the FTC to the rules of the OTT road. Comcast, in particular, operates under a consent decree related to its merger with NBC Universal, giving the government heightened visibility into its dealings with potential competitors. For cable-based ISPs, it’s better to cut deals with OTT providers than to have a deal forced on them by the FCC.