What happened in Vegas: Comcast, Netflix peering agreement talks got serious at CES

The  peering agreement confirmed today by Comcast and Netflix had been discussed by engineers for both companies for months, as consumers reported continued declines in their video streaming quality. But the turning point came last month at CES, when the CEOs of the sparring companies got involved in those talks alongside engineers, a mark of how significant this deal is: CEOs almost never get involved in peering agreements.
At the annual Vegas tech confab, both Comcast CEO Brian Roberts and Netflix CEO Reed Hastings first met with senior engineers and staff to discuss an interconnection agreement, as first reported by Gigaom on Friday and confirmed by the companies on Sunday. Having the top executives of the company involved shows two things: one that this is an important strategic deal for both companies and also that the technical questions about how the internet should work are only part of the equation — business considerations matter too.
Netflix accounts for about 30 percent of U.S. broadband traffic during peak hours according to research from Sandvine, a company that makes gear for ISPs. Comcast is the largest broadband provider in the U.S. and is gunning to have about 30 million subscribers if its merger with Time Warner Cable goes through. And while Comcast has been pushing for transit providers like Level 3 or XO Communications to pay to interconnect with it, Netflix has historically refused. Instead it offered up Open Connect, a content caching server that ISPs can put inside their data centers to lessen the amount of traffic coming into their network.
Comcast isn’t using Netflix Open Connect for this interconnection however, according to sources close to the deal. ISPs tend to look at the Open Connect box with skepticism, arguing that if they accept one server for every large content provider on the internet, they’d soon be out of data center space. Some ISPs offer their own caching services, but content companies don’t like giving up control.
For this deal, there’s no caching involved (says my source) which means we’re talking straight interconnection — paid most likely as a function of the number of gigabits delivered. As for how much this is costing Netflix, it’s hard to say.
Transit pricing is a secretive business, although Cogent’s CEO recently gave some numbers to Ars Technica that might serve as a starting point:

Cogent sells transit for an average price of $1.31 per megabit, though large volume users like Netflix get discounts.

Since Netflix is delivering gigabits of traffic — and the costs associated with transit involve buying wavelengths in pre-set chunks — we’re likely looking at a per-gigabyte rate that’s much, much lower than the Cogent quote. But still this deal has the potential to change a lot of things about how the internet works, by establishing paid interconnection as the de facto standard for large content providers to reach ISPs with a large number of end users.