said by Morac:
I don't think this increases costs for ISPs since the traffic still flows over their network regardless if they peer with Netflix directly or not. Peering directly with Netflix can be cheaper for ISPs since they aren't paying for Netflix traffic anymore and Netflix actually provides the hardware.
I think the biggest issue is that most ISPs in the U.S. are also TV providers. They don't want the competition from Netflix so even if it saves them money from the ISP side, they won't sign up as it will cost them money on the TV content side (reduced rates from competition).
Comcast already refuses to allow HBO2Go and EpicHD on Roku for that reason.
If you are Verizon though, you don't pay for traffic anyway being a Tier 1. Same for At&t. The Netflix hardware is limited. They give them to you to feed the high density areas, but not your entire network if you are as big as Verizon.
But otherwise I agree with you. It competes with their own offerings.