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SpaethCo
Digital Plumber
MVM
join:2001-04-21
Minneapolis, MN

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SpaethCo

MVM

It's about bandwidth costs, not TV revenue

National network providers have a much more complicated bandwidth pricing structure due to regional peering (SFI and paid) agreements. Say you have an AT&T customer in Atlanta and a Verizon customer in Seattle. Rather than AT&T having to carry that traffic across their backbone to hand it off to Verizon and Seattle, AT&T and Verizon make a deal that Verizon will take the traffic directly in Atlanta and carry the traffic on their own network to their own customers in Seattle. This works if you assume that you can leverage economies of scale to build your own network capacity cheaper than you can buy it from someone else.

So if I'm a backbone provider like Level(3), I work out a deal with national network operators like AT&T, Verizon, Comcast and Time Warner that I will give them a screaming deal on transit costs if we interconnect at numerous regional peering locations. I do this because I can then sell the hell out of bandwidth to content providers in, say, Denver. Most of that traffic will be going directly to ISP subscribers, so if I can connect directly with "eyeball networks" in Denver I can dump all of that traffic, regardless of where in the country it's really going, and only have to grow my network capacity in the Denver area itself.

Regional networks like Sonic.net and Cablevision don't get this same pricing because carriers need to backhaul all traffic to the west and east coast to reach them (respectively). That's why the regional networks will sign up for the Netflix deal -- it's cheaper for them because they don't already have the preferential transit pricing agreements.

For national operators, however, the problems become numerous. Now they have to dedicate capacity to connecting to Netflix's non-Internet private network at all of their regional interconnect locations. Once they connect, they then have to pay for all the capacity augmentation on their own backhaul network to get the traffic to the various destination cities of their customers. After that, because carriers like Level(3) are no longer selling as much capacity to Netflix, the pricing structure for Level(3) to the ISPs will increase in price.

So you end up in a situation where Netflix saves a ton of cash on bandwidth costs, the national ISPs take on costs of adding connections that only connect to Netflix (not the Internet), and overall Internet transit pricing goes up so that all non-Netflix traffic will actually end up being more expensive.