Monday, August 11, 2014

An estimate of Netflix's "fast lane" fee to Comcast -- $.86 per subscriber per month

Netflix, ISPs and transit providers blame each other for poor Internet performance. The public would be well served by transparency -- seeing the cost and traffic data underlying the debates on network neutrality and, more important, the high cost of US Internet service and lagging investment in US Internet infrastructure.

Generator Research has estimated the cost of delivering Netflix content in their report Over-the-Top Television, 2014, which includes an estimate of the cost to Netflix and Comcast of delivering Netflix content and of the fee Netflix is paying Comcast.

They begin by noting that Netflix's total cost of revenue (including content, delivery and other costs) was reported as $1,849 million in 2013 and they had an average of 29 million US subscribers for the year, then make the following assumptions:
  • The cost of content is 80% of the total cost.
  • The cost of delivery is 80% of the remaining cost.
  • 75% of delivery cost is in the access network, 25% in the ISP network.
  • Comcast earns $30 per month per subscriber, $24 of which is as a result of delivering Netflix traffic.
  • 80% of Comcast traffic is due to Netflix.
Based on this, they estimate the total cost of delivering Netflix content as $2 per subscriber per month, with Netflix paying $.86 and Comcast $1.15. Assuming they split the cost in proportion to their monthly revenue ($7.99 for Netflix and $24 for Comcast), Generator guesses that Netflix's fee to Comcast is around $.28 per month per subscriber -- less than 5% pf the cost of a subscription. (Compare that to my ISP increasing my bill by 5-10% every year because, as a monopoly provider, they can).

Generator's conclusion is based upon several assumptions, which you may question, but it is a starting point in estimating cost of content delivery.

-----
Update 8/26/2014

Whatever the marginal cost, someone has to pay for investment in Internet infrastructure. Netflix CEO Reed Hastings says it would cost the ISPs very little to upgrade in order to provide the level of service they advertise to their customers.
It's worth noting that Netflix connects directly with hundreds of ISPs globally, and 99 percent of those agreements don't involve access fees. It is only a handful of the largest U.S. ISPs, which control the majority of consumer connections, demanding this toll. Why would more profitable, larger companies charge for connections and capacity that smaller companies provide for free? Because they can.
Hastings' post is one in a series on How to Save the Net running at Wired.com.

-----
Update 9/24/2014

Netflix CEO Reed Hastings was on a panel at the Cable and Telecommunications Association for Marketing EuroSummit Conference in Copenhagen last week. Mike Fries, CEO of Liberty Global was a fellow panelist. Hastings "jokingly" offered Fries the following deal:
Consumers are choosing Netflix and if we’re supposed to pay some of the cost of the network, maybe we should get some of the broadband revenue ... we’ll pay 10% of your network costs if we get 10% of broadband revenue. Or we’ll pay 10% of your network costs if you want to pay 10% of our content costs.
Hastings also stated that
The crazy thing in this whole debate is the actual amount of money being talked about is trivial to both of us – but we’re both worried on both sides about the precedent and what does it mean in the longterm?