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Netflix Unhappily Signs Deal for Access to Broadband Customers

Over the course of this Spring, Netflix (NFLX) made two things clear: It opposes the idea of paying Internet service providers for access to their customers, and is willing to pay Internet service providers for access to their consumers. Yes, this may sound contradictory, but this may be the only way for Netflix to get their customers to enjoy their streaming services.

Netflix acknowledged on Monday that it has signed an agreement with Verizon (VZ)to pay more for direct access to its network, mirroring a controversial deal it signed with Comcast (CMCSA) earlier this year. It’s not clear how much Netflix is paying in either deal, but the company has complained loudly about how its payments to Comcast are equal to tolls levied by a giant using its market power. Comcast says that Netflix was already paying to move its traffic on the Internet and is being disingenuous in its complaints.

PrintThe disagreement has gotten nasty enough that Netflix is asking the federal government to reject Comcast’s proposed merger with Time Warner Cable (TWC), the country’s second-largest cable company. Netflix first laid out its anti-Comcast stance in a blog post last month, in which it acknowledged that it was setting its own troubling precedent. “Netflix believes strong net neutrality is critical, but in the near term we will in cases pay the toll to the powerful ISPs to protect our consumer experience,” wrote Reed Hastings, the company’s chief executive officer.

The fact that Verizon has become the next company to sign a deal with Netflix is no surprise. When Netflix released data on the speed of its service through various Internet providers earlier this month, Verizon FIOS had dropped to eighth-fastest provider in the U.S. when it had been sixth as recently as January. Comcast, meanwhile, leaped six spots to become the fifth-fastest network as of March.

Its clear why Netflix is willing to pay for these deals, which are known as paid-peering arrangements. The streaming-video company it would prefer that cable providers use Open Connect, Netflix’s own content-distribution network that puts its network equipment inside the facilities of Internet providers. Netflix has praised Long Island-based Cablevision (CVC)because it has gone along with this idea.

These technical negotiations are gaining unusual prominence because they’re happening in an unusually charged political atmosphere. The Comcast/Time Warner Cable merger is set to give the combined behemoth even more power over the market, and the Federal Communication Commission is mulling new regulations for how Internet providers can distinguish among different types of traffic. Indeed, recent debate over net neutrality was set off by Verizon’s lawsuit against the FCC over its 2010 rules on the subject; in January a federal court ruled in Verizon’s favor, forcing the federal government to come up with a fresh approach to regulating the Web. This all weighs on Netflix. Its stock is down almost 40 percent since Comcast announced its intention to buy Time Warner Cable. Netflix shares had started to recover when the FCC said its new net neutrality rules would allow so-called fast lanes wherein companies such as Comcast can charge companies like Netflix to deliver service at higher speeds. The deals that Netflix has signed with Comcast and Verizon affect a part of the Internet that the FCC isn’t addressing with these new rules. Still, now that Netflix has signed two of them, it seems likely that more companies will seek similar payments.

(Image Source: iCLIPART)