Will The Comcast Internet Toll Test The Netflix Business Model?

Tyler Durden's picture

As was mentioned briefly yesterday, and all Netflix longs had hoped it would be promptly dead and buried, Comcast has begun imposing a fee on Internet middleman Level 3 Communications Inc., one of the companies that Netflix Inc. has hired to deliver movies and TV shows to Web customers. Bloomberg adds: "Comcast, the largest U.S. cable TV company, has set up an Internet “toll booth,” charging Level 3 whenever customers request content, the Broomfield, Colorado-based company said in a statement yesterday." This could very well be the end to the Netflix business model which so far has had the benefit of near-free streaming content distribution. Of course, this move was inevitable as Netflix is rapidly stealing traditional cable subscribers from precisely the likes of Comcast, whose premium on demand services are unable to compete with the Netflix model (which is based more on marginal churn retention than anything, and as such has very little barriers to entry). Furthermore, traditional distributors of content are also starting to scratch their heads at the cost-benefit analysis of their Netflix relationship. As such, as more and more gates are imposed, and as the cash breakeven suddenly surges for Netflix, what will likely be impaired is not only the firm's cashflow (which as we described recently has been rapidly declining) but to its long-term growth prospects. In a word: nothing good.

More from Bloomberg:

Level 3 plans to complain to U.S. regulators who may enact so-called net-neutrality rules next month. The Federal Communications Commission is seeking to bar phone and cable providers from interfering with legal traffic on their networks. The rules are backed by President Barack Obama and companies led by Google Inc., EBay Inc. and IAC/InterActiveCorp. Phone and cable companies say rules aren’t needed and may hurt investment.

“This action by Comcast threatens the open Internet and is a clear abuse of the dominant control that Comcast exerts in broadband access,” Thomas Stortz, Level 3’s chief legal officer, said in the statement. “With this action, Comcast is preventing competing content from ever being delivered to Comcast’s subscribers at all, unless Comcast’s unilaterally determined toll is paid.”

Comcast, which is seeking regulatory approval to acquire majority ownership of NBC Universal, defended the fee in a statement, saying it is based on “long established and mutually acceptable commercial arrangements” with Level 3’s peers.

Comcast however is not taking this quietly:

Level 3 is preparing to more than double the traffic it puts on the cable provider’s network and has tried to pressure the company into accepting it for free, Joe Waz, Comcast’s senior vice president for external affairs, said in an e-mailed statement.

Level 3 announced on Nov. 11 that it will carry films and TV shows for the Web streaming service offered by Netflix.

Eventually, this will likely mean an FCC ruling on net neutrality:

FCC Chairman Julius Genachowski, in proposing net neutrality rules last year, called for a principle of non-discrimination by Internet-service providers. The FCC will meet on Dec. 21.

“This means they cannot block or degrade lawful traffic over their networks,” Genachowski said.

Public Knowledge and the Media Access Project, two Washington-based advocacy groups, backed Level 3 yesterday. The groups said the request for payment to carry Level 3 traffic shows the need for stronger net neutrality legislation and more scrutiny of Comcast’s NBC deal.

Therefore the question now becomes who has more clout and pull at the FCC: the movie studios and the legacy cable providers, or nascent companies which have carved out a niche which however has no barriers to entry. While the outcome is uncertain, all it takes is for some weakness at NFLX to be taken advantage of by some other companies which has better relationships with content providers, and can provide the same service for a comparable cost. At best, this will be precisely the customer retention test that NFLX bulls claim the company will be able to pass with flying colors. At a forward multiple that is completely meaningless, they better hope they are correct.


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Mr Lennon Hendrix's picture

pets.com did not replace pet stores.  Netflix bankrupted Blockbuster/Hollywood video.  Poor example.

Spalding_Smailes's picture

Built on dreams in the market .... Everything is going digital/ in the clouds.

Mr Lennon Hendrix's picture

No way!  Everyone needs entertainment, and netflix > blockbuster.

I will not say it should have the price it does now based on earnings and whatnot, but I could give a rats ass about dollar denominated value.  netflix is one of the only companies that will make it out alive.  and a small disclaimer, I own no shares in netflix, nor have I ever.  Just sayin'.

aerojet's picture

Actually, what Americans could use is a lot less vapid entertainment and a lot more serious study, or at least turning off the tv, game consoles, and streaming media and cracking a book instead.

trav7777's picture

it's not an issue of whether people need entertainment, it's a matter of NFLX not controlling the infrastructure and these monopoly organizations like Verizon and Comcast owning the last mile of the internet.

The best part is how we all chipped in so the ISPs can have monopoly on the wires into our houses, now they get to profit from it.  Municipalities paid via debt and taxes to get these lines laid and now the providers can charge what they feel like.

NFLX has done well; this is a matter of Comcast saying, gee, that's a nice business you've got over there, be a shame if something happened to it.

Comcast wants all its customers to get jacked paying for their overpriced VOD.  Sony has a huge title collection on PSN, it's wack priced too.  Vz's VOD is overpriced as well.  But without the infrastructure, NFLX is subject to getting squeezed by both ends.

idea_hamster's picture

The real comparitor is Vonage -- good idea, but nothing that the wire-owners can't do themselves.

In the end (at least near me) the cable company offered a "package" of web+TV+VOIP that cost less than just web+TV.  Is that an antitrust tying violation?  Probably, but who's going to fight that?  Nobody.

VG: $12 --> $3  in one year.

dkny's picture

VG should go to $3 just for the simple reason that they charge an obscene amount of money. I'm paying almost $30/month on basically no calls.

Perhaps it is time to switch to CallCentric to facilitate that decline.

MonsterZero's picture

They own the physical cable, they can ask whatever amount of paper fiat money they want.

Ripped Chunk's picture

Hmmmmm. I guess it really is all about political climate?

AT&T    MCI ......recall that little spat having a large effect (eventually erased by "market forces") on telecom.

Dr. No's picture

They do and they get it.  My rates just increase last month...

MeTarzanUjane's picture

Exactly. Fuck these cable companies! $70/month for Internet access?!!!

FUCK YOU Cable bitches!

There are enough unemployed peoples to be able to digitize all known channels onto DVD and sell to people out of their trunk at the local Krogers.

Hey, I heard rumors about a Wikileaks IPO? Any truth?

tmosley's picture

I wonder if they will be surprised when they lose all of their internet customers when they refuse to pay Comcast's charge and they find that their customers can't get Netflix.

ebworthen's picture

Good point. 

I'm amazed at the early 20 something's using just their smart phones to watch movies.

Even a laptop with wireless is becoming passe to them.

Comcast had better be careful because they have competition from the phone companies big time; Verizon is pushing a celular broadband connection that I've seen several friends adopt in favor of Comcast.

trav7777's picture

the wireless providers are capping GBs now...only the grandfathered "unlimiteds" have anything resembling a decent price point.  And that's subject to just having your plan cancelled, fuck you style.

I used 17GB one month on my unlimited ATT PDA plan and I was concerned that if I continue to roll like that, they will just shut me off and say take your business to verizon or else fork over more cash.  As I am right next to a tower, I get 3G+ exceeding 2Mbps and could stream NFLX via a tethered windoze smartphone

hewhohesit8s's picture

Shortsighted view.  The percieved value is more and more in "the internet", and less and less in the physical medium.  Comcast will drive their customers into the arms of the telcos unless the telcos are stupid enough to charge tool too.  In that case, new entrants will eat both their lunches. 

aerojet's picture

IIRC, Americans paid additional taxes for that cable infrastructure, so don't we fucking own it?

ebworthen's picture

Agree, the monopolies are just sick.

I miss the days of an Antenna on the roof and having to sit through commercials, not paying out the nose to a monopoly AND having to sit through commercials (what crap!).

Cable television is de-evolving to where there are only 13 channels you can watch and you have to be picky at that - just like back in the day of the Antenna and Rabbit Ear's.

dkny's picture


It is for that reason that I on principle refuse to pay for TV. I mean, heck, why should I be paying to watch ads. And, as you said, almost nothing to watch anyway: "reality" shows as far as the eye can see.

$70/month? Ha!
I'll stick to the OTA Jerry Springer reruns instead of the latest CSI Unemployment Office Division, thank you very much.

Doctor sahab's picture

I have an antenna in my attic that I've connected to two HDTVs and I get all the local channels for free in HD and surround. You should be able to get a decent reception in most parts of the country.

A Nanny Moose's picture

Commericals were the time to get up and make that Swansons T.V. Dinner.

Cable use to be the end-run around commercials. Now we pay, and still get fucked with the propaganda.

trav7777's picture

yes, we DID pay for that infrastructure.  We used bonds and tax cash to PAY the telcos to lay lines that THEY NOW OWN 100%!  How awsumz is that

asteroids's picture

Bullshit, the end user pays a fee for use of said cable. It's like leasing a car and only being to drive it where the leasing company tells you to drive.

Jim in MN's picture

Awwwww.  Easy come, easy go.

Not like it's an important stock for the go-go galz around here...eh?

Oh regional Indian's picture

Old money always wins out. The studios will side with who-ever can get their content to the end user.

Clearly a company like Netflix has no business being valued at where it is and since all these biggies work under the same thumb (not Tom), maybe Netflix is going to get replaced in the Holy Trinity by.....GM? It could happen. Go long GM! Today's tip ;-)



Ripped Chunk's picture

The studios will side with who-ever can get their content to the end user that puts the most money in their pockets

Oh regional Indian's picture

Thanks Ripped, I felt that sentnce was incomplete even as I was writing it.


Critical Path's picture

As of last week I now pay $7.99 for instant unlimited streams (up from $5.99).  I like the service and think its a better deal than some other options that don't include owning a massive library of films.  Not sure where I draw the line on their fees though.  Either way, definitely not good news for cash flow... 

Joe Davola's picture

Unfortunately, many of the movies I'd like to watch aren't available for instant.  There's a whole lotta unwatchable crap that is.

aerojet's picture

So...it's just cable tv all over again?  100000 channels and nothing on?  Fuck that. 

SheepDog-One's picture

ok, now junk away.

Hephasteus's picture

Does comcast still have customers it hasn't pissed off yet?

I don't believe it.

Ripped Chunk's picture

Now they are Xfinity. Such a cool, modern name. All the bad consumer experiences just disappeared! 

Just like when GMAC changed its name to Ally.

See how stupid they think everyone is? Does it piss you off?


trav7777's picture

lol...I used to work for Comcast and was responsible for implementing some of these hairbrained ideas.  Don't blame me, blame the marketing idiots.

You want some cool info?  Comcast uses a wholesale plan to provide wireless internet where they put you in a bucket.  They use heuristics to predict how much data you will use and will roll you into a lower bandwidth wholesale plan that is cheaper to THEM but will still charge you for whatever your subscription level is.

So, if you want to fuck Comcast, get a particular data plan, underuse, and then rack that mfer up.  They will pay overages to the end providers like Sprint and Clearwire.

Lost My Shorts's picture

Funny, didn't stop Nutflex from being up 3.5% again today like every day.  Maybe the FCC is long.

shushup's picture

Right - NFLX was up $7 today and $7 yesterday. Why?

It must be Cramer.

G. Marx's picture


Here's what I like to know, in how many jurisdictions was Comcast (or other cable companies) granted a monopoly position as being the only cable provider within a politically geographical area? IMO, any region of the country where Comcast (or other cable companies) have been granted this condition by the local government, then they can go screw themselves. They're nothing more than a utility. Where they have competition they have a right to charge such a fee and I have a right to change my carrier if I so choose.

Species8472's picture

The end user should pay the toll!

ThisIsBob's picture

Ultimately end users will.

shushup's picture

Since when has an end user ever won?

hdunn2's picture

pretty outrageous price movement all things considered. One, the broader market (specifically tech) is down, two, you have this news that, while not certain, could cause serious headaches in the future, and three, the whole crazy valuation is predicated on international expansion; you would think chaos in Europe would put that in some doubt..

Hansel's picture

Netflix isn't forcing its data onto Comcast's network.  Comcast customers are requesting Netflix data.  Comcast customers pay Comcast for access to the internet.  Netflix shouldn't have to pay Comcast too.

Cone of Uncertainty's picture

Comcast will get it's pound of flesh from L3, how much L3 eats is anyone's guess.

Cone of Uncertainty's picture

Comcast started their own competing site, which sucks.


Sly move on comcast's part to put the screws to L3 right after they swooped in and inked the Netflix deal.

I bet they split the fee.

Either way, how is Netflix going to pass it on to customers right after a pricing move--they can't.

Long term model (margins) in jeopardy...abort, abort, abort.




Lucius Cornelius Sulla's picture

I see this as an opportunity for Comcast's competitors.  If Comcast cuts out Netflix then I will simply switch to Verizon which happens to be slightly less expensive anyway.

Cone of Uncertainty's picture

Telcos will go along with Comcast on this.

Lucius Cornelius Sulla's picture

Will they though?  I think it is a perfect marketing opportunity for the Telcos to differentiate their services.

Cone of Uncertainty's picture

That just means already low DSL margins go lower.

Of course, it might make sense for FIOS, but again, someone has to eat the fee here.