Netflix may need to pay AT&T, Verizon for faster speeds

Tue Feb 25, 2014 6:50am IST

The Netflix logo is is shown on an ipad in Encinitas, California, April 19,2013. REUTERS/Mike Blake /Files

The Netflix logo is is shown on an ipad in Encinitas, California, April 19,2013.

Credit: Reuters/Mike Blake /Files

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REUTERS - Netflix Inc (NFLX.O), which agreed to pay Comcast Corp (CMCSA.O) for faster video delivery, may have to make similar arrangements with other broadband providers to ensure customers get trouble-free access to its streaming movies and TV shows.

Verizon Communications' (VZ.N) chief executive said on Monday he expects Netflix (NFLX.O) will pay the telecom company for faster speeds after Netflix customers complained about slow connections to Verizon's FiOS service.

AT&T spokesman Mark Siegel said in a statement on Monday that "we're in discussions with Netflix to establish a more direct connection between our networks, similar to agreements we have with others, so that AT&T broadband customers who use Netflix can enjoy an even better video experience."

Talks with telecom companies that provide broadband Internet access gained momentum after Sunday, when Netflix agreed to pay Comcast Corp (CMCSA.O) for faster speeds.

Evercore Partners analyst Alan Gould said the agreement with Comcast removed uncertainty and likely involved small payments since Netflix agreed voluntarily to the arrangement.

"This is probably a template for the deal that will get done with other broadband providers," said Gould, who has an "equal weight" rating on Netflix shares. "We are assuming the payments are not going to materially change the business model."

Netflix shares rose 3.4 percent to close at a record $447 on Nasdaq.

Verizon CEO Lowell McAdam said on CNBC, where he discussed Verizon's talks with Netflix, that the two companies have been in negotiations for a year.

These deals hinge on whether Netflix can set up direct access to Verizon, known as an "interconnect agreement," rather than go through a third party. Verizon provides millions of U.S. customers with its FiOS broadband service and Netflix speeds have slowed on that network in recent months, leading to complaints.

Interconnect deals have been common in the broadband industry for years. Comcast has agreements in place with Google Inc (GOOG.O) and Yahoo Inc (YHOO.O), according to a source familiar with the matter.

Many providers including Cox, Cablevision (CVC.N) and Google Fiber (GOOG.O) directly connect to the Netflix network through a service the streaming company developed called Open Connect. Those providers have not seen their speeds deteriorate in recent months.

But others, including AT&T and Verizon, have opted not to use Open Connect.

Shares of Cogent Communications, one of the companies that took care of the Internet traffic exchange between the Comcast and Netflix networks, fell 7 percent on Monday as investors worried that these deals would take away Cogent's business.

Cogent's chief executive Dave Schaeffer played down the effect of the Comcast-Netflix agreement on its business and reaffirmed the company's annual revenue forecast.

"It doesn't mean that revenue goes away from Cogent. It just means that some of the growth in revenue may not occur through us," he said.

McAdam, the Verizon CEO, spoke out in favor of telecom companies signing deals with Netflix.

"It shows you don't necessarily need a lot of regulation in a dynamic market here. Doing these commercial deals will get good investment and good returns for both parties," McAdam said.

Asked about discussions with Verizon or other providers, Netflix spokesman Joris Evers said "we talk to all major ISPs all the time to make sure Netflix users get the best possible experience."

(Reporting by Liana B. Baker in New York, Lisa Richwine in Los Angeles, Alina Selyukh in Washington and Diane Bartz in Washington; Editing by Sophie Hares and David Gregorio and Miral Fahmy)

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