Netflix is paying Comcast for the right to connect directly to the cable operator’s networks, but the amount isn’t enough to change Netflix’s financial projections, according to chief financial officer David Wells.
“For us, (the Comcast agreement) was important because it was an opportunity for us to shore up the long-term subscriber experience,” said Wells, speaking at the Morgan Stanley Technology, Media & Telecom Conference 2014 in San Francisco.
For Netflix subscribers on Comcast, “there definitely were some choke points around peak period usage times,” he said. “We still philosophically believe that the consumer is still best served in an environment where a content provider like ourself doesn’t pay an ISP… but it was an opportunity for us to ensure better service long-term for our subscribers.”
Last week Netflix and Comcast announced a multiyear pact, under which the Internet streaming company is paying for direct access to the cable operator’s network. Financial terms of the deal were not disclosed, but analysts have speculated that Netflix was not paying a significant amount.
In its projections to investors, Netflix has said it expects improvements in contribution margins of 400 basis points per quarter (vs. the year-prior period) for the U.S. streaming business, and “you are hearing me confirm that will not change” as a result of the Comcast agreement, Wells said at the Morgan Stanley conference.
Wells said Netflix might cut similar agreements with other Internet service providers, but noted, “Not all ISPs are created equally… We’re not going to be interested in doing something that’s going to meaningfully change the economics for us on that.”
Netflix is likely paying Comcast about $12 million per year under the interconnection deal, according to an analysis by industry expert Dan Rayburn on his blog Streaming Media. That assumes Netflix has been able to secure a rate of less than 50 cents per megabit per second monthly, which is among the lowest transit pricing in the industry. (For context, $12 million would represent 0.6% of Netflix’s $1.85 billion in cost of revenues for U.S. streaming in 2013.)
Ultimately, the Comcast agreement came down to the fact that “it was an opportunity for us to ensure better service long-term for our subscribers,” Wells said.
Wells also said the deal with Comcast is wholly independent of the concept of “network neutrality.” That idea, as embraced by FCC regulations that were recently struck down by an appeals court, refers to an ISP not giving preference (or degrading) traffic based on the source of the data. “There was no throttling going on,” Wells said.
Asked at the conference about Netflix’s tests with new pricing plans, Wells said the company was looking to offer different choices because as the customer base grows larger “one size does not fit all.” He added that “we’ll be consistent in the grandfathering concept,” saying the company learned from the customer backlash it endured in 2011 after splitting apart monthly DVD and streaming plans in what was effectively a price hike.
Wells also addressed the question of whether Netflix will seek to own more of its original content. He said Netflix will have originals projects across a spectrum — ranging from straight licensing to full production and ownership — but that it would be oriented more toward ownership. “To the extent we think we can produce the content more efficiently if we own it… we would do that,” he said.
Netflix likely will never get to the point where 80% of the content mix is originals. HBO — a favorite comparison for Netflix execs — has 40% to 50% original programming, Wells said. “HBO has been in the game a lot longer than we have,” he said.