Netflix Inc. and Comcast Corp., two of the most powerful companies on the Internet, resolved long-standing differences Sunday on how they conduct business in a deal that will result in drastically improved Netflix video streaming into millions of American homes, company officials said.
Netflix, an on-demand video service, will now connect directly to Comcast's broadband network in "dozens" of locations around the nation instead of streaming its film and TV content through third-party Internet content-delivery companies - a process that some believe was expensive for Netflix and degraded its service.
One or more of the interconnection locations is expected to be in the Philadelphia region, sources say. Comcast is the nation's largest residential Internet provider, serving 19 million users, an undetermined - yet arguably sizable - number of whom are Netflix subscribers.
Headquartered in California and founded in 1997 as a mail-based DVD-rental firm, Netflix is the nation's largest online entertainment streaming company, with 44 million members in the U.S. and international markets, according to information provided to shareholders. The company expects to add 4 million members globally in early 2014.
The Comcast/Netflix arrangement could help Comcast politically in Washington as it seeks regulatory approval of its recently announced $45.2 billion merger with Time Warner Cable Inc. - a marriage that has sparked concerns from consumer advocates about market dominance and dwindling choice.
Servers loaded with Netflix entertainment content have been directly connected to Comcast's network in about five locations, and that number will increase dramatically in coming weeks, leading to an "optimized Netflix experience," sources close to the deal say.
Netflix's video streaming can account for 30 percent of the traffic on the Internet during peak hours. The company is reportedly negotiating with other Internet service providers, such as Verizon Communications Inc. and AT&T Inc., over how to deliver its content flawlessly over the Internet.
Critics have said the Comcast-Time Warner merger, if approved by federal and state regulators, would consolidate Comcast's power in the residential Internet market and pose a threat to Netflix and similar companies. Among their specific concerns: Comcast could interrupt or slow Netflix's streaming of entertainment content to protect its legacy cable-TV business. Mark Cooper of the Consumer Federation of America said Comcast could be a choke point for online streaming companies.
Comcast and Netflix had been negotiating since September over the highly technical arrangement, which was not timed to gain political advantage in the Comcast-Time Warner regulatory review, sources say.
Comcast and Netflix issued a joint statement on Sunday after independent experts noticed new Internet traffic patterns between the two companies.
They called their deal a "mutually beneficial interconnection agreement that will provide Comcast's U.S. broadband customers with a high-quality Netflix video experience for years to come. Working collaboratively over many months, the companies have established a more direct connection between Netflix and Comcast, similar to other networks, that's already delivering an even better user experience to consumers, while also allowing for future growth in Netflix traffic."
Sunday's agreement between Comcast and Netflix involves only video streaming over Comcast's backbone network and will have no effect on how TVs, laptops, WiFi, set-top boxes or other consumer electronic devices interact with one another in the home.
The agreement is described as a business and technical arrangement. Financial terms were not disclosed. Before the deal was finalized, Netflix had been seeking to embed its computer servers with Netflix entertainment directly inside Comcast's network - a model viewed as financially advantageous to Netflix as the company wouldn't have to pay high network-transport costs. Comcast saw that model as impractical because it might have to offer the same arrangement to Hulu, YouTube, and other streaming companies.
Instead of inside the Comcast network, the Netflix servers now will be hooked directly to it.
"I would have thought Netflix would have held out with the Time Warner Cable deal looming," Craig Moffett, founder of research firm MoffettNathanson L.L.C., told Bloomberg News. "Netflix can ask for whatever it wants and has a reasonable shot at getting conditions put on the merger that could provide it with long-term benefit. On the other hand, that could be precisely what spurred this deal - that Comcast was willing to settle with Netflix for a relatively low price to make the Netflix problem go away ahead of the regulatory review."
Comcast chief executive Brian Roberts and Comcast executives Sam Schwartz and John Schanz met with Netflix chief executive Reed Hastings at the Consumer Electronics Show in Las Vegas in early January to work out the final deal.
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Value of proposed merger of Comcast, Time Warner Cable.EndText