Since at least September, Cogent Communications Group and Netflix have called for the Federal Communications Commission to impose conditions on AT&T’s $48.5 billion acquisition of DirecTV because they have insisted the carrier will have a greater incentive to discriminate against distributors of online video services.
Thanks to Comcast’s recent decision to walk away from its planned acquisition of Time Warner Cable, AT&T through its DirecTV merger would become the biggest multichannel video programming distributor, according to Netflix. That would give AT&T an even greater incentive to discriminate against companies that distribute online video, Netflix argued in a recent FCC filing, exacerbating “the anticompetitive behavior in which AT&T has already engaged.”
But AT&T said such a strategy would be contrary to its own interests because the company would risk alienating its broadband customers, including its profitable subscribers who purchase multiple services such as Internet, television and phone offerings.
A number of AT&T broadband customers are among the 40 million Americans who pay Netflix to stream movies and TV shows.
“AT&T could not effectively and persistently degrade any [online video distributor] without degrading all OVDs and degrading any single OVD, much less all OVDs, would risk significant loss of broadband and bundle customers while saving few, if any, video customers,” AT&T said in a May 6 FCC filing.
AT&T said customers who drop broadband usually discontinue subscribing to video and other entertainment services as well.
“Thus, a degradation strategy would risk losing not only broadband profits, but also associated, and much greater, double and triple-play revenues and profits, which include video profits,” AT&T added. “Simply put, it makes no economic or business sense for AT&T to pursue the hypothetical OVD degradation strategy put forth by Netflix, either before or after the transaction.”
Not only do Netflix’s recent objections ignore business realities, they fail to mention the fact that it has reached a long-term agreement to interconnect with AT&T’s network, AT&T said.
AT&T also noted Netflix has achieved “spectacular and consistent growth” in recent years, including during the times of the network congestion. In the most recent quarter, Netflix added 4.9 million new members globally, beating its forecast of 4.1 million, and bringing its total streaming membership to 62.3 million.
AT&T also attributed to Netflix a public statement that interconnection agreements such as the ones that it entered with AT&T are not negatively affecting its margins.
Netflix and Cogent have argued the FCC should not …
… approve the merger without imposing conditions, including a clause that would bar AT&T from charging content providers a terminating access fee to interconnect with AT&T.
The companies have blamed AT&T for degrading the experience of Netflix customers due to unnecessary congestion on the company’s network. Cogent, an Internet service provider that has carried Netflix’s traffic, claims AT&T refused to upgrade its port capacity at an interconnection point, which led to a degraded experience for Netflix subscribers.
Cogent wants the FCC to impose a number of conditions on the merger, including a provision that would require AT&T to upgrade its ports to avoid congestion if an interconnection point between AT&T and another network reached 70 percent capacity. In a filing last September, Cogent also said AT&T should maintain settlement-free peering relationships.
“This condition would ensure that edge providers can use Tier 1 backbone networks to provide a cost-efficient and reliable means to reach AT&T-DirecTV customers instead of being compelled to enter into paid, direct interconnection agreements,” Cogent wrote.
In a letter to shareholders on its first-quarter results, Netflix expressed support for the FCC’s recent network neutrality regulations. In its massive open Internet order that is currently the subject of litigation, the FCC provided authority to hear interconnection disputes between the likes of AT&T and Netflix. However, a number of the FCC’s key Network neutrality rules – including prohibitions on blocking, throttling or paid prioritization of traffic – do not apply to Internet traffic-exchange agreements.