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Verizon, AT&T Negotiating Network Deals With Netflix

24 Feb, 2014 By: Erik Gruenwedel

As expected, Netflix’s landmark agreement to pay Comcast for direct broadband access into subscribers’ homes wasn’t an isolated event.

Verizon Communications and AT&T are in discussions with the subscription-streaming pioneer to afford its members more-direct access (i.e. smoother streaming) to movies and TV shows.

Verizon CEO Lowell McAdams told CNBC the telecommunications giant has been in talks with Netflix CEO Reed Hastings for about a year, and that he expects to iron out in the near term a peering agreement whereby the SVOD service market leader pays Verizon for direct network access.

McAdams said he didn’t know the particulars of the Comcast/Netflix deal, but added that the arrangement was a necessary investment to keep the Internet “vibrant.” He said a streaming service with a lot of video “load” must be positioned in an efficient place (i.e. proprietary network). The CEO said that SVOD services paying for access in a commercial model will work, and not require regulatory oversight.

Notably, Verizon recently acquired the assets of Intel's scuttled over-the-top video streaming service. It also co-owns Redbox Instant with Outerwall Inc.

"I'm not here to pre-announce and I'm not here to change my hand at the negotiating table, but I think there's a good opportunity here," McAdam said. "Both Reed [Hastings] and I have talked about it and we think it's in both of our interests."

Meanwhile, an AT&T representative said the telco was in discussions with Netflix.

“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," the rep said in an email.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, said he believes Netflix will pay upwards of $50 million annually over three-to-five years for direct access to Comcast’s broadband network.

Pachter contends Comcast could have sought as much as 1 penny per GB transmitted — a rate that would tally $400 million annually based on the assumption that Netflix’s 33 million domestic subs consume an average of 100GB of data per month.

Considering such an amount ($400 million) would be more than two-thirds of Netflix’s operating income in 2014, Pachter believes the rate was significantly less, coupled with the fact Comcast has a big pan on the fire.

“We think that Comcast was motivated to get a deal in place prior to its merger [with Time Warner Cable], but do not expect Verizon, AT&T, Charter, Cablevision or any other U.S. broadband provider to be similarly motivated to strike a deal,” Pachter wrote in a note.

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