Why deals with Internet service providers are helping Netflix

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Oct. 23 2014, Updated 8:00 a.m. ET

Netflix signed a number of agreements with ISPs

In the previous part of this series, we discussed how huge amounts of traffic travel from Netflix (NFLX) to Internet service providers (or ISPs) in the U.S. and why Netflix continues to vouch for strong net neutrality rules. We also discussed how Netflix has been fighting with various ISPs over the slow Internet speeds that have been ruining its customers’ experience watching Netflix videos. To overcome these issues, Netflix signed a number of interconnection agreements with various ISPs.

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The company first signed a deal with Comcast (CMCSA) in February this year. Netflix then followed up with Verizon (VZ) in April, AT&T (T) in July, and Time Warner Cable (TWC) in August. According to these agreements, ISPs will provide Netflix with preferential treatment by offering faster Internet speeds for Netflix customers watching its videos online.

Media ISP speed index

Agreements have started to show results

These deals didn’t immediately effect the desired results for Netflix. Netflix continued to blame Verizon and AT&T for slower Internet speeds until July this year. However, Netflix’s updated ISP speed index for August and September showed dramatic Internet speed improvements for all the above-mentioned ISPs—especially Verizon. As the chart above shows, Verizon’s FiOS is now the best ISP in terms of Internet speeds for Netflix videos. Verizon’s average Internet speeds for September were 3.17 Mbps (megabits per second), while AT&T U-Verse recorded 2.77 Mbps.

Although Netflix has signed these agreements with ISPs for preferential treatment, it still maintains its stance on net neutrality and claims that it shouldn’t pay any fees in return for quality service from ISPs. Until now, the Federal Communications Commission (or FCC) has decided not to regulate this market. But the commission may formulate some rules in future.

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