Why the Netflix, Comcast Agreement Is Such a Big Deal

Updated from 10:37 a.m. to include thoughts from analyst Craig Moffett.

NEW YORK (TheStreet) -- Netflix (NFLX) and Comcast (CMCSA) announced over the weekend a major deal that gives Netflix direct access to Comcast's broadband network. Not only is this a landmark deal between a content company and a broadband provider, but it will change the way content is delivered to homes in the future.

The deal ensured that Netflix's domestic streaming subscribers that use Comcast will have access to a smooth viewing experience. In recent months, the average speed for Comcast subscribers has fallen, and fallen dramatically. In January, the average speed for Comcast subscribers fell to 1.51 megabytes per second, down from 1.63 in December.

This has been a trend for the past few months, and it's not limited to just Comcast. Netflix speeds at Charter Communications (CHTR), Verizon (VZ) FiOS and a few other broadband providers have dropped sharply as well, something that's obviously a big concern for Netflix CEO Reed Hastings and his team. With the company surpassing 33 million domestic streaming subscribers in the fourth quarter, and the stock near all-time highs, it's important for Hastings to keep his subscribers happy, and lessen the amount of buffering that's going on while watching video.

In an interview on CNBC, Verizon CEO Lowell McAdams said Netflix and Verizon had been talking for around a year about a similar issue, and would expect to sign something.

Shares of Netflix were rising in early Monday trading, gaining 2.6% to $443.29, as people begin to understand what the deal actually means. There were several blog posts, tweets and articles saying the deal is negative for Netflix, in that the company would have to pay more for direct access as opposed to using intermediaries to access Comcast's services.

NFLX ChartNFLX data by YCharts

There's a really good blog post from Dan Rayburn, EVP StreamingMedia.com, and a principal analyst at Frost & Sullivan, who laid out what the deal really means and tried to clarify that it's not necessarily a precursor to higher Netflix rates for everyone. This particular passage highlighted just exactly what the deal means:

"Today's news is very simple to understand. Netflix decided it made sense to pay Comcast for every port they use to connect to Comcast's network, like many other content owners and network providers have done. This is how the Internet works, and it's not about providing better access for one content owner over another, it simply comes down to Netflix making a business decision that it makes sense for them to deliver their content directly to Comcast, instead of through a third party. Tied into Netflix's decision is the fact that Comcast guarantees a certain level of quality to Netflix, via their SLA, which could be much better than Netflix was getting from a transit provider. While I don't know the price Comcast is charging Netflix, I can guarantee you it's at the fair market price for transit in the market today and Comcast is not overcharging Netflix like some have implied. Many are quick to want to argue that Netflix should not have to pay Comcast anything, but they are missing the point that Netflix is already paying someone who connects with Comcast. It's not a new cost to them."

If you liked this article you might like

7 Essential Rules for Investing in Tech Stocks

Politics Hang Heavy Over FCC's Review of Sinclair-Tribune Media

Microsoft's New Xbox One X Shows It's Done Trying to Please Everyone

Cord Cutters Aren't Just Leaving Pay-TV Because of Price

Netflix Shares Could Rise 16% on Big Boost in Subscribers