How Netflix's Business Model Got Turned Upside Down

NEW YORK (TheStreet) -- Netflix (NFLX) shares were jumping, gaining 1.8% to $319.90 after the company signed a direct connection deal with Verizon (VZ), similar to one it had signed with Comcast (CMCSA) earlier this year.

According to a tweet last night by BTIG Research analyst Walter Piecyk, Verizon CEO Lowell McAdams had confirmed the company signed a "direct connection deal with Netflix like Comcast's."

Netflix spokesman Joris Evers also confirmed in a tweet that: "We have reached an interconnect arrangement with VZ that we hope will improve performance for customers over the coming months. Verizon spokesman Bob Varettoni also tweeted confirming the deal, adding that terms were confidential.

The agreement comes two months after Netflix signed its deal with Comcast that ensured that Netflix's domestic streaming subscribers using Comcast will have access to a smooth viewing experience. Prior to the deal, the average speed for Comcast subscribers had 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.

Following the deal, Netflix noted speed on Comcast broadband lines in March jumped six spots to fifth on the list, with an average of 2.5 megabits per second (Mbps). That's up markedly from February, when the average speed on Comcast was 1.68 Mbps, and 1.51 Mbps in January.

That pales in comparison to speeds on Verizon's broadband network, FiOS, which had an average speed of 1.91 Mbps per second for the month of March.

Netflix has been adamant about not only opposing the pending Comcast, Time Warner Cable TWC merger because of the position it thinks the merged entity will have over other companies, but the laws surrounding net neutrality as well. When discussing the company's first-quarter results, CEO Reed Hastings noted the deal with Comcast had to be done because "we felt like we had no choice." Here are his entire comments below:

The Internet is in constant evolution in terms of the relationships and interconnection that we see. So we did end up choosing to pay Comcast to improve the video quality that our members experience. We don't think we should have to, but in the short-term we felt like we had no choice. So we have got that deal in place. In addition, more lobbying for this idea that we think is very natural, which is interconnect as part of net neutrality, it's a stronger form of net neutrality and now we are in opposition to the Comcast, Time Warner merger because we are really concerned about what happens when the combined entity, if the merger were to go through, would have with over 60% of U.S. homes passed and eventually over 50% of U.S. homes subscribing to cable Internet and that's a worrisome factor. So we think it's more in the public interest to either not have them merge or if the government goes ahead with it, to at least put some significant merger agreements, settlements in there.

--Written by Chris Ciaccia and Laurie Kulikowski in New York

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