On the Tussle Between Over-the-Top and Internet Service Providers: Analysis of the Netflix-Comcast Type of Deals

Abstract

Over-the-top (OTT) services reach users via the open Internet without dedicated infrastructures and have expe- rienced enormous growth in recent years. Netflix, an OTT streaming provider, now accounts for more than one-third of peak U.S. downstream traffic and causes cord-cutting of traditional cable pay-TV services from incumbent Internet service providers (ISPs). However, the service quality of video streaming is still influenced by the last-mile Internet access providers, who do not have incentives to deploy enough capacity and want to charge OTT service providers (OSPs) for direct connection. Although Netflix has reached deals with ISPs such as Comcast and Verizon to improve service quality, their undisclosed agreements have raised concerns about net neutrality. In this article, we study the economics of the Netflix-Comcast type of deals and derive the conditions under which an OSP and an ISP would reach such a deal. We analyze the impact of a deal transaction on the revenue of providers, the utility of users and the social welfare. Based on these results, we further classify different policy regimes and draw regulatory implications that depend on the intensity of ex- post deal competition and the cost of the deal. Our results can help understand how existing deals were made, how future deals might emerge, and how regulators should respond to various market conditions and scenarios.