According to The Wall Street Journal's sources, Apple is in talks with Comcast to build a streaming television service that would bolster its digital content portfolio and guarantee a high level of quality (via prioritization) to Comcast subscribers' homes. But Apple paying for priority access to Comcast's subscribers would be another blow to net neutrality and could signal that content distributors will have to pay for access to cable customers.
It wouldn't be a precedent for such an arrangement, however. In February Netflix and Comcast announced a "mutually beneficial interconnection agreement" that provided "a high-quality Netflix video experience" for Comcast subscribers "for years to come." Terms of the deal weren't disclosed although the WSJ indicates that Netflix paid for the privilege.
Netflix was forced to pay for priority access to Comcast subscribers after its streaming performance began to lag and customers complained of poor video quality and buffering. Comcast prioritizes data packets for its own Xfinity streaming TV and Video On Demand (VOD) services ahead of competing video streaming packets.
Netflix performance was over 2 Mbps on Comcast in September 2013 but dropped to 1.5 Mbps in January 2014. As you can see from the chart below, Netflix bounced back up significantly in February 2014 after the announcement of the interconnection agreement with Comcast.
Netflix performance should continue to climb on Comcast in the next few months as communications director Joris Evers touted in a blog post after the deal. If it doesn't, Netflix just has to pick up the phone and call Comcast – not an option for video services lacking such an agreement.
Google also offers a Video Quality Report but results for my location "were not yet available" at the time of publication.
Although Netflix was probably wise to cut a deal with Comcast (Netflix traffic consumes a whopping 30 percent of all Internet bandwidth during prime time) the move could spell trouble for other video streamers like Hulu and YouTube/Google who could begin to see their video performance drop on Comcast as the service "prioritizes" its own (and now Netflix's) video traffic ahead of providers that don't pay the toll.
Apple is negotiating for two of Comcast's crown jewels: access to its streaming video portfolio and speedy access on the last mile into Comcast's 30 million plus homes. Apple could conceivably gain access to live television (which it doesn't currently offer) and higher-speed service to Comcast customers' homes. Apple couldn't launch a video streaming service that its customers would find disappointing, so it makes sense to cut a deal with the number one broadband provider for priority access.
WSJ notes that there are still many hurdles that remain between a deal between the world's most valuable company and the largest cable company in the U.S., but the possibilites are tantalizing. Imagine having live television programming (like news and sports) on your iPad or iPhone and an iCloud DVR for watching recorded shows on demand. When combined with the deep TV and movie catalog that earned Apple's iTunes division almost $13 billion in revenue in 2012, its an even more compelling product – and one that will bolster Apple's bottom line. For context, if the iTunes empire of content and services was spun off into its own company, it would be ranked 130 in the Fortune 500, slightly below Alcoa and above Eli Lilly.
If the WSJ is correct in assuming that Netflix paid for the Comcast deal (which I bet it did), it stands to reason that Apple will also be paying for the privilege to access its subscribers – which should give Comcast a boost in revenue. Other broadband Internet providers could follow suit. You can bet that Cox Communications Inc., Charter Communications Inc., and Cablevision are paying close attention to Comcast's new negotiating power and its ability to productize the last mile.
As new toll gates are being erected on the Internet, other high-bandwidth video services like Hulu, Vudu, and YouTube may be forced to step in line and pay Comcast (and other broadband ISPs, potentially) if they expect to see good performance in customers homes.
Should the largest ISPs be able to charge content providers for priority access?