By Shalini Ramachandran and Drew FitzGerald

Streaming video on the Web can be a bumpy experience: The video can slow or
stop altogether. To avoid these problems, Netflix Inc. (NFLX), the biggest
online video outlet, has been trying to install special equipment directly
connected to the networks of Internet access providers.

But the yearlong effort hasnt got very far with the major U.S. Cable and
phone companies. A big reason: Some of them have asked Netflix to pay for that
access.

People close to the company say it doesnt want to set a precedent for
itself, although it is in talks with broadband providers about compromise
solutions.

The standoff highlights a quiet but momentous shift in the relationship
between major Web content companies and Internet access providers in the past
several years. And at the heart of the debate is an increasingly pressing
question: Who is responsible for the Internets growing costs?

According to people familiar with the matter, many Internet content
companies, including Facebook Inc. (FB), Google Inc. (GOOG) and Microsoft Corp.
(MSFT), have been paying major providers, such as Comcast Corp. (CMCSA, CMCSK),
Verizon Communications (VZ) and AT&T (T), for connections to get faster and
smoother access into their networks.

The payments, so far, arent huge. Comcast, for instance, says it earns about
$25 million to $30 million a year for such payments, less than 0.1% of its
total revenue. Time Warner Cable Inc. (TWC) generates tens of millions of
dollars, network executives said. Executives at both companies say they arent
looking to turn this revenue into a big business.

These kinds of payments long have been shrouded in secrecy, largely because
the companies involved are wary of discussing unregulated territory where
contract negotiations can be contentious. Microsoft, Facebook, Google, Verizon,
AT&T and Comcast declined to comment on the specifics of such arrangements.

Sensitivity aside, paying for these direct connections is legal. The practice
doesnt breach the Federal Communications Commissions open Internet
rules--enforcing the concept popularly known as net neutrality--which forbid
landline broadband providers from favoring certain Internet traffic on their
networks. The rules address traffic traveling over a providers last mile
pipeline into consumer homes. But these payments are for a direct connection
between content companies networks and the edge of broadband access networks.
The rules are more ambiguous about such payments.

Nevertheless, they have raised concerns among Internet executives that
smaller startups could be put at a disadvantage.

If broadband access providers require payment from Web publishers, the FCC
warned in a court filing last fall, it will increase barriers to entry of new
services and would make it more difficult to attract the necessary financing
for startup Internet ventures. The next Google or Facebook might never begin,
the commission said in the filing, responding to a pending Verizon lawsuit that
challenges the regulators open Internet rules.

Some Web companies feel they have little choice, people close to the
companies say. If Microsoft stopped paying Comcast tomorrow, said a person
familiar with the matter, its Web performance would go downhill and the pages
wouldnt load as fast. Googles decision came down to whether the Internet
giant would put advertising revenue amounting to tens of billions at risk for
the millions Google would have to pay Comcast, some of the people said.

The debate is likely to intensify as more companies plan online video
services. Intel Corp. (INTC), for example, has been pursuing media deals in
hopes of offering a streaming package of live channels and on-demand programs
to customers in a product by the end of this year.

In January, Time Warner Cable publicly criticized Netflix for requesting
unprecedented preferential treatment. This week, Time Warner Cable said it is
engaged with Netflix and seeks an optimal solution for their mutual
customers.

Comcast in recent months complained to the FCC that Netflix was asking for
special access to its broadband network, people familiar with the matter said.
Comcast said the issue could cause a financial dispute but didnt require
regulators involvement. Netflix responded to the FCC that it wasnt seeking
special treatment and was being pressured by big operators with market power to
pay for mutually beneficial, improved delivery of its content.

Broadband providers see these content guys who are minting money, said
Daniel Golding, an Internet engineering consultant and former negotiator for
AOL Inc. It is a question of who should be paying for their fair share of
this?

Historically, the companies controlling the Internets pipelines have made
the investment. Much of the Webs backbone belongs to Internet middlemen,
telecom companies like Cogent Communications, which help connect websites with
Cable and phone companies.

Web publishers have always paid middlemen to help carry their traffic.
Middlemen connected with big broadband providers on terms that have evolved
over time. The historical idea was that networks exchanging roughly equal
amounts of traffic would interconnect for free.

But as the Web has evolved from a predominantly text platform to one where
video, games and music dominate, those business arrangements have been
strained.

The volume of Internet video content is expected to more than double by 2017,
according to network-gear giant Cisco Systems Inc. (CSCO), adding more stress
to broadband providers networks extending to consumers homes, which are
costly to upgrade.

Comcast is seeing its Internet traffic grow at a compounded annual rate of
55%, according to its chief network officer John Schanz. That means the company
is having to double its networks capacity every 18-24 months.

This has prompted broadband providers to start charging some middlemen in
exchange for taking their traffic, according to several people familiar with
their negotiations. In 2010, for instance, Level 3 Communications (LVLT)
revealed a dispute with Comcast over data-heavy Netflix traffic that forced the
company to buy backbone Internet service from Comcast, which Level 3 said it
did not need or want to purchase. More than two years later, a Level 3
spokesman said the two sides havent yet resolved that dispute.

Meanwhile, big Web companies like Google and Facebook in recent years have
invested heavily in building their own specially-designed infrastructure,
extending to the edge of broadband providers networks, to speed the passage of
their content across the Internet. By paying Internet access providers, they
can establish a direct connection into the providers networks.

Once inside the broadband providers networks, however, all content faces the
same traffic travails along the last miles of pipe connected to homes.

Network executives on both sides say that the continuing presence of
middlemen acts as a check on big Cable and phone companies ability to raise
prices too aggressively.

The executives also say that the access providers are offering reasonable
rates, sometimes cheaper than the rates they would get from a third-party
transit provider.

Theres a tremendous opportunity today for any Internet startup to find
different ways to send its traffic, said Comcasts Mr. Schanz.

Still, some content owners worry that direct payments to broadband-access
providers will eventually become their most viable option to get data-heavy
traffic to consumers with the speeds and quality they expect.

Internet traffic that doesnt go over those direct connections is really
what I would call a poor mans backbone, and you get what you pay for, said
Lane Patterson, chief technology officer at network data center operator
Equinix Inc.

Already, some access links connecting the middlemen into big broadband
providers networks are getting clogged, network engineers say. Cogent, for
instance, says it has been seeing congestion on its links with Time Warner
Cable, Comcast and Verizon. Operators do upgrade for more capacity, but they
do it at a very procrastinated manner, Cogents chief executive, Dave
Schaeffer, said. Cogent says it doesnt pay broadband companies to connect with
their networks.

Broadband provider executives said that the bottom line is that if a network
wants to dump a lot of traffic into their networks, it needs to start
paying--whether its a content company or a middleman. Some content senders
have been known to fabricate crises to try to shift costs of their business
models to others, one executive said.

There is no win and it makes no sense for us to ever deliberately congest
our network when we are in the business to provide Internet service to our
customers, said Comcasts Mr. Schanz.

-Amir Efrati and Shira Ovide contributed to this article.

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(END) Dow Jones Newswires

June 19, 2013 16:10 ET (20:10 GMT)

Copyright (c) 2013 Dow Jones & Company, Inc.

061913 20:10 -- GMT