Netflix is paying level 3, a tier 1 provider for access. All the tier 1's interconnect with each other for free (by definition) - they're basically the backbone of the internet for global transit.
Customers pay a consumer ISP, like comcast, for access to the internet, i.e. access to the tier 1 network. So both ends are paying for their connection, all they need is for both networks to be connected in a datacentre somewhere - both ISPs pay for their own equipment, and when that link gets congested, they add more/faster interconnect ports, paid for by the customers that are paying for their side of the link. And that's how it works basically everywhere except the US now.
Because Comcast, along with the other big US consumer ISPs are saying to netflix - a customer of another ISP altogether - 'nice traffic, shame if something happened to it.' And charging extra for a 'fast' path to their network. They've deliberately let the interconnect to level 3 become congested, and are refusing to upgrade it, affecting netflix and all other services that comcast customers request from level 3's network. Netflix offers to host their CDN cache servers inside comcast's network, so it does't have to all go via the level 3 interconnect, comcast refuse.
So basically comcast are singling out netflix, as a competitor to their own video services, and demanding money with menaces. Successfully.
Comcast's argument that more traffic comes in from level 3 than goes out - well duh, they're a retail ISP, and they provide much faster download connections than upload, and put restrictions on what services customers can put on that upload. Of course they're largely going to be seeing more traffic come in than go out. Netflix said they could change their client so as much traffic went up as came down, and comcast said that wouldn't make a difference, thus blowing that argument out of the water.
Given the natural and legally provisioned regional monopolies the cable companies in the US have got themselves, they've got their own customers over a barrel. They can let the interconnects go to shit, and the customers are stuck with it.
5 of the 6 permanently congested links to level 3's network are in the US. It's absolutely obvious that with the FCC unwilling to exert its existing regulatory authority, and congress' refusal to step in as it would be 'government regulating the internet', you have a textbook example of oligopoly abuse. Free markets cannot exist when monopolists abuse their market controlling power, and netflix is just the start. Enforcing regulation against monopolists abusing their position is the only practical, effective answer, and it's high time the FCC used its power to do just that.
Apply common carrier status to regional monopoly cable companies, and the sooner the better.