I work for an ISP. The way it works is, the 2 isp's have a free peering agreement... Every month or 3 they compare traffic and true up. You ate up 100gig more than we did? You party us X. And vice versa.
I own an ISP. This is not the way it works at all.
Peering policy is actually a rather complex topic. How it works depends on what kind of ISP you are and your size. Small ISPs want to peer no matter what. Large ISPs typically do not want to peer at all. The balanced peering requirement is a poor excuse to say no to peering.
As a small ISP we want to peer with all and everything. This is because any byte transmitted over a free peering is a byte that did not have to go via our paid transit circuit. It does not really matter in what direction that byte is going.
As a residential ISP the majority of our traffic is download. The transit cost is determined by the larger of upload and download. If we can get rid of some download, we will save good money. Netflix is offering to bring some of that download to us for free.
It is very asymmetric and it is a very good deal for both companies. It is a win-win.
So why do large ISPs not want to do this? Because they can get away with forcing everyone to pay to deliver traffic to them. It is no longer a win for them if they think they can get Netflix to be a paying customer. Nor if they already have free peering with the big transit providers, because then they are already getting the stream for free.
Why do mid sized ISPs not want to peer with small ISPs? If the mid sized ISP has a peering agreement with the transit provider of the small ISP, they are already getting the traffic for free. So there is no gain for them. On the other hand, the mid sized ISP might believe the smaller ISP could become a transit customer and you never peer with your customers or potential customers.
But instead of coming clear and tell the real reason, you will typically get the balanced peering requirement quote instead.
In truth balanced peering is not really possible nor desirable for a residential ISP. Only other residential ISP would have balance with us but there will be very little traffic. Just a little bit of bittorrent etc. As a residential ISP we need to peer with content providers, hosting companies and the like.