I'm somewhat sympathetic to the ISPs issues.
1) Internet connectivity at the end user level is oversold. AT&T (comcast, timewarner, google fiber, [insert your ISP here]) does not charge in such a way that every single user can have 100% unfettered access to your bandwidth all simultaneously. It's just the way it works
2) Netflix may pay their ISP for their bandwidth usage.
Here's the disconnect. Netflix's ISP and [insert your consumer ISP here] do not share the same network. Thus at some point, the two ISPs have to cross some barrier. Now if all of [insert your consumer ISP here]'s customers are simultaneously connecting to Netflix at the exact same time for primetime hours, who's responsibility is it to ensure that the peering arrangement is fair? Does the consumer ISP need to pay to make sure that the peering relationship is such that all their users have the ability to stream from Netflix unfettered? Considering 1) above, is this fair to the ISP? They could do so, but to maintain their existing cost structure it'd likely mean that they may have a smaller pipe to another peer. Is it fair to users using those other peers or do they also have simply make sure ALL of their peers are able to fully pass 100% of traffic unfettered at peak times?
The simple answer is, if you expect the consumer ISP to allow full bandwidth to all of these sites, it's going to significantly raise the cost of bandwidth per end user. So we're complaining that consumer ISPs are demanding money from Netflix, but the alternative is to demand more money from the end user or eat the costs. We know eat the costs is never an option in the US market system :). So where's the money coming from? If the consumer ISP started charging people more for this, people bitch about being charged more rather than bitch about crappy Netflix.
Perhaps Netflix's tier 1 should pay for a larger peering pipe to the consumer ISP. But where's that money coming from? They're going to increase Netflix's rates, but even then, the consumer ISP would have to have the proper equipment to handle the larger peering pipe.
I don't really agree with the entirety of either Netflix or the consumer ISP (AT&Ts) arguments, but peering bandwidth has always been a balancing act, especially with multiple networks you have to peer with. This is why we have CDNs to begin with, and CDNs are paid for by the content producer, and they in turn either pay the consumer ISP to host their gear, or work with the consumer ISP to come up with a mutually beneficial decision. In some cases, the reduced bandwidth flowing through the peering reduces the ISPs costs that they can justify hosting the CDN equipment without asking for any money.
I do agree that it's wrong for a consumer ISP to purposefully lopside their peering arrangements to hurt a competitor, just like I agree that there's nothing wrong with the notion of paying an ISP to host a CDN appliance. Given our lobbying system, do you really think that net neutrality legislation will even begin to address the many nuanced aspects of this issue?