Level 3 Plays Politics In Internet Peering Spat With Comcast

You only get the chance to cry wolf once.

Level 3 Communications decided that this week was the right moment to play the net-neutrality card in its peering dispute with Comcast (see Level 3 Alleges Comcast Demanded Fees To Deliver Internet Content).

Consider: Comcast is nearing the finish line on its deal for NBC Universal, making it a convenient punching bag (see Groups Coalesce To Criticize Comcast/NBCU and Comcast Taps Post-Merger NBCU Team). Meanwhile, the FCC is keenly interested in establishing network neutrality rules (see Sources: FCC Looking To Reunite Net Neutrality Stakeholders).

Level 3 just won a major customer for its content distribution network business: Netflix, which now reportedly sucks up around 20% of the downstream broadband traffic in the U.S. during peak times (see Netflix Accounts For 20% Of Peak U.S. Internet Bandwidth: Study).

As a result Level 3 is dumping far more bits onto Comcast’s networks (and, by the way, the networks of other ISPs such as AT&T, Verizon, Time Warner Cable and Cox). According to Comcast, Level 3 is doubling the amount of data it sends to the cable operator. In Comcast’s view, Level 3 should pay the freight for the increased amount of traffic it’s expecting the MSO to deliver.

So what did Level 3 do? It cynically complained that Comcast was erecting a “toll booth” on the Internet, in a statement on Monday that accused the MSO of violating the spirit and letter of the FCC’s Internet Policy guidelines.

Hogwash, said Comcast, suggesting that Level 3 raised the specter of network neutrality in the hopes it will be able to avoid paying regular industry rates for CDNs.

“We are happy to maintain a balanced, no-cost traffic exchange with Level 3. However, when one provider exploits this type of relationship by pushing the burden of massive traffic growth onto the other provider and its customers, we believe this is not fair,” said Joe Waz, Comcast senior vice president for external affairs and public policy counsel.

But Level 3 apparently wants to have it both ways on this issue. As several observers have pointed out, Level 3 in October 2005 cut off its connectivity with Cogent Communications because the settlement-free peering agreement with Cogent “was not equitable to Level 3,” the company said.

Comcast’s Waz threw Level 3’s comments about the Cogent dispute five years ago back at it:

“To be lasting, business relationships should be mutually beneficial. In cases where the benefit we receive is in line with the benefit we deliver, we will exchange traffic on a settlement-free basis. Contrary to Cogent’s public statements, reasonable, balanced, and mutually beneficial agreements for the exchange of traffic do not represent a threat to the Internet. They don’t represent a threat to anyone other than those trying to get a free ride on someone else’s network.” 

What most likely happened is that Level 3 “bid too aggressively for the Netflix business and is now trying to recover,” VideoNuze publisher and industry consultant Will Richmond speculated in a blog post.

“When it couldn’t do so privately in its negotiations with Comcast, it instead went public, wrapping itself in the cloak of net neutrality,” Richmond continued. “My bet is that the FCC will quickly see this as well, and that over time content delivery pricing to Netflix will find its appropriate level. Regardless of what that is, online delivery will still be vastly less expensive to Netflix than postage, so in the long term, streaming is still hugely beneficial to its future.”

Other industry analysts also believe this is nothing more than a business dispute.

“In our view, Comcast is not discriminating against this type of traffic; rather it is simply requiring Level 3 adhere to the same type of commercial arrangement as the other CDNs it works with,” Citadel Securities analyst Vijay Jayant wrote in a research report. “Logically, Comcast would not be keen to allow Level 3 to exploit a loophole in its peering relationship, especially when the balance of traffic has grown grossly disproportionate (5-1 in Level 3’s favor).”

Added Sanford Bernstein’s Craig Moffett: “Level 3’s implied claims of traffic discrimination — that is, differentially charging for video traffic in an

effort to prevent online competition — appear unfounded.”

But let’s consider the heart of the matter here: Does Comcast have enough market power to dictate interconnection rates? With about 16.7 million high-speed Internet customers as of the end of Q3, it holds 22% share of the U.S. broadband market, according to Leichtman Research Group.

Does that let Comcast unilaterally decide what the “tolls” for CDNs should be? And if so, should the U.S. government step in to try to “fix” a market failing?

At this point, it’s not clear that the free market isn’t working — a point the industry has made in the network neutrality debate — meaning that a lighter regulatory touch would be preferable to a heavier-handed one.