Comcast Erects Toll Booths for Delivering Data Over the Net

Big backbone provider accuses U.S. cable television provider of closing the Internet

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Steven Cherry: Hi, this is Steven Cherry for IEEE Spectrum's "This Week in Technology."

The Internet is, literally, a network of networks, and the busiest network in the world belongs to Level 3 Communications. Earlier this month, Level 3 announced that Comcast—a much smaller but still enormous broadband provider, but also a cable television provider—has started charging Level 3 a fee to deliver data to Comcast's users.

This is a sticky proposition. First of all, major carriers don't charge one another to send data through one another's networks. This free exchange is called peering, and it's one of the things that makes the Internet work. The backbone providers have generally said to one another: I'll deliver your data packets to my customers if you deliver my data packets to your customers.

Why pick on Level 3? Maybe it's because the company recently made a deal with the movie service Netflix to deliver the company's streaming movies. This means that much of the data that Level 3 is sending through Comcast's pipes is video data destined for Comcast's customers—customers who have chosen to get a movie through an Internet service instead of Comcast's own cable television service.

That would seem to put Comcast in the awkward situation of using its position as the nation's largest cable broadband provider to protect its position as the nation's largest cable television provider. It would also seem to violate the spirit of net neutrality, an amorphous philosophy that boils down to the idea that Internet service providers shouldn't favor—or disfavor—some packets of data over others.

To help sort all this out, my guest today is Scott Wallsten. He's vice president for research at the Technology Policy Institute in Washington, D.C., a senior fellow at the Georgetown Center for Business and Public Policy, and he's also served as economics director for the Federal Communication Commission's Broadband Task Force. He joins us by phone from Washington, D.C. Scott, welcome to the podcast.

Scott Wallsten: Thanks for having me.

Steven Cherry: Scott, Level 3 has called Comcast's demand for a fee to deliver Level 3 data to its users a "threat to the open Internet." Comcast, on the other hand, claims that its business negotiations with Level 3 are a "simple commercial dispute." So which is it?

Scott Wallsten: I don't think it's either of those, exactly. Each company wants to influence the FCC's decisions, of course, when it makes its public statements. But there are certain aspects of this that make it especially interesting. So as you noted, the issue is that Level 3 is providing service to Netflix, so therefore offering a service that competes with some of Comcast's products. So you do worry that Comcast might have the incentive to create entry barriers to competitors, and that gets into the net neutrality issue, but it also becomes potentially an antitrust issue. You don't want to be anticompetitively discriminating against a competitor. On the other hand, Level 3 now has suddenly started putting a whole lot more traffic onto Comcast's networks by virtue of now having Netflix data. And the peering arrangements that you described happen when the data flows between networks are roughly in balance. So all of a sudden the balance has the potential to change dramatically as a lot more data comes into Comcast than Comcast is sending out to Level 3. So you can see both sides of the argument here. Whether it's exactly a simple commercial dispute, that's probably not the case, because even if it was a commercial dispute there was a big change in the traffic. So that doesn't necessarily mean it's simple, but it still could be a commercial dispute.

Steven Cherry: Yeah. Comcast for its part issued a somewhat vague statement, but it did say a couple of interesting specific things. One was that, quote, "What Level 3 wants is to pressure Comcast into accepting more than a twofold increase in the amount of traffic Level 3 delivers onto Comcast's network—for free." It also said that Level 3 proposes to send traffic to Comcast at a 5:1 ratio over what Comcast sends to Level 3. But when it comes to end users—and Comcast's network exists to serve end users, you know, that is, households of broadband subscribers—downloads always exceed uploads, and so Comcast's network peers will always be sending more data into Comcast's network than Comcast is sending out. Isn't that what Comcast's broadband customers are paying it to do?

Scott Wallsten: Yeah, to some extent downloads are always going to exceed uploads. The question is, what kinds of costs is another company imposing on the network and how do you share those costs? So people have pointed out that if Level 3 has to charge more and ends up charging Netflix more, then Netflix customers will have to charge more. But on the other hand, if it really is imposing real costs on Comcast and Comcast isn't allowed to charge Level 3 for those costs, then Comcast's customers will end up paying higher prices. So somebody ultimately will pay. If there are no congestion issues, then the marginal costs of delivering a bit is very small; it's not zero, but it's fairly close to zero. Once you get into congestion issues, then the cost of delivering bits becomes much higher, because each additional bit squeezes out another bit. And we don't know from the information provided how close we are to seeing that kind of congestion. But one of the things about Netflix's traffic that's difficult, this kind of video traffic, is that it's very concentrated around particular times—basically in the evening when people come home and watch streaming videos. So this has the potential to create real congestion problems at particular times, those peak load problems. And as the amount of video grows, the potential costs for that are real, and somebody's going to have to pay for them.

Steven Cherry: Looking at this a little more broadly, it seems like there are more and more options for getting television shows and movies via the Internet; there's Netflix and iTunes and Amazon and Hulu and I don't know, a thousand more new ways. So more people are choosing to just get the shows and movies they want individually and not through a big cable package like Comcast sells in its cable television service.

Meanwhile, in most of the country, households that want broadband have very few choices, right? They generally have a single cable provider, such as Comcast, and a single telephone provider, such as AT&T or Verizon. Both AT&T and Verizon have television services of their own. So if Comcast gets away with this and charges Level 3 in this way, won't the telephone providers want these payments too? And if they get them, won't the Level 3s of the world have to charge the Netflixes more, and Netflix will have to charge its customers more, and so more people will just say you know, to heck with it, I'll just stay with cable television?

Scott Wallsten: Well, there are a few issues at play here. The first is that again, if it's imposing real costs—and again, we haven't seen data that this is causing that kind of congestion—but if it's imposing real costs, then somebody's going to have to pay for it. And if the costs don't get passed on to Netflix or whoever the video provider is through Level 3 or directly, then that means Comcast will have to pay for them, which means Comcast's subscribers will have to pay for it. So if there are real costs, then somebody's going to have to pay for it somewhere—this stuff's not free. But more directly to your point, that's exactly the concern: You want to make sure that companies are not anticompetitively discriminating against potential competition, and fortunately we have laws to deal with that. Those are the antitrust laws. And one hopes that the Justice Department watches these events carefully, because that's exactly what they're supposed to do, what they're trained to do is look at these issues carefully and determine whether certain actions are anticompetitive or not. Now the Justice Department is a much higher bar than is the FCC, which is why everyone goes to the FCC first, because all you have to do is convince three commissioners that what you're saying is right, and they do it. And the Justice Department actually has standards that you have to make a strong case. But what you're describing would be, in fact, a real problem, and it is the problem to worry about, but we have agencies that are supposed to be overseeing that kind of behavior.

Steven Cherry: Yeah, so I guess the first hurdle would be the FCC, and just today Chairman Jankowski said that the commission was "looking into"—that's the phrase he used—the Comcast Level 3 dispute. Now, you've served at the commission, Scott. What do you think the FCC perspective on this will be?

Scott Wallsten: Well, just because I was at the commission doesn't mean I know what they'll do. But my guess is that they'll recognize that there is an aspect to this that is simply a business negotiation, even if it isn't a "simple" business negotiation, and that there are thousands of these such agreements. There have been these sort of interconnection disagreements and disruptions in the past. They haven't lasted long, and I think we'll have to look at it in that context. Level 3 knows that it has a certain advantage right now: Comcast wants its merger with NBC to be finalized; it needs to keep the FCC on its good side. So Level 3 must feel that it has a certain advantage now. And hopefully, people at the FCC will try to keep all that to the side and just look at the issue itself.

Steven Cherry: Just to take the broadest possible perspective here, one way of looking at it might be that, I mean, is Comcast foreseeing maybe the eventual collapse of its cable business? You know, just like the music industry faced the collapse of the CD business to the Internet, and newspapers are looking at the collapse of their subscriber business to the Internet? But in this case, Comcast, unlike those businesses, has a monopoly or duopoly power as an Internet provider and can extract additional revenues on the Internet side.

Scott Wallsten: The future of video is an interesting question, and nobody knows the answer yet. We're really at the early stages of what's going to happen to online video. Most of the data so far say that online video is mostly a complement to video that people watch on TV, rather than a substitute. Most up-to-date data that you look at from Nielsen seems to suggest that. But, more and more, people also believe that if it's not quite yet a substitute, it's certainly likely to become one, for at least some video. And for the first time we're starting to see some people cutting off cable subscriptions, and it's becoming feasible for people who want to watch video—everything except for live sports broadcasts, basically. But the question I have and I think others are asking is, why exactly do cable companies want to hold onto the video business in the first place? I mean for today, it's still a reason why a lot of people subscribe; they're more interested in watching TV than in doing things online. But they pay a fortune for programming—the cable companies do—they spend more for access to programming than they do on infrastructure. So the video delivery business is not an especially high margin business, whereas the broadband business is a very high margin business. People act as if a transition to different video delivery systems would be bad for cable companies or any video-delivery company, and it's not obvious to me that that's the case. I mean, if it happened overnight it certainly would be, because it's such a big part of their business. But transitioning to a different method of delivering video—it's not obvious to me that in the sort of medium-long term that's actually a bad thing for the cable companies. I think they would probably disagree with me, but given the share of their expenses that comes on programming it's not obvious to me that it's such a great business for them to stay in.

Steven Cherry: Just getting back to the Comcast Level 3 question specifically for one last moment, do you have a prediction here?

Scott Wallsten: I think it's plausible that what Level 3 really wants is to get Comcast to just lower the price, and maybe Comcast will, to make the issue go away. It's really hard to say. I think the odds are that this issue is going to keep coming up, and how this particular controversy plays out might have a big effect on similar ones in the future. If video continues to grow and really does start imposing costs on networks, then every ISP is going to have to deal with this in one way or another. It's Comcast right now, but it's not as if only Comcast subscribers watch Netflix. And so I imagine all the other ISPs are watching with great interest to see what happens—especially the ones whose networks are closer to being congested than others, and I don't know which ISPs those are, but the closer you are to kind of reaching capacity, the more concerned you ought to be. One other thing to think about is that Level 3's traffic onto Comcast has increased by at least 2½ times—I think that's what Comcast said—because of Netflix, and there's no reason to doubt that given what we know about the share of all download traffic that Netflix accounts for right now. But that also means that Akamai's traffic to Comcast presumably has decreased by that same amount because it used to be Akamai that served it up, and now it's Level 3. So it would certainly be interesting to know what has happened to Akamai's agreement with Comcast as a result of this, and so far no one's offered any information on this.

Steven Cherry: Very good. Well, thanks again.

Scott Wallsten: All right, thank you.

Steven Cherry: We've been talking with Scott Wallsten, vice president for research at the Technology Policy Institute in Washington, D.C., about a dispute between Comcast and Level 3 and what it might mean for a free and open Internet.

For IEEE Spectrum's "This Week in Technology," I'm Steven Cherry.

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