With the FCC apparently toothless to oversee net neutrality, "toll road" fees for both consumers and content providers could soar
The "commercial disagreement" between Comcast (CMCSK) and Level 3 (LVLT) is still ongoing, and while many (including the cable company) portray it as a simple peering disagreement, it's also illuminating two things about the current state of the Internet. The first is that the lack of competition among access providers is the underlying issue at the core of this dispute, and the second is that this lack of competition means we need to come to some sort of regulatory compromise on net neutrality or lay new pipe to businesses and consumers. Laying new pipe isn't really an option, however, and the FCC is so emasculated, it's possible we won't get regulations to solve this problem. If that's the case, the Web as we know it is in trouble. To recap: Last month, Level 3 blasted Comcast for charging it more money to deliver traffic to the cable company's customers. Level 3 argued this violated network neutrality, and since it had recently started delivering traffic from Netflix's (NFLX) streaming video service, people in power started taking a long look. Level 3 accused Comcast of setting up a "toll road" to deliver content to consumers who subscribe to Comcast's service, but Comcast pointed out that Level 3 was suddenly trying to deliver double the traffic it normally sent to Comcast. Comcast claimed this violated its peering agreements, which are deals struck between network providers to let each other's traffic pass at no cost on their networks, with the idea being that the traffic is reciprocal. New Way to Pay for the Web
Comcast has made some very convincing arguments. But the issues raised by Level 3, which hasn't been a fan of net neutrality in the past, are also compelling, especially as ISPs explore the idea of charging both consumers and content providers for access to their pipes, which creates a double-sided market. The argument is that video takes so much network capacity to deliver that ISPs can't possibly beef up their networks to meet this demand and make a profit. Many find this argument implausible, but since the market for broadband access is a duopoly in most of the country, it's also difficult to know exactly what the market will bear, since the market isn't actually functioning. I've talked to many people about this and have heard from those who believe that content providers should pay ISPs for access in much the same way folks in Europe who make telephone calls on cell phones pay for originating a call, while at the other end folks pay for the ability to receive it. Plenty of folk question that model, however, especially since it would cut into the business models of startups trying to offer bandwidth-intensive content. Any video startup, for example, would immediately be faced with fees (outside of the server capacity and CDN fees it already pays) to deliver its content to consumers. In addition, once you set up a pay-to-play system in order to get someone's bits to the end consumer, the Internet becomes a less democratic place, a place where mommy blogs or teens who make money via their haul blogs may not exist, much less such projects as the Internet Archive or various political watchdog organizations.
Even as it brings in revenue, it also places ISPs in a position where they can no longer argue they aren't responsible for the bits on their pipes, making them vulnerable to copyright attacks or even public outrage if they are found to have enabled objectionable (but lawful) content to get to subscribers' homes. It may sound fine for ISPs to block creepy pedophiles, but if they are pressured to block abortion information or the It Gets Better Project, it opens up a can of worms that may not be worth the extra revenue. What We Don't Know Will Hurt Us
At its core, there are still too many questions about the Level 3 and Comcast spat. Comcast has said it offered Level 3 a lot more ports to handle its traffic, ports that Comcast has to provision and pay for. Some have pointed out it's suspicious that Comcast was unable to provide ports on demand for a backbone provider but was able to scrounge them up for a "customer," while others see it as a clear indication that Level 3 is flooding Comcast's pipes. Another question I'd like to have answered is whether the Netflix deal with Limelight and Level 3 is reducing the traffic Akamai (AKAM) sends to Comcast—and thus reducing what Akamai pays as a CDN to Comcast. Did Limelight's rates shoot up as well? So far, all parties are silent on that issue. The other unknown is the cost of sending a bit around various networks in the first place. It's different for every provider depending on its network size, infrastructure, and the route any bit travels. Knowing that helps determine reasonable prices for both consumers and content providers, if ISPs were to charge them. In a competitive market, the prices would reach some sort of profitable equilibrium, but in a market where the cable company or a Baby Bell is the last-mile provider (or a Baby Bell is the middle-mile access), it's hard to know if an equilibrium has been reached. What's the FCC to Do?
All this means that net neutrality regulations of some sort are necessary. Absent pricing information and a fair market, communications companies can act in their own interests and harm their customers by making it impossible for subscribers to access content from providers who don't pay, or who pay more to deliver content faster. Even if the Comcast/Level 3 issue is a "simple peering dispute," the lack of transparency and the lack of options for Level 3 as it tries to deliver a service that's competitive with Comcast's pay TV business smells bad. Transparency removes some of the stench, but I won't argue that important and potentially competitive business dealings should be shared everywhere. Absent transparency in a market with no competition, we need regulations. Unfortunately, the FCC isn't in a strong position to make those regulations. Thanks to Comcast's win against the FCC last April, the FCC's authority over the bits passing over cable, DSL, and wireless pipes is weak (GigaOM Pro subscription required). So as it offers up a network neutrality framework on Tuesday at its open meeting, it will have to bow to industry demands and weaken its original ideas and stance. Yet, even as it caves, the Bells and cable companies are not satisfied and are pushing hard to keep the FCC from doing anything. Yesterday, a group of senators threatened to revoke the FCC's funding if it attempted net neutrality, while the Republican commissioners campaign against it. The Comcast/Level 3 fight is a perfect example of why we need network neutrality rules: Absent real competition and transparency, we need a framework for keeping ISPs from preventing lawful content from reaching subscribers or discriminating against content providers based on price. Ironically, it is also a perfect example of why network neutrality rules are problematic: They can act as a shield behind which content providers can attack ISPs for running their networks as they see fit. We need a strong FCC to arbitrate these issues at a moment when the FCC is at its weakest, with little to no power to regulate broadband providers. So the combination of a powerless FCC, combined with Comcast's and Level 3's spat, may indeed change the Internet as we know it. I'll call it broken, while ISPs and Wall Street will call it profitable. For more on the Level 3 and Comcast fight, please see the following resources: Level 3 Calls for Conditions on Comcast/NBC Deal Comcast's Dec.17 Letter to the FCC The Real Story Behind the Comcast/Level 3 Battle Updated: A Play by Play on the Comcast/Level 3 Spat Forget Net Neutrality; Comcast Might Break the Web Also from GigaOM: In Q3, E-books and White Spaces Ruled the Consumer Space (subscription required) How Netflix Shares Continue to Beat Cable Next Up for Schwarzenegger: Tackling Federal Energy Policy? Nokia and Microsoft Looks Like a Desperate Hook-up Will the FCC Approve Qualcomm's Spectrum Sale to AT&T?