None of us like talking about Network Neutrality. It’s a namby-pamby subject for do-gooders which has nothing to do with us business people operating in the searing white heat of modern pay TV. In Pay TV circles it is the elephant in the room which nobody can see. The only reason that we go on about it at Faultline is because we’ve had reports from ISPs that they have traffic blocked illegally by incumbents all the time, who just pretend they know nothing about it. We can see first-hand how it stops new business models and innovation in its tracks.
But most of us want to simply ignore it. Well we can until some idiot breaks the status quo and changes everything. Step forward Comcast this week, which has decided to impose a charge for Netflix traffic going to its customers in the US (although it says it’s not).
We’ve been in lots of debates over the past few months, with vendors, operators, and on discussion boards about some of the language used in the area, and the ‘free ride’ words are just about the most infuriating and we can see that nobody out there can speak rationally about this topic because they all come with pre-agreed political opinions.
Take this dispute ‘ Level 3 Communications, which carries the Netflix traffic, has had its legal counsel go public on the fact that Comcast wants to charge it an extra fee for carrying Netflix (or rather any video) traffic to a home. I can hear all you Republicans out there automatically nodding and saying quite right, let a man make an honest buck, but regardless of your politics and the fact that the FCC sees Title II as the answer to this thorny problem and many are violently opposed to that, this tax on a rival, if that’s what it is, is clearly unfair.
The tone of the letter that Level 3 published is clear. This toll is only for Level 3 Communications and it is only imposed on video. Level 3 video is mostly Netflix and in passing the toll on to Netflix, it will potentially raise the price of Over The Top video services, artificially, effectively taxing them. This is not a payment for increased traffic ‘ Level 3 already pays for all the traffic it sends to Comcast Customers. Level 3 will already have built its backbone network so that can take it to Comcast at its most convenient point of entry into its network, so as to disrupt it as little as possible and get the best price.
This is not about the huge strain on the Comcast access network, because there is none compared to the piracy and P2P downloads that Comcast has complained so bitterly about in the past and tried to block. It was a legal dispute over traffic shaping which led to the situation whereby the FCC tried to stop Comcast butchering network neutrality, but which a US court ruled it had no power to do so. That case has led to the Title II provisions. Had Comcast not acted, and had it not tried to test the legal situation, there would be no issue of Title II being raised.
For those who have not followed the debate Title II provisions are a way of regulating supply of telecommunications services to the general public and include a number of principles designed to ensure everyone gets the same kind of service. Opponents see the internet as a pure, natural untamed market, wild and free of government interference, but of course that’s never been true. In 1990 the National Science Foundation, a department run and funded by the US government, found that it was paying for the entire development of the internet and published proposals for it to become commercialized, which happened around 1992.
So the Government sponsored and ran the internet from 1969 to 1992. It has only recently been free of US government intervention. And now it appears to be needed once more, through regulation. But as we say that has only become real since Comcast has acted.
Comcast says quite openly that it is not asking for anything new at all and that this deal with Level 3 is purely about peering charges. That is a simple process, the more traffic that a company shifts onto a neighboring ISP, the more it pays ‘ they cancel out traffic and the one shipping more to its neighbor pays per GB over the odds. Nothing new there. We don’t believe for a moment that this is about peering charges despite Comcast’s protestations and if it is, it will be about changing them for a company working with Netflix.
Comcast issued a statement saying that its customers can see as much video as they want and says it wants to continue to charge a flat fee for its internet service, uncapped. It says this is business as usual and that Level 3 is crying wolf to get itself a negotiating advantage.
This is the same company that on the day it took over AT&T Broadband told Liberty Media that it wanted to dump its legally binding contract for content distribution, with a cut in payment of tens of $millions and if it didn’t like it, it could go to hell. That’s how Comcast does business. When it has a strong hand, it ignores all the rules and plays it. It is a company used to throwing its weight around. It will take the FCC about five minutes to see if just Level 3 is right, based on the cost per GB of the peering charge compared to other such charges and Level 3 would look pretty stupid if it was just business as usual.
Let’s also remember that Comcast was once openly rebuked for blocking Vonage VoIP traffic and it said the same at the time, denying it at first. There was no confusion there, the amounts of traffic were tiny, and it never charged more for the traffic, it openly blocked it and the FCC said it could not do this. Could it get away today with blocking or charging more for Vonage traffic? You bet it could. The entire idea of services is that it’s the value of the data that matters in a service, not how much there is. Peering charges are about how much data is shifted by a company that is not part of the service model.
This situation has the potential to lead to the end of the internet as we know it. Even if this is about Comcast re-pricing peering charges because it has the market weight to do so, a GB is still a GB, whomever it is transferred to and from. What could have happened here is that some destinations would simply cease to be visible for Comcast customers. This is already the case internationally ‘ if you try to get access to a content service where the content is only licensed in the US, you hit a brick wall from outside the US.
But if Comcast can charge more for Netflix peering, (but not for Roku, Hulu Plus, Amazon Video Store, iTunes, Microsoft Xbox Live!, Google TV, at least not yet), then so can AT&T, Verizon, Time Warner Cable and others. If this was just peering charges, the Level 3 deal with Netflix would have covered it, instead this is about an unprecedented increase in charge per GB, for Level 3 only, because it works with Netflix.
The US is already a regulatory backwater where telecoms is concerned. It was the country which first proposed the unbundled loop, but its legal system and lack of compensatory legislation, has led to the major telcos setting wholesale unbundled pricing at a level where rivals and CLECs (Competitive local exchange carriers) could make no profit. Level 3 was one such CLEC and had to rapidly shift its business model to survive.
So while operators around Europe and the Far East and Japan all have healthy rivals in the local loop, the US has only cable operators to compete regionally with Telcos. Outside of the US there is a choice of around 8 ISPs you can use in any given territory, inside it the choice is rarely more than 2, and if they are both ignoring Net Neutrality, suddenly you have no way of getting Netflix or any other Over The Top Service except through a service which charges a premium for Netflix.
Because Level 3 has actually already given in to the ‘improper’ charging by Comcast, it means that Netflix has not been cut off. But had it not given in to what is being described as a unilaterally imposed tax on a rival, customers would have been cut off from Netflix. They could have immediately signed up with the local Telcos, but if that telco followed suit and imposed an overcharge on Netflix traffic, then Netflix will be priced out of business.
It is the sudden rapid surge in customers at Netflix that has caused this, representing a mainstay in the efforts of the public to cut the cord from pay TV providers. If Netflix is not ‘discouraged’ it has the potential to overtake Comcast as a home family favorite.
But in a way we cannot blame Comcast. Its time has come. If content goes over the internet without Comcast controlling its pricing through a toll on that traffic, then it will be found out as a company, which is sustaining a physical network by overcharging for content, as will all cable companies.
Comcast has no interest in just being a very good ISP. The triple play already gives it an inbuilt advantage when it comes to pricing. It puts VoIP, TV and Internet traffic over a single network. It pays once to build the network and gets three revenues. If you are Vonage, and want to send VoIP packets over someone else’s network, you are disruptive, if you are YouTube and want to send video packets over someone else’s network you are disruptive, but if you are Netflix and want to send a complete rival service over the network, you are a Nemesis and must be halted or taxed out of existence.
This is the thorny problem that we have to deal with on the internet and interestingly the US will likely end up as another backwater here. It has come up with this term of Network Neutrality, but not had the guts to go ahead and impose it, even though regulators can see clearly the nightmare world you create without it. Europe has said that it doesn’t have to impose such laws, because recent regulation in its Telecommunications Framework gives local regulators enough power to deal with an organization behaving like Comcast. Well that remains to be seen, because in Eastern Europe it has taken many years to convince local incumbents that they have a duty to open up their networks to unbundled ISPs.
It is almost as if Comcast has talked with all of its ISP rivals and volunteered to be the ‘bad guy’ and test legislation in this area. It has a history of brushes with authority and it has evaded control by the FCC regulator for some time by having its services regulated as an information service, despite its customer wins being up against organizations controlled under Title II.
The result of allowing this Comcast decision to stand is that it will tax other services. It will tax them more and more each year, in the same way that it has taxed its public by above inflation price rises every year for two decades. It will deliver its TV Everywhere service, its existing content over the internet, but since no other ISP will want to deliver this for Comcast, it will probably only end up being able to deliver it to the homes that already have Comcast lines. AT&T and Comcast and Verizon and Cablevision, will be prevented from extending their reaches beyond their own networks, by the same principles.
Netflix, Hulu Plus, YouTube, and countless VoIP services will all be taxed within an inch of their lives and without healthy margins will either fade or slow down their progress, and become less of a threat. And the customer will perceive this as usual business, moan a bit about pricing and carry on as before.
The solution is tough. Net Neutrality is only one answer. The world has to decide if it wants OTT systems and it might not.
It may appear that cablecos are doing a great job, offering pay TV, the internet and VoIP from a single network, so that must be as cheap as it can be right? Wrong.
It is possible, if you don’t have a pricey network to constantly upgrade, to deliver all that for a fraction of today’s pricing. Sezmi and others want to offer TV services at $5 a month, Netflix at $8, so an entertainment service at around $13 a month. Try to find cable for that. Vonage began life offering VoIP across all the US for $25 a month, today it is 40% of that.
How is that possible? Quite simple ‘ when organizations get so big and have so little competition, they can dictate pricing and all those benefits of the triple play go to their shareholders, not their customers. A disjoint between pricing and cost begins to appear. That is the situation in the US today with cable companies.
At Faultline we don’t think we’re not stupid and we’re not idealistic, and we understand that a fully regulated market will end up paying other taxes, for instance what we call the ‘Google Tax’ whereby new businesses have to spend a fortune building a brand, not just through advertising, but by building search credits on Google so that potential customers can find their services. That’s done with the dark arts of Search Engine Optimization, and Google allocates a lot of credits to web sites that have been around for 20 years, so slowing the arrival of new web properties. We don’t want to see one duopoly replaced by a search monopoly. But we have to solve one problem at a time and the first one is how can businesses compete with AT&T, Verizon and Comcast if these companies block or charge extra for all popular NEW competing services?
One way is to force these established incumbents to operate not as a triple play, but at arms-length from one another. But to do that you need a regulator that is legally empowered. Comcast as an ISP should compete in the market fairly, on price, quality of its customer service and marketing and its ability to deliver services like Netflix, efficiently. If Level 3 had another alternative route into those 23 million Comcast homes, then it would have taken it and any smaller ISPs will have insufficient leverage trying to get Level 3 to pay a toll duty on content.
But Comcast only wants to toll video because it is also in the video business. It only wants to block Vonage packets because it is in the VoIP business. If the three services were forced to operate at arms-length there would be no point in stopping traffic from flowing freely over the ISP business. But there is a problem. Comcast would need to charge more for the broadband part of its business, and less for the others.
ISPs have traditionally offered services on top of their original wired services ‘ telcos had their full costs once paid for by voice, cable operators by TV ‘ so they could offer cheap broadband. The all you can eat pricing would have to go away, and be replaced by service promises which cost extra, and data caps which automatically trigger more payment from the consumer who watched Netflix all day. We have electricity and water meters, we need bandwidth and data meters.
We don’t need services which pick and choose for the consumers, just those which make a real business out of being a top class ISP.
The Level 3 note came from Thomas Stortz, Chief Legal Officer and he said, ‘On November 19, 2010, Comcast informed Level 3 that, for the first time, it will demand a recurring fee from Level 3 to transmit Internet online movies and other content to Comcast’s customers who request such content. By taking this action, Comcast is effectively putting up a toll booth at the borders of its broadband Internet access network, enabling it to unilaterally decide how much to charge for content which competes with its own cable TV and Xfinity delivered content. This action by Comcast threatens the open Internet and is a clear abuse of the dominant control that Comcast exerts in broadband access markets as the nation’s largest cable provider.
‘On November 22, after being informed by Comcast that its demand for payment was ‘take it or leave it,’ Level 3 agreed to the terms, under protest, in order to ensure customers did not experience any disruptions’
‘Level 3 believes Comcast’s current position violates the spirit and letter of the FCC’s proposed Internet Policy principles and other regulations and statutes, as well as Comcast’s previous public statements about favoring an open Internet’
‘Given Comcast’s currently stated position, we are approaching regulators and policy makers and asking them to take quick action to ensure that a fair, open and innovative Internet does not become a closed network controlled by a few institutions with dominant market power that have the means, motive and opportunity to economically discriminate between favored and disfavored content.’
And allowing Comcast to become a major content business as well, by acquiring NBC Universal, means that the Comcast bundle can extend to content licensing, broadcasting, voice, internet and Pay TV channels ‘ perhaps blocking that deal would be a good start. After all, if the OTT trend continues in the US, then like Viacom before it, Comcast will find itself encumbered by content ownership and broadcasting and be encouraged by its shareholders to break itself up. How do you value a company with fingers in that many pies which have differing and varying margin levels.
Suddenly Network Neutrality is the most vital debate among set top makers, VoD suppliers, companies which offer codecs and adaptive streaming services, to the entire technological community which has been trying to support the OTT business model.
So either the US sorts this out or all you guys working on an OTT service, along with all satellite operators wanting to offer TV Everywhere, but which don’t have their own broadband network, and all apps wanting to play on Google TV ‘ down tools, the party’s over.