What The Comcast/Level 3 Fracas Is Really About: Money

The headlines are pretty rough: Comcast hates Netflix! Net neutrality is dying! Communist forces from Russia and Cuba are attack a small town in Colorado and a ragtag band of high school students band together to fight them (although, arguably, this may have nothing to do with Comcast/Level 3)! But what’s really going on here?

First, let’s understand how data gets from the cloud to you. Back in the old days, when you wanted serve something on the web you rented a T1 line, set up a machine, and hoped someone would arrive to view your wares. This server, in turn, connected to a backbone and then ISPs – which used to be small mom and pop shops offering dial-up and are now faceless corporations – gave that data to you. It’s like a series of tubes, you know? That was before sites like Slashdot and Digg created a massive surging effect on popular content and the general public thought it would be nice to watch movies on their television via the Internet. As a result, digital traffic rose to alarming rates and everyone involved – from the dude with the T1 line to the T1 line providers to the person at home using a cable modem – had to upgrade. And upgrade. And upgrade. To put this in perspective, we only really had this problem for the past decade or so and the technology has improved so quickly it’s almost like the carriers are sprinting – and they are. In turn, it makes the 30 year move from Public Switch Telephone Networks (which were partially mechanical) to digital switching of telephone calls look like a leisurely walk from New York to Antarctica.

So this stuff costs a lot of money and carriers didn’t do it out of the kindness of their hearts. They want to be paid for their data centers. That’s where Level 3 comes in. Level 3 acts as both a backbone – meaning a massive, nationwide carrier of data – and a Content Delivery Network. Back in the old days, the backbone would be the only thing on the net. But once it became clear that hosting all your data on one server was a bad idea, CDNs grew up and allowed content providers to cache their data in different physical locations. You’d hit one CDN in California and I’d hit one in New York. Things worked faster that way.

CDNs also became massive sources of traffic but they didn’t have many network resources so they tried to pay less to deliver their traffic as a “service” rather than an “insurance policy.” Now in a perfect world my bits are worth as much as Netflix’s bits. And, for the most part, that’s true. But when Comcast sees Level 3 as a CDN, things change. Here’s what Comcast said:

Comcast has long established and mutually acceptable commercial arrangements with Level 3’s Content Delivery Network (CDN) competitors in delivering the same types of traffic to our customers. Comcast offered Level 3 the same terms it offers to Level 3’s CDN competitors for the same traffic. But Level 3 is trying to gain an unfair business advantage over its CDN competitors by claiming it’s entitled to be treated differently and trying to force Comcast to give Level 3 unlimited and highly imbalanced traffic and shift all the cost onto Comcast and its customers.

To quantify this, 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. In other words, Level 3 wants to compete with other CDNs, but pass all the costs of that business onto Comcast and Comcast’s customers, instead of Level 3 and its customers.

Level 3’s position is simply duplicitous. When another network provider tried to pass traffic onto Level 3 this way, Level 3 said this is not the way settlement-free peering works in the Internet world. When traffic is way out of balance, Level 3 said, it will insist on a commercially negotiated solution.

Here’s what Level 3 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 operates one of several broadband backbone networks, which are part of the Internet and which independent providers of online content use to transmit movies, sports, games and other entertainment to consumers. When a Comcast customer requests such content, for example an online movie or game, Level 3 transmits the content to Comcast for delivery to consumers.

So Comcast is all like “They’re a CDN!” while Level 3 is all like “They’re strong-arming us! They’re anti-competitive!” Well, they’re both right.

To be fair, Level 3 is a CDN. However, it is also the world’s largest backbone. It’s akin, to use the series of tubes analogy, a sewer operator offering special toilets that can really blow through the system very quickly for folks with those sorts of… needs. The sewer is the backbone while the super-toilets are the CDNs. Where, then, is the line drawn? Should Level 3 pay twice for the same traffic it would carry anyway? CDNs like Akamai already pay Comcast CDN rates, after all. And can Comcast prevent folks from gaining the benefits of those special super toilets, especially if they have their own super toilets to sell?

Now, if you read Comcast’s side, they’re saying “Level 3 is a CDN. They want to serve popular, populous data. They need to sign a new contract.” while Level 3 says nothing has changed. Comcast also suggests that Level 3’s content is clogging up its tubes. After all, movies are bigger than emails, right?

Wrong. What Comcast is really doing is holding a certain set of bits hostage. Level 3 does act like a backbone and it is an extremely important backbone. Anything you do online probably touches Level 3 at some point. Therefore, to force Level 3 to pay what a CDN does to blow content through Comcast’s network is non-competitive, one of the problems that net neutrality hopes to prevent. In fact, given the value of Internet connectivity to the average user, Comcast could do itself a favor and offer faster, better service to its current subscribers for a little more money instead of shaking down Level 3 (and then probably shaking us down by telling us it can offer “Gold++ Netflix Streaming Service” for $50 a month). As it stands, cable and DSL service is abysmally slow and underperforming in the first place. Clearly Comcast needs to get its own house in order before crying victim.

This is the worst kind of inside baseball because the players don’t induce much sympathy in the first place and there’s another game going on called Net Neutrality and it, too, is delightfully unpalatable. A bit is a bit is a bit, says the NN crowd while the ISPs see themselves as aggrieved sherpas, forced to carry the rich man’s heavy gear alongside the poor man’s light gear. However, everyone should, in theory, pay the same for the same service. In practice, it’s cases like this that will help decide who pays whom for what and, as we all know, we’ll end up paying in the end.