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Summary:

Has Comcast been imposing extra peering fees on Level 3 to hurt Netflix, which is competing with its TV business? That’s what Netflix is alleging in its just-published annual report, without actually stating it that frankly. The warning is carefully worded, but Netflix is clearly concerned.

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Netflix broke its silence on the spat between Comcast and Level 3 with a cautiously worded warning in its annual report Friday, alluding to the possibility that Comcast may use network discrimination to hit Netflix where it hurts.

Level 3 and Comcast have been in a stand-off over peering issues since last November, when Level 3 alleged the cable company was “putting up a toll booth” by charging for Level 3 traffic going over its network. Comcast has disputed this notion, saying this was a regular peering practice and the traffic coming from Level 3 had increased exponentially in the weeks leading up to the dispute.

It soon became clear that much of the traffic in question was from Netflix, which Level 3 won as a CDN customer last fall. Netflix initially refused to publicly take sides on the issue, but it has gotten more frank in recent weeks, going as far as saying that peering charges imposed by “some ISPs” are “inappropriate.”

Today, Netflix finally named names and started pointing fingers. Sorta, kinda, maybe. Here’s what the company had to say in its 10-K:

“(In) late 2010, Comcast informed Level 3 Communications that it would require Level 3 to pay for the ability to access Comcast’s network. Given that much of the traffic being requested by Comcast customers is Netflix data stored with Level 3, many commentators have looked to this situation as an example of Comcast either discriminating against Netflix traffic or trying to increase Netflix’s operating costs.”

Many commentators. Riiiiight. Essentially, this is a careful way of saying Comcast is imposing extra charges on Level 3 to hurt Netflix, which increasingly sees itself as a cable competitor. The report goes on to say:

“Most network operators that provide consumers with access to the Internet also provide these consumers with multichannel video programming. As such, companies like Comcast, Time Warner Cable and Cablevision have an incentive to use their network infrastructure in a manner adverse to our continued growth and success.”

The passage ends with Netflix saying it trusts in regulators to get this right. Unless they don’t, in which case Netflix could be in trouble. Netflix tackles the issue as part of the risk factors to its business, which always tend to include some vague warnings of earthquakes, plagues and other bad things that may never actually happen but have to be mentioned to shareholders anyway.

However, the wording makes it pretty clear that Netflix is actually quite concerned about the issue, and it sees Comcast not as a friendly competitor, but as a company that has plenty of reason to play dirty.

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  1. Level 3 is a CDN in name only. Akamai sets up edge servers. Level 3 does not. Level 3 is selling themselves to Netflix as a CDN but does not want to spend the money to deeply integrate servers into Comcast’s network.

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  2. Good find Janko. They are right to call this out to their shareholders, but I would be scared as HELL if I was a shareholder trusting “in regulators to get this right”.

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  4. Level 3 and Netflix can build a much stronger case to the FCC if they can genuinely prove that they’re being singled out. One thing that strike’s me about this situation is that we aren’t hearing similar complaints from CDNs that facilitate online content from the likes of Apple, Hulu, YouTube, Activision Blizzard, or the NHL. In that case, I don’t understand why Comcast isn’t an equal-opportunity toll booth. Certainly, content from those other companies are as much of a threat to Comcast’s offerings as Netflix is.

    However, if Level 3 is the CDN for all of them, then I don’t understand why the other players remain silent.

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