The new UI, which was previously known as Xcalibur, will offer a completely revamped program guide that will look much more like an iPad app than your plain old EPG. For example, the guide will offer search, which users can access via T9 with their regular TV remote control.

There will also be a bunch of extra meta-data around the program, making it possible for end users to find new content by actor or even through personal recommendations. Another neat feature: TV viewers will have a history of the nine most recent items viewed across VOD, live TV and online content.

Speaking of online content: Comcast’s upcoming cable box will also offer access to apps, including a weather widget, Pandora and a Facebook app. The latter will also be used to recommend TV content based on what’s popular amongst a viewer’s Facebook friends.

Comcast is now testing this new UI in one market, and plans to start rolling it out to a broader subscriber base some time in 2012. However, Blaine made clear that this would just be one step, with cloud services and meta-data offering many more possibilities.

The question is: How much of this will be embraced by cable companies? Asked how open the cable box of the future will be for third-party developers, Blaine said: “The cable operators have been the owners of the mall.” But with cable getting to new devices, like Microsoft’s Xbox, there are now several possibilities of who’s in charge of the mall, he explained, adding: “It’s less of a technical question and more of a business question.”

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After watching big companies aim products at the home consumer and talking to venture firms trying to see which business models might have the most success, the question seems to boil down to whether applications or hardware are better way to deliver connected home services? Fundamentally, every entrepreneur should realize that in a broadband world, what they will deliver is a service, and the rest is just the wrapping.

Hardware makes consumers happy

The Nest thermostat (in cooling mode).

Earlier this week, we saw the launch of Nest, a smart, connected thermostat, which is both beautiful and simple to use. All its complexity is hidden in the simplistic touch wheel design, but it aims to control the heating and cooling in your home in a manner that will save consumers up to 30 percent of their energy consumption. At $250, this isn’t a cheap thermostat, but what people are buying here is the intelligence that rests in the service (and a pretty thermostat).

A similar example is the Sonos system, which is awesome-sounding hardware that acts as a music delivery service. Again, the Sonos system isn’t cheap, but it does offer consumers aesthetically pleasing (in terms of sound, the boxes aren’t all that attractive) hardware with the true purpose of delivering music services from the web. The box is also easy to set up and manages to mask any problems with the quality of a user’s home Wi-Fi network, so the consumer doesn’t need to worry about allocating bandwidth to the box.

The list goes on with devices such as the Roku, which, like Sonos, is easy to set up and helps ensure a solid experience. And I can’t avoid mentioning Apple, which might be the king of building out hardware that hides its complexity and is heading toward becoming a means of delivering services such as iTunes, iCloud and MobileMe. It’s not quite there on the services side, yet, but I have no doubts it will get there.

The app-ortunity is unclear

Comcast's Xfinity app

While the app economy is huge on mobile devices, its ability to deliver services designed to be consumed at home are unclear. So far, apps designed to help consumers manage network-based services inside the home have faltered. On the energy management side, Google’s PowerMeter and Microsoft’s Hohm products were shuttered after low adoption. That may be a lack of interest in home energy monitoring, so we’ll have to see if Nest makes an impact where these services failed.

The television industry hopes to build apps for its screen, and pay TV providers are offering apps in the form of TV Anywhere products that might count as an example of success. But it’s hard to pinpoint specific apps that provide a connected experience tied to the home or gadgets residing in the home. I wonder if services such as security and TV apps might be the best way to hide a service in the form of an application.

With TVs and TV content, an app strategy makes sens,e because the content will come via IP to a multitude of devices from different manufacturers, (although for traditional TVs, a set-top box might work too). For security, which would require a professional installation of equipment (or people are more willing to buy professionally installed equipment) an app strategy may also work.

The other area where I’d love to see some sort of user-centric app or device is for managing the network. Right now, I don’t have the ability to easily allocate bandwidth to certain areas of my home or to certain applications. I think as more devices compete for limited Wi-Fi, such services make more sense. It could be built into a router or perhaps managed through the web via an ISP-provided app.

Either way, consumers are beginning to get frustrated with the toll of maintaining, updating, troubleshooting and having mediocre experiences on their connected devices. Instead of bringing the glitchy-PC experience to homes, let’s get it right this time around with something that looks more like electricity. I don’t care if it’s hardware or an app; I just want to be able to flip a switch and have it work.

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Motorola's new Google-Ga-Ga baby monitors?

Google’s planned buy of Motorola Mobility is about patents and the war of mutual destruction in the mobile space. We get that, but it’s also about connected TV and carriers and how the convergence of broadband and data will change our lives. And so I found myself thinking about how, if Google wants to use Android as a way into the home, Motorola’s home automation, set-top box and broadband gear businesses now gives Google a platform from which to jump.

The mobile phone is poised to become our interface with the digital world, including the devices that control our lighting, in-home music and even home temperature. Don’t believe me, ask Qualcomm’s Paul Jacobs or the folks at Sonos or anyone building Android or iPhone remotes for cable. Even Sanjay Jha, the CEO of Motorola Mobility has absorbed a bit of this thinking in some of his comments over the last few years.

So even as the world wonders if Google knows what it wants to do with Motorola’s home businesses, which include baby monitors, Bluetooth headsets and cable gear, it has the potential to make waves with consumers and especially with service providers.

This puts Google back in the home automation market.

Motorola Mobility clearly has been working on the home automation space for awhile. It purchased the startup 4Home last December. 4Home’s software enables home owners to access information — from digital media to energy info, home security and health data — across devices, and remotely and is used by Verizon in home automation/energy management pilots in New Jersey.

On the Google/Android side, Google has been looking to use Android as the layer to connect home devices, from connected light bulbs to other devices. So while, Google killed its separate home energy software PowerMeter earlier this year, it could end up back in the home automation game, this time with Android. And if Android is the dominant layer, Google didn’t really need PowerMeter, which was aimed at utilities. Android and Motorola’s 4Home software is aimed at carriers, a relationship Google is more familiar with, especially on the wireless side.

Wait, we’re buying our gear from Google?

However, on the wireline side Google may still have some fears to lay to rest. The company, which used to be ISPs’ favorite whipping boy (until they moved on to hating Netflix) will soon find itself owning through Motorola Mobility a large portion of the set-top box market as well as some of the gear inside the cable plants. According to Multichannel News this deal has created some strange new bedfellows in the service provider world:

In any case, the deal has shifted dynamics in the industry quite significantly: “Comcast overnight has become a huge customer of Google, and Comcast has no way out of that in the short run,” the executive said.

This sort of convergence may have been unintentional, but it’s also something that should be expected as broadband, not only brings people closer together, but also forces our networks and devices to merge. So soon Google will have not only have close relations with wireless carriers because of Android, but also wireline ISPs that have traditionally been cooler to the search giant.

Will it help wireline carriers keeps consumers in a pay TV world, or help ISPs deliver differentiated home automation services so they can forestall the process of becoming dumb pipes? Or might Google look at the unexpected businesses it picked up with its patents and dump them like I dump that insanely pink lipstick color I get whenever I get my “free gift with purchase” at the makeup counter?

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For the past few months, I have been hearing about Facebook and Spotify getting a lot closer as companies, with a much tighter integration between the two services. However, Facebook’s musical ambitions go beyond Spotify and include other music services and applications. The company is currently working on lining up more partners for the 2011 edition of f8, its annual developer conference, which is most likely to be held in August 2011.

It seems that Facebook, after consolidating its position in three major Internet sectors – retailing, news and games – is now getting serious about music and media. At The Cable Show held recently in Chicago, Comcast CEO Brian Roberts extolled the values of cloud-based services and explained why cloud-based guides and interfaces are going to be key to television’s future. He showed off a deep integration with Facebook that can make television more social with recommendations from your social graph.

Just like Comcast, Spotify already allows you to share the information about the song that you are listening to on Spotify with your Facebook friends, but the next level of integration is going to be much deeper. And it won’t be just Spotify – my sources tell me that Facebook has been reaching out to other online music services and much of the attention at f8 should be focused on music. Facebook Connect and Facebook Likes are key components of this effort.

Facebook Music Features

Whether it is Pandora, Turntable.fm, SoundCloud or iTunes, listening to music, sharing music and then talking about is inherently a social activity and it makes perfect sense for Facebook to encourage this social behavior. Also, as we become an always-connected society, the idea of downloading and buying music is slowly giving way to the idea of “subscribing” to a giant library of music.

Facebook’s music plans are aimed at capitalizing on just such a future. Here is what Facebook is planning to launch as part of its music efforts, based on pitches it has made to some of the music services:

• In the left-hand column, right where Facebook lists Photos, Friends, Places, Groups, Deals, Pages, and Games, you will find a new tab called Music. This tab will show up if a user has listened to music with one of Facebook’s partner music services.
• Clicking on this new tab will open a page called Music Dashboard.

• The Persistent Playback/Pause Button at the bottom of the Facebook page, where currently you have the chat icon. This button essentially is like a quick snapshot and controller of the music experience. Mouse over it and you can see what is playing on whatever service you might be logged into using Facebook Connect. It also allows you to play or pause a track once you discover it on Facebook. It is also linked to the play buttons in the news feed.
• A page with snapshot of all the songs you have listened to on any specific service and also your top tracks and the number of times you have listened to those tracks.

Facebook’s push for integrating deeply with music services is understandable. The company wants everyone to keep coming back to their website – if they don’t, then they cannot sell the ads they need to keep those revenues growing.

Music Equals Social Commerce

In addition, this could also be the start of a new kind of social-powered e-commerce business, something I discussed in one of my Om Says newsletters – So what comes after Social Commerce.

When Apple launched its Ping service, I was pretty excited by the idea of that service and what it meant for the future of commerce. Here is what I wrote then:

This click-and-go-somewhere-to-download model of affiliate links can never match a unified experience. Amazon, for example, encourages bloggers and others to link to things they like and then get a piece of the action. This separates social from commerce and treats them as two discrete activities. On the post-Facebook Internet, I don’t think anyone can afford to keep these two actions distinct.

Ping, from what little I saw during Steve Jobs’ demo, allows a similar level of social interaction. It can tell me who my friends think are cool and the top 10 favorites of people in my social graph. Some of my friends are famous deejays. Others just have eclectic musical tastes. They can collectively sift through over 10 million songs and help with the discovery of music.

Unfortunately, Apple never did things right with Ping and it seems Facebook is on its way to becoming a worthy challenger – without even having to deal with the record labels.

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Given his track record of being able to accurately predict the future of video — he called video the killer app of broadband at our NewTeeVee conference in 2009 – it’s easy to buy into what he has to say. He also predicted video would be available as streams on many devices and to many screens over the Internet.

It has been an amazing year for the company. Netflix has seen its subscriber base leap from 14 million to 22 million in the U.S. Its stock has been on a tear, and it has seen rivals such as Blockbuster fall by the wayside. It has been painted both as the savior of niche television shows and the destroyer of broadband.

When I think of Netflix, I think of a big data company with a special focus on user interaction and content. Of course, there’s nothing better than getting the lowdown from the man himself to find out what he’s thinking about next. Last week, in a short freewheeling conversation over Skype (Reed does love Skype), he shared his thoughts on the future of television, video and broadband. Here are some excerpts from my conversation.

By topic

• Why ISPs Have to Shape Up
• Impact of Bandwidth Caps
• Importance of Fiber broadband
• What TV Looks Like in 20 Years
• Sensors & User Experience
• House of Cards & Content Expansion Plans

On Internet Service Providers & Innovation

In a letter filed with the FCC, Hastings and Netflix were critical of Internet service providers. When I asked if they indeed were the enemies of innovation, he said his criticism isn’t “blanket” criticism, but he’s critical of certain ISP practices such as pay-per-gigabyte (particularly in Canada) and the practice of charging for sending bits into their network.

“Their consumers want Netflix bits and they charge the consumer,” says Hastings. “Comcast wants to charge our provider for providing those bits. What they want to do is make money on both ends: consumers and the content end.” He believes Comcast shouldn’t charge for the “entry of our bits into their network.”

Instead, Reed endorses settlement-free peering, but Comcast doesn’t agree. Comcast is currently locked in a bitter dispute with Level 3 Communications, Netflix’s service provider. Hastings points out that Charter Communications, a cable broadband provider, practices settlement-free peering. “So, no, we are not making a blanket statement that all ISPs are bad, just certain ISP practices are bad.”

(By the way he does think Comcast has done a great job on its Xfinity app for the web and for the iPad, so he’s not holding any grudges against them.)

Top

On Bandwidth Caps

Last week, Canadian broadband provider Shaw decided to increase its bandwidth caps. According to Reed, this is a step in the right direction because ultimately, it’s good for the Canadian consumer.

Canadian consumers want unlimited Internet, Reed added. (In the U.S., we’ve had unlimited Internet, though some ISP are beginning to impose caps.) He takes heart from the fact that Shaw increased the bandwidth caps and have said it’s going to increase them again.

“The marginal cost of delivering one more gigabyte is a penny,” Hastings added. “I think once you have the fiber installed, it almost doesn’t matter how much [bandwidth] you use.”

Top

On Fiber Broadband & the Future

Over the past twenty years, Internet bandwidth has expanded dramatically, and in the past decade or so, we’ve gone from dial-up to DSL and cable broadband. Now we’re going fiber-to-the-home.

Hastings was super-excited by Google’s 1 Gbps Google Access fiber project in Kansas City, Kan. because it would show us “what can be done” with so much low-cost bandwidth. Today, he pointed out that Netflix works just fine with DSL and cable, but “more fiber means there are going to be more high-definition streams” and more on-demand content. “It is much more than a Netflix story. It opens up possibilities for many interactive, immersive applications.”

“What we have got to do is get fiber to everybody’s home just like we got electricity and telephone lines,” said Hastings. “It will happen over a certain number of years.”

Hastings believes the future of broadband is already here, and pointed to countries like Australia, Brazil and Costa Rica, which made fiber broadband to their citizens a top priority. In the U.S., he’s excited by states like Vermont, which are laying fiber for fast connections for its citizens.

When I asked Reed if the fiber deployments were going to be key to Netflix’s future international expansions, he declined to comment and said the company would share its global expansion plans in the second half of 2011.

Top

It’s an All-NewTeeVee World

Fiber broadband is key to the future of companies like Netflix in a world where all video would become “click-and-watch,” and will always be on demand.  “In the next 10 to 20 years, almost all video will become click-and-watch Internet video and consumers will interact with it on a wider range of devices and it will able be on demand,” he predicted. “You will not tune into a certain channel this is broadcasting — and that is the radical change. It will be an on-demand world.”

“Today on the iPad, you install various apps and in two years Samsung televisions will be like that. You can already see bits of that future,” he added. In five years Hastings believes that all televisions sold globally will have a built-in Wi-Fi connection and the television will also be an Internet access device. In this brave new world, Hastings says Netflix is one of the subscription sources for television shows and movies.

Top

On Sensors & the User Experience

When I asked Reed if he thought the click-and-consume metaphor will apply to everything on the network, he said yes and pointed out that in such a world, the difference would be how consumers interact with services defined by the user experience.

He believes the future user interface of not only Netflix, but other applications, will have to become more interactive and will have to take into account inputs from various sensors. “Sensor web is growing, and Netflix will have to integrate it into our experience,” he added.

“Our user interface will be tremendously advanced from where it is today,” Hastings added. “It will talk; it will integrate with sensors; and when you shake your phone, it will give you various shows.”

Reed also said, “It is up to application developers to integrate those sources of data and figure out social video and what social video means.” When I asked him if re-imagining the user experience with various sensor inputs was par for the course going forward, he concurred. Over the next few years, he expects companies like Apple, Amazon, YouTube and Comcast to keep innovating and learning from each others’ experience.

Top

On House of Cards and Its Content Plans?

When I asked Reed if Netflix was getting into the content business, especially with them spending so much money on the House of Cards show, he said the company is in the business of licensing content. It’s not in the business of producing content and reading scripts. “We don’t produce content,” he said.

In the case of House of Cards, he noted they are still licensing the content in certain release windows and certain categories. “It is a riskier license than the ones we have done before, as we know less about the content than say Mad Men, where we can get a pretty tight prediction on how much people will view it,” Hastings added. “It is fair to say we are taking a lot more risk in our licensing but it is different from being a content developer.”

Top

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Meanwhile, Google, fresh off of getting rebuffed by Groupon in its $6 billion bid, has launched a Groupon clone — though, as Mathew points out, the search giants is better off buying a company to achieve the necessary scale to compete, rather than trying to build a daily deal company itself. Speaking of daily deals, LivingSocial showed off what a $175 million investment from Amazon can do. The No. 2 competitor to Groupon sold more than 1 million Amazon gift cards by offering users the ability to buy a $20 gift card for half off. Though the promotion cost a pretty penny, it delivered a bunch of user e-mails in one feel swoop.

The NBC Comcast saga came to an end this week after the FCC agreed to allow Comcast to acquire NBC Universal. The FCC finalized conditions needed for it to approve the $30 billion acquisition, setting the stage for the close of the deal by the end of this month. As my colleague Liz points out, the FCC seemed to pay close attention to protecting online competition, an important issue though one that will be determined by FCC enforcement.

Speaking of video, Netflix removed the “Add to DVD” queue from the user interface on streaming devices, saying that by doing so, it could concentrate on streaming video to those devices. The move was not well received by many Netflix users, who complained about Netflix pushing them away from DVDs to streaming video. Meanwhile, my colleague Ryan Lawler found that Netflix’s selection of streaming videos was going down in quality and selection, which will be a major challenge for the company if it looks to migrate users away from DVDs.

Meanwhile in other news:

• Verizon  filed an expected appeal to the FCC’s recently passed Net Neutrality rules.As Stacey pointed out, Verizon’s main goal is to find a sympathetic court to take up the case. It looks like it might have found one in the D.C. Appeals court.
• Nokia’s X7 smartphone launch on AT&T apparently looks like it’s either canceled or delayed, which Kevin wrote suggests AT&T doesn’t need a Nokia smartphone as much as Nokia wants to get sign a deal with AT&T.
• Google raised questions about its Android Market rules by removing the Kongregate Arcade gaming app, which Google said was an app-store competitor. It also got me wondering what that means for Amazon’s planned Android app store.
• Starbucks launched a new mobile payment system, allowing people to pay for stuff using a Starbucks Card app on their iPhones and BlackBerry devices.

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Photo courtesy Life.com

Nov. 29:

Level 3 issues a statement claiming Comcast is charging it for delivering movies and video content to Comcast subscribers, a fee that Level 3 likened to placing a toll bridge on the Internet. Comcast later came out and said that Level 3 was trying to take advantage of its peering agreement with Comcast to undercut other CDNs and that the dispute was essentially a commercial one. Netflix and the Federal Communications Commission are silent on the issue.

Nov. 30:

Commentary on the web accelerates with some accepting the commercial disagreement argument, and others seeing in the move a chance to implement a double-sided revenue model for ISPs that would allow ISPs to collect revenue not only from the end consumer of broadband, but also the folks trying to send the traffic over the ISP’s pipes. Meanwhile, Netflix is still silent, but it likely didn’t see this fight coming.

In a press conference the FCC Chairman Julius Genachowski declined to comment on the issue but said, “The staff is looking into it.”

Level 3 Responds to Comcast’s statement with a new statement that scoffs at the idea of this as a peering dispute and portrays it again as Comcast being anticompetitive. The statement reads in part:

The fundamental issue is not whether Comcast sends more traffic to Level 3 or whether Level 3 sends more traffic to Comcast. Both Level 3 and Comcast are responding to the requests of Comcast’s subscribers, who want to be free to see and use the full suite of content and applications that are available on the Internet today and in the future. Level 3 wants to assure that freedom is preserved.

”Instead, the fundamental issue is whether Comcast, as the largest cable company in the country with absolute control over access to its cable TV and broadband access subscribers, has the right to unilaterally set a ‘price’ for that access that effectively discriminates against competitors of Comcast’s cable and Xfinity content.

Update 1: Comcast tries to help its position by posting a video on how peering works. It’s also filed a letter with the FCC defending its position that detailed its past relationship and proposed new relationship with Level 3. According to Comcast, prior to this dispute Comcast provided Level 3 with 27 interconnection ports under its peering agreement. Then, after Level 3 signed its agreement with Netflix, Level 3 asked for more. From the letter (PDF):

The parties’ current interconnection facilities[3] could not begin to support that type of traffic flow. As a result, Level 3 approached Comcast approximately two weeks ago (shortly after reaching their Netflix agreement, we later learned, although they made no mention of it at the time) and demanded 27 to 30 new interconnection ports, which would allow them to send a much greater amount of traffic onto Comcast’s network.[4] To that request, Level 3 added the following twist: it insisted that Comcast should provide it with all those new facilities – and support this vast new influx of traffic – for free.[5]

Comcast was able to scramble and provide Level 3 with six ports (at no charge) that were, by chance, available and not budgeted and forecasted for Comcast’s wholesale commercial customers. The amount of traffic that would be exchanged over these six ports (and the parties’ preexisting ports) was just barely within the generally accepted bounds of a roughly balanced traffic exchange between the parties. Level 3 accepted those ports, and they are using them right now to send traffic to Comcast’s network.

Bravado aside, Comcast is responding to the FCC’s request for information so it’s answers should be taken seriously. Comcast also brought up the point that Netflix also has a deal to deliver its content though Limelight, so even if Comcast blocks Level 3, Comcast’s subscribers will still get Netflix content from Limelight. Comcast ends the letter pointing out that this is a commercial dispute as opposed to one requiring regulatory involvement.

The National Cable and Telecommunications Association weighs in with its take reinforcing the idea that this is a commercial dispute and something unrelated to network neutrality. And for the deeply nerdy, and researchers thinking about peering and the web, there’s this article from the New York Times earlier this year on the topic of public peering stations as opposed to direct peering arrangements to provide some background on the general topic of peering. Meanwhile, Ars Technica interviews a lot of smart people and comes up with a similar conclusion to mine (although without such a dramatic headline). This is a commercial dispute, but it’s also suspiciously like the beginning of a new way for ISPs to make money off of the content flowing through their pipes.

Updated 2: Dec. 3

Level 3 took Comcast’s video post on peering and fired back with an FAQ of things people should know about the dispute, including the lack of competition in last mile services and how that affects the debate between Level 3 the cable ISP. What’s important to note here is that Level 3 is seeking to change this into a debate about interconnection as opposed to one over peering, with the idea that peering agreements are commercial in nature, while the ability to interconnect lies at the heart of how the Internet works. From the FAQ:

A: No. The dispute between Level 3 and Comcast is not a peering dispute, which relates to connection of Internet backbone networks. At issue is a fundamental interconnection disagreement between Comcast, as a provider of local high speed Internet access to consumers who pay Comcast for access to content, and Level 3, which delivers content to residential broadband access providers like Comcast in response to consumer requests. Unlike “peering” in the Internet backbone, where competition abounds and prices have been declining steadily, Internet carriers that have content requested by Comcast subscribers have no choice but to exchange traffic with Comcast. Comcast is using this dominant position to demand payment for traffic delivered at its customers’ requests. You simply cannot “route around” Comcast to provide requested content to Comcast’s subscribers.

Level 3 in its FAQ is arguing what I argued earlier– namely that Comcast is abusing it’s position as a last mile provider to may Level 3 pay Comcast money to deliver content on behalf of Level 3′s customers. Unfortunately, without more information, such as how much Level 3 is paying to Comcast or how much less Akamai may be paying to Comcast after losing the Netflix account, it’s hard to get to the actual truth behind this battle of rhetoric. Meanwhile, Comcast, offered a much shorter reply that basically says Level 3 is still wrong and Comcast won’t cut off people’s Netflix. For more on this, check out a Daniel Golding’s guest post for us that lays out some of the issues involved in a peering dispute.

Update 3: Dec. 7
And the sniping continues with Comcast posting its own FAQ’s in response to those LEvel 3 issued on Friday, basically continuing it’s line of reasoning that Level 3 is gaming the system by calling itself a CDN for customers and then trying to arrange for peering with Comcast. The format is exhausting, with Comcast quoting Level 3′s questions and then providing a refutation. However, in this type of he-said-she-said debate it’s the things we don’t yet know that will likely decide this issue, as opposed to either side’s spin.

Check back for more.

Edit Note: This post was originally published on Nov. 30 at 12:40, and has been periodically updated since then with new information.
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First, let’s dismiss the alarmism . No one is “breaking the Internet.” That’s sort of the first rule among network engineers and peering managers, and a great deal of effort goes into meeting this goal. (Stacey did a good job explaining the issues involved in her post.) A peering dispute of this sort can lead to a partition — a condition where some Internet users can’t reach others — but that’s rare and considered to be highly reckless by the network operations community. While Cogent has been willing to prosecute its goals by partition, most other providers find it to be anathema.

So, what happened between Comcast and Level 3? Prior to this dustup, Level 3 was one of Comcast’s Internet transit providers. Level 3 sold wholesale Internet capacity to Comcast (as does Tata). Comcast engages in settlement-free peering with many networks, but as it’s not 100-percent peered, it needs upstream transit providers, such as Level3 or Tata , to offer a route for all non-peered traffic.

Level 3 has recently become one (but not the only, by any means) content delivery network for Netflix, which has radically increased the outbound traffic from Level 3 to Comcast, threatening to saturate the transit links between the two providers. That’s just business: no harm, no foul. But what Comcast found troubling was that Level 3 now looked a lot less like an upstream transit provider, and a lot more like a content delivery network (CDN). This is an issue, because Akamai and Limelight pay Comcast to deliver their traffic to their end users. Level 3, on the other hand, is paid by Comcast, ostensibly for transit, but now, seemingly, to deliver traffic that Level 3 has already been paid for — by Netflix. Level 3 wanted to get paid both ways: coming and going. That’s nice work if you can get it.

Level 3’s transformation into a CDN raised additional questions. The era of the Internet backbone providers has been coming to a close. The Level 3s, Global Crossings, and such are in some ways relics; the real power is with the last-mile carriers — cable, DSL, FTTP providers — and the content providers  – Google, Microsoft, Akamai, Limelight, et al. These eyeball and content providers have been increasingly disintermediating the classical Internet backbone providers out of the equation by interconnecting amongst themselves. While providers like Level 3 still have some utility there, that utility is shrinking rapidly.

Comcast and its EVP of Networks, John Schanz, have surely been asking themselves, “Why have we been paying Level 3 for transit?” After all, Comcast is a much larger and more important network, especially in terms of traffic, in the general scheme of things. While many of the old backbones have been acquired — and more will be in the coming year — Level 3’s titanic debt load has scared off just about everyone, leaving it high and dry.

All of this said, no one here did anything wrong; these disputes aren’t uncommon. Well, no one did anything wrong until Level 3 whined to the press and regulators. When you’re on the losing side of a peering dispute, you’re always tempted to complain to regulators about how you’ve been treated unfairly. Then you remember a regulated peering arrangement is the only thing worse than what we have now. More regulation puts more power in the hands of the big providers, not less, as they have the experience, resources, and the legions of regulatory lawyers necessary to “play the game.”

Look at the Telecom Act of 1996; the Baby Bells won that fight due to their superior regulatory game-playing ability. The cable companies, PTTs (national telephone companies), AT&T, and Verizon would surely come out on top of any major movement towards peering regulation which would cut out the large number of small firms that peer 50 percent to 70 percent of their traffic.

So, how does this play with network neutrality? The short answer is that it’s completely unrelated. Netflix isn’t paying a dime to Comcast. Level 3, which sells services to Comcast, is. It’s the price of doing business when you have a large amount of outbound traffic. No user will pay more to watch Netflix movies. Netflix certainly won’t see this passed on to them; the low cost of Level 3’s service is what won the deal, and if that goes away, so will Netflix, to greener pastures. Instead, this is a battle where a provider that does no business with consumers (Level 3) will pay money to a company that does provide services to consumers (Comcast). There will be no prioritization of traffic as part of this deal, only delivery.

This in no way absolves Comcast of its duty — as good corporate citizens, not to mention a company trying to make a merger happen — to be more transparent, to deal openly with its customers, to improve its levels of service, to provide competitive prices. These are all areas where Comcast has a lot of work to do, to put it mildly. However, in this latest peering conflict, one of the dozens that I’ve observed or participated in, there is nothing malevolent or damaging to consumers, on either party’s behalf.

Daniel Golding is Managing Director of DH Capital, a boutique investment firm in the Internet infrastructure and datacenter sector. Prior to that, he worked at Tier1 Research, was the Global Peering Manager at AOL. Daniel is an engineer with 20 years of network and mission critical datacenter experience.  Disclosure: He takes no money from CDNs, Netflix, Comcast, Level3, or anyone else involved in this story, but in the past, he has sold research to those companies.

Image courtesy of Flickr user TheTruthAbout.

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Comcast has countered that its arrangement with Level 3 is similar to what it has with other content delivery networks and Level 3 should be expected to pay for the outsized traffic it sends to Comcast. The company said the dispute is a peering issue between network operators dealing with an 5:1 imbalance of traffic that can’t be dealt with a settlement-free agreement. Stacey had a good write up on how this dispute underscores the need for more competition and could ultimately break the web.

The issue has touched off warning sirens for net neutrality proponents, who have taken to the Web to decry Comcast’s behavior, calling it uncompetitive and a step toward paid prioritization of traffic. Advocates like Free Press said the episode highlights the need for an investigation of Comcast and additional scrutiny of Comcast’s proposed purchase of NBC Universal.

“This is just a preview of what a media monopoly will look like in the Internet age – one company, consolidating its media power to squash competitors, stifle innovation and price-gouge consumers. Comcast has demonstrated time and again that it can’t be trusted and will do anything and everything to undercut its competition, abuse its power, and evade accountability,” said Free Press President Josh Silver.

Susan Crawford, a professor of law at Cardoza, said the dispute provides a defining moment for the FCC, as it looks to institute net neutrality rules, which it could take up at a Dec. 21 meeting. She said the fight should prompt the FCC to decide how far it needs to go in checking the power of cable giants such as Comcast. Crawford said the timing of the rate hike, shortly after Level 3 secured a deal to handle Netflix’s video traffic, along with Comcast’s own competing video products including its TV Everywhere service, gives it motivation to fight Level 3.

“This is how companies that don’t face competition act. It may be that transmission service is so expensive to install and needs to be at such a large scale in order to be maintained that it is, indeed, a natural monopoly.  If we have gotten to that point (and I think we have), then regulatory oversight needs to be in place to protect consumers and innovation,” Crawford wrote.

But others have pointed out that the dispute is one of fairness. George Ou, policy director at think tank Digital Society senior analyst at the Information Technology and Innovation Foundation, said Level 3 is trying to wave the banner of neutrality to distract from the fact that it was taking advantage of Comcast. Ou said Level 3 was able to win the Netflix contract by underbidding other CDNs because it intended to not pay for the expected 5x growth in traffic.

“With the added confusion of “Net Neutrality”, the hopeless pro-anything-labeled-Net-Neutrality biased blogosphere and the FCC proceedings on the Comcast NBC merger, Level 3 figured that they had a good chance of getting away with bandwidth theft or at least negotiating a much more favorable deal.  But not only is Level 3 trying to steal bandwidth, they’re a hypocrite because they’ve fought just as vigorously against other bandwidth thieves that tried to violate Level 3′s peering agreements,” Ou wrote.

Rebecca Arbogast, managing director for Stifel Nicolaus, said Comcast may be on firm footing with federal regulators if it can prove that it was acting on the imbalance of traffic and not targeting a specific type of traffic, which could set off alarms with net neutrality proponents. But she said Comcast may be using the traffic imbalance issue as a backdoor to target Netflix’s video traffic, which reportedly accounts for 20 percent of transmissions at peak hours.

“If Comcast imposed a new charge on Level 3 on the basis of its newly imbalanced traffic, which is largely due to competing video traffic, that could raise a more complicated set of questions for regulators about the effect of the fee. And that also raises the question of why Comcast picked this moment to impose the new charge, which if nothing else could muddy the merger review and net neutrality proceeding,” Arbogast wrote in a research note.

Comcast may end up helping usher in stronger net neutrality rules because of its dealings with Level 3, said Tony Bradley, a writer for PC World.

“With FCC action on net neutrality expected within weeks, the latest events with Comcast make a very solid case for why net neutrality is necessary and provide ample justification for the FCC to move forward. If I didn’t know better, I would say that Comcast is actively lobbying in favor of net neutrality…and doing a damn fine job of it,” he wrote.

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Post and thumbnail photos courtesy of Flickr user heavylift.

So what’s the issue? Level 3 told the world that Comcast had hit it up for more money in order to deliver traffic from Level 3′s customers (such as Netflix) to Comcast’s 17 million broadband subscribers. Level 3 said Comcast’s demand for more dough violated the principles of the Open Internet, which is shorthand for net neutrality. On the other side, Comcast, said Level 3 was trying to sell itself as a CDN while not having to pay fees to Comcast as other CDNs do. In short Level 3, was calling itself a CDN to its customers and a backbone provider to Comcast. This (plus the fact that Level 3 owns one of the largest Internet backbone networks) enabled it to undercut its competitors in the CDN business because it didn’t have to pay the fees that Akamai or Limelight did to get content onto Comcast’s network.

For example, Level 3 even told people back in 2007 that it could deliver CDN services for the same price as Internet access, a feat made possible because it owned its own networks. So when Comcast pointed out the traffic Level 3 was sending to its network would more than double to reach a 5:1 ratio when compared to the Comcast traffic sent over Level 3′s network, it was justifying its decision to act, something covered in Comcast’s peering agreement . (For detailed analysis of Comcast’s peering agreement check out this post from Vijay Gill.)

Peering is the face of this issue — the idea that Internet Service Provider A allow traffic from similarly sized and loaded networks to traverse its own for free because ISP A‘s traffic gets a pass when it’s on networks owned by ISP B or ISP C. However, the soul of this issue is how it exposes how uncompetitive the nation’s broadband networks really are. The very threat that Level 3 alleges Comcast made — essentially that Level 3 could accept the proposed fee or Comcast wouldn’t deliver Level 3′s content — should lead to concern.

This is a problem the Congress and regulators cannot ignore. Just as in the recent retransmission fights in the pay TV world, these rumblings between giant companies leaves consumers in the lurch, even though they’ve actually paid for access to the Internet — that is, the whole Internet, not one approved by Comcast or some other company. The problem, of course, is lack of competition in the broadband markets.

For the consumers who aren’t confused by their inability to access certain content and decide to switch to a provider working with Level 3, there aren’t a lot of choices. Typically, areas have only two ISPs — a cable company and a telco — and many ISPs are now offering service with annual contracts which could lock a consumer in. Plus, what happens if AT&T or Verizon decide to address this imbalance of traffic with Level 3? It is, after all, fairly common for there to be an imbalance of traffic given that consumers tend to request data from Level 3 and backbone providers far more often than they upload content to Level 3′s end customers.

It’s not far-fetched, given that by getting Level 3 to pay more for delivering a CDN service that essentially is the same as its Internet access, but does send more Level 3-specific traffic onto Comcast’s network, Comcast is getting Level 3 to pay for the increase in traffic on its network. One can wonder if Akamai’s CDN fees are calculated on the traffic it sends to an ISP or how much space its servers take up in the ISP’s data center, but with Level 3 and Comcast, there’s no need to wonder. It’s about the traffic. This idea of content providers paying ISPs to deliver the traffic to consumers, while consumers pay ISPs for access to the pipe isn’t a new one.

If that flies, then companies such as Google or Hulu may find themselves paying more for peering. That’s great for the ISPs, but again, it’s not like there are myriad opportunities for a company like Google to exert its market power short of building its own networks. For example, if a large content provider wants its services to reach folks in Rochester, N.Y., it has to work with either Frontier or Time Warner Cable. So while Comcast and Level 3 fight their commercial disagreement over peering in the press and possibly in front of regulators, the real people to suffer will be those who depend on the web. Not because Comcast has decided to call Level 3 on it being a CDN, but because of the lack of real competition in our broadband networks.

Yup, we have a problem!

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Update: This is looking more like peering spat as opposed to a net neutrality fight. Comcast said in its statement that it was treating Level 3 like it treats all other CDNs and noted that it offered Level 3 the same terms it offers to other CDNs.

From the Level 3 release:

“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.

I’ve reached out to Comcast to discover if this is an action and fee proposed for Level 3 only, or if other backbone or content delivery networks are also being charged a new fee. Update: Comcast’s Joe Waz, Senior Vice President for External Affairs and Public Policy Counsel emailed a statement characterizing this as a peering issue and noted that Level 3 has even dealt with these imbalances in traffic in the same manner as Comcast is– by charging a provider that sends the greater amount traffic across the network more money to compensate for the fact that it’s using more of the resources than it is providing.

Level 3′s position is 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.

Now, Level 3 proposes to send traffic to Comcast at a 5:1 ratio over what Comcast sends to Level 3, so Comcast is proposing the same type of commercial solution endorsed by Level 3. Comcast is meeting with Level 3 later this week for that purpose.

The timing of the fee request is suspicious given that in the middle of November, Level 3 announced that it would provide content from Netflix the online video rental and streaming service, whose streaming traffic generates a lot of online traffic. Netflix declined to comment on the issue today, but Chief Product Officer Neil Hunt recently said Netflix ships “over half a billion” DVDs a month. CEO Reed Hastings previously said Netflix will stream more content online than it will ship on DVD in the fourth quarter, so one can assume Netflix is currently streaming more than 40 million DVDs’ worth of video each month.

That’s a lot of video, and a lot of potential traffic. However, is this a peering spat between two large backbone companies or an attempt by Comcast to monetize over-the-top web streaming traversing its pipes, and to halt a competing offer from Netflix delivered by Level 3? I’m still awaiting more details from Level 3.

Comcast has taken the low road before when it comes to network neutrality by blocking peer-to-peer content on its network. It eventually earned a slap on the wrist from the Federal Communications Commission for its actions. As a result, it changed its network management practices to avoid discriminating against certain types of content on its network. That covers the textbook definition of network neutrality: that ISPs can’t discriminate against certain types of traffic on their networks. Comcast said its move was about network management, but many saw an anticompetitive reason for Comcast to block P2P files, which somewhat competed with its pay TV business.

However, if it is electing to set up a fee for those delivering Internet movies, Comcast is deploying a new weapon in the fight for ISPs to recoup some of the revenue made by others delivering services over the ISP’s pipes. Is it a net neutrality violation? Folks are eager to paint it as such, and the threat to stop content that consumers want and have paid for is problematic. As a consumer, if I pay $7.99 to Netflix and $40 a month to Comcast, I should be able to get my service. What Comcast could be doing is raising the fees for Level 3 in the hopes of getting more money (it’s the double-sided revenue model Cisco has preached). It may also raise the price for over-the-top content by forcing Level 3 to pass those fees along to its customer base, which in turn could charge more for their products.

However, by placing a potential roadblock between consumers and the content they expect on their broadband connections, Comcast is playing a high-stakes game. When consumers can’t stream their Netflix, they’re going to complain to someone, and it’s not going to be Level 3. The showdown may also renew the calls for the FCC to figure out some kind of network neutrality proposal, although attempts to enforce its earlier proposals ran into trouble after Comcast won its lawsuit against the agency questioning the FCC’s legal authority and ability to set forth network neutrality rules.

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Updated: Internet services providers are calling for a Federal Communications Commission with less authority over regulating broadband, just as the FCC reportedly prepares to vote on new neutrality rules. The latest push comes from Verizon, which called for an overhaul of the Telecommunications Act. Meanwhile, Comcast is joining Verizon in advocating for technology industry forums to take on a leading role in building consensus on thorny issues like net neutrality instead of the FCC. It’s all part of a larger attempt by the telecommunications industry to undercut the power of the FCC and reshape its regulatory role. So will this full court press serve as a powerful enough threat to the FCC, forcing it to water down its potential net neutrality rules?

The latest words came from Tom Tauke, Verizon EVP of public affairs, policy and communications, who over the weekend called on Congress to rewrite the Telecommunications Act and establish a new framework policy for a single agency to rule on broadband issues. Tauke, whose comments were taken from a speech at the Federalist Society’s National Conference in Washington, D.C., said the current regulatory framework is unfit to handle the dynamic growth and innovation happening in the Internet ecosystem. He said with the net neutrality debate, the FCC is too preoccupied with network providers because of its current jurisdiction rules, but sidesteps operating systems and applications, where consumers can also face harm. Tauke called for four components as a new policy framework to guide the Internet:

• The policy should be a federal framework.
• Because of the innovative nature of the marketplace, the framework should not involve anticipatory rule making, but rather, principles that allow for case-by-case adjudication.
• The test for government intervention in the marketplace should be to prevent either harm to consumers or anti-competitive activity.
• A single federal agency should be given clear jurisdiction

By pushing for a new federal framework and case-by-case adjudications instead of anticipatory rule making, Verizon is looking to edge the FCC away from reclassifying broadband carriers as common carriers and give operators more wiggle room as they craft their network management plans. Also, if the telecommunications firms can get case-by-case adjudication, it sets the stage for different levels of enforcement depending on who heads the FCC. It also might lead to rules governing the case-by-case adjudication that limits the FCC’s power or ability to halt the offending practice.

Tauke and others have also been pushing policy makers to let technologists solve the thorny debate around net neutrality instead of the FCC. David Cohen Comcast’s EVP recently called net neutrality an engineering problem that needs to be solved by engineers. Speaking at the Brookings Institution last week, Cohen also championed the newly established Broadband Internet Technical Advisory Group, an industry forum of engineers and technologists, calling it an innovative group that can solve problems, rather than prolong them.

The telecom industry is pulling out all the stops now to head off any attempt by the FCC to assert more power over broadband services. The FCC is expected to vote on new net neutrality rules next month that could ensure ISPs don’t discriminate against any of the content running through their pipes, though officially, the commission hasn’t released its December agenda. The ISPs have new allies in Congress who are calling for the FCC to hold off on any new rules until the new year. But with the FCC apparently forging ahead, what effect will all these threats have on an already compromised commission?

The FCC has already been rebuked by the courts for trying to enforce net neutrality under the current regulatory structure, something that happened under previous FCC chairman Kevin Martin. FCC Chairman Julius Genachowski faces an uphill battle to reclassify broadband under the stricter Title II regime of the Telecom Act. If Genachowski proceeds with his so-called “third way” — which blends some protections with the understanding that the FCC should not regulate the Internet, and ISPs are allowed to employ reasonable network management practices — there’s still no guarantee it will withstand legal challenges. With all the rancor from ISPs lately, how far will the FCC water down net neutrality rules while still claiming some type of victory on the issue? Or will it wait for Congress to come in and lay down the law? Either way, it looks like the ISPs win.

Update: The FCC has pushed back its December meeting back a week to Dec. 21, buying itself time for a possible vote on net neutrality rules. Rebecca Arbogast, managing director for Stifel Nicolaus wrote in a research note that she expects Genachowski is looking to bring new rules that that would generally bar unreasonable wireline broadband discrimination but would allow managed services that could be monitored and dealt with on a case-by-case basis. Genachowski is in a tough spot trying to work out a compromise with ISPs while getting the support of the other two Democrats on the commission, who favor stronger regulation under Title II, said Arbogast.

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Here’s what Charter customers can expect:

• Subscribers to its Lite and Express services will be capped at 100GB of bandwidth per month.
• Subscribers to the Plus and Max services will be capped at 250 GB per month.
• Subscribers to its Ultra60 service will be capped at 500 GB per month (previously the Utra60 tier was unlimited)
• Charter will not charge overage fees for those who exceed the caps, but their account may be suspended

Charter will start notifying excessive users next month to “make them aware of their usage patterns, to help identify possible causes (e.g., unsecured wireless routers or viruses) and review security options with these customers to reduce the risk of unauthorized Internet use,” said Lamont via email. Eventually (Lamont didn’t say after how many times) that user’s account would be suspended. Unfortunately, for those who get these calls, Charter doesn’t yet have a tool to help those customers measure their use, but is working on one. However, when Comcast implemented its caps, it too lacked a measurement tool, and getting one out was a long process, so Charter subscribers may have to wait a while. Lamont expects one next year.

Lamont said that 98 percent of Charter’s 5.2 million customers will be unaffected by the decision to enforce the caps (Charter actually first included caps in its acceptable usage policy in February 2009). However, demand for broadband is increasing every week as folks use more online applications and consumer video from the web. For example, streaming a movie on Netflix uses about 1 GB per hour, so that equates to about 100 hours of Netflix streaming video each month. Services such as Netflix and Hulu Plus that involve high-quality video streams are only becoming more popular and pervasive as more consumers connect their televisions to the web. We made this argument back in 2008 when Comcast implemented its 250 GB per month cap and continue to believe that such caps could act as a threat to innovation.

Currently Charter says the typical U.S. residential Internet customer consumes between 15 and 20 GB worth of data on a monthly basis when taking both uploads and downloads into account. Lamont writes, “The usage thresholds defined within our AUP greatly exceed current typical residential use and accommodate future growth.” I reached out to Comcast to find out if changes in user habits had led to increased consumption on its network, and spokesman Charlie Douglas said that the usage was still pretty much the same on its network with the median download for a customer being between 2 GB and 4 GB per month. That’s a wide discrepancy between Charter’s data and even the Cisco data that shows worldwide household Internet consumption is 14.5 GB per month.

Charter will also introduce a congestion management policy with a protocol-agnostic approach that’s applied only during periods of congestion (Charter notes that congestion is rare on its network). The policy will affect only the heaviest users (less than 1 percent) in small time increments. Those affected will have their bandwidth limited, but no Internet activities will be blocked. For Comcast’s similar policy see our coverage here.

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Comcast’s offering of free wireless connectivity to customers follows that of several other Internet providers, as home broadband companies look for value-add services. Last summer, Verizon partnered with Boingo Wireless to include Wi-Fi access with Verizon FiOS broadband plans. Cablevision also provides Wi-Fi for its customers as does Time Warner in some regions of the country. Indeed, through a collaborative agreement, Comcast customers can use both Cablevision’s and Time Warner’s Wi-Fi hotspots in the New York Tri-State area at no additional charge.

Although consumers can check for Wi-Fi coverage online at http://www.xfinity.com/wifi, Comcast specifically mentions the new service in certain key areas. Some SEPTA train platforms, such as the Paoli/Lansdale Line and the Manayunk/Norristown Line, offer Xfinity Wi-Fi service as do SEPTA’s Suburban and Market East Stations. So too does Philadelphia’s Wells Fargo Center, which is found at the end of Philadelphia’s Broad Street line. Ironically, the subway station there at Broad and Pattison was just renamed last month: It’s now called AT&T Station, so even though AT&T offers home broadband in the area, the nearest Wi-Fi service to the station is coming from Comcast.

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Why? Because these large cable carriers won’t face real competition and have every incentive to favor their own business plans, they may not be interested in supporting yours. Right now, they’re doing their best (even linking up with the Tea Party) to convince America that having rules of the road protecting consumers and new online businesses amounts to a “government takeover of the Internet.” Don’t believe it for a minute. These giant companies want to make sure that the Internet poses no threat to them, and they have the market power (and political power) to ensure that their profits remain intact.

The Comcast/NBCU merger is aimed right at competition — avoiding any series of steps that might result in having dumb (but big) pipes serving the areas where Comcast now has dominion, and avoiding having Comcast’s pipe itself made dumb. If the merger goes through as Comcast proposes, the new NBCU will have the power in Comcast’s market areas (where it routinely has a 60 percent-plus share of local pay-TV customers) to raise other pay-TV providers’ (satellite, small cable, telephone, nascent online distributors) costs of doing business substantially.

This will mean, among other things, that competing aggregators of online video who don’t have reasonable access to crucial NBCU content (particularly sports) won’t have the power to constrain Comcast’s prices. Comcast ties access to online video content it controls to a cable subscription, and Time Warner does the same thing with its content. Many of the other pay TV providers will cooperate in this plan, which goes by the nickname “TV Everywhere”. This means that independent online aggregators don’t stand a chance — because consumers will be used to getting highly-branded online video for “free” as part of their bundle from their ISP, they won’t be willing to pay for an independent service.

Without powerful online video distribution companies that can compete successfully with Comcast, the economics won’t be there for any other wired high-speed Internet access provider to enter the market in Comcast’s areas – and so Comcast’s already great pricing and discriminating power will grow. Watch for the mergers that will follow — say, Time Warner Cable with Disney. Or, eventually, the FoxLibertyComcast company.

Imagine a big pipe coming into everyone’s house in a given market area controlled by one actor. Now imagine that you want to aim an online business – particularly an online video business – at that area. You’ll be subject to the whims of the carrier, and there will be no countervailing force to protect your ability to reach your customers. Maybe a small portion of that pipe will be reserved for traditional Internet access, but maybe not, and what’s reserved won’t be very fast or very standardized. Comcast wants to build a moat around its business so that it can avoid being treated like a commodity transport provider, and the addition of NBCU content will make it far easier for Comcast to make this possible.

Comcast spent nearly $90 million in the first two quarters of 2010 related to the deal; promised $20 million in venture funding for minority entrepreneurs; pledged $6 million to support independent productions; agreed to place a Hispanic member on its corporate board of directors; made deals with NBC’s affiliates; and hired (with NBCU) about 100 former government employees to shepherd the deal through — including several former chiefs of staff to key legislators and policymakers.

There’s been very little media coverage of the Comcast/NBCU merger. You may want to pay attention to it, because there’s a good chance that it will go through. This is bad news for up-and-coming video aggregators– who will want to invest in them? It’s bad news for new applications and new uses of the network, because as things stand in Washington Comcast (and other cable companies) will be able to allocate bandwidth however they want. It’s all
one pipe, and there are very few rules.

What about other ways of getting online? Well, Verizon’s FiOS service, which could effectively compete with cable’s high-speed pipe, will reach only about 18 million homes. In early March 2010, John Killian, Verizon Communications’ chief financial officer, told analysts: “We are coming more to the end of the (fiberoptic) build-out.” It’s much more expensive to upgrade to FiOS than swap out cable electronics.

Wireless? Well, the laws of physics tell us that wireless just doesn’t have the capacity of a fast wired cable connection. It will be a complementary service, not a substitute. Wireless is much less efficient in its use of spectrum and faces much harsher signal environments than signals do inside a controlled cable environment, and so the overall number of bits that can be conveyed in a given amount of time in a mobile environment is much lower than that possible in cable systems. We love mobility, but for watching live video, we’ll still prefer wired cable.

The giant cable operators generally do not compete with each other in major metropolitan areas in the US. (The one exception is New York City, which is so large and complex that Comcast, TW, and Cablevision have all stayed in place – but the cable systems have divided up the boroughs among themselves.) In general, non-competing cable systems have at least 70% of the video customers in more than half of the top 50 DMAs in the US. In a series of transactions and gentlemen’s agreements, the operators have carved up the country among themselves and stay out of each others’ territories.

We’ve known since the days of Ma Bell that basic transport of communications to the home has the characteristics of a “natural monopoly.” According to Wikipedia, that’s “an industry in which a business will have such enormous
economies of scale that a single firm can effectively and efficiently supply the market at lower cost than two or more firms. A natural monopoly will dominate these industries if government does not impose restrictions. Electric utilities are generally considered natural monopolies.”

The fact that Verizon is backing off its investment in FiOS signals that we’re reaching a tipping point: Looking at DSL v. cable modem access, and wildly hoping for broadband over powerline or satellite, the BushAdministration believed that there could be competition for high-speed Internet access that would make regulation unnecessary. But DOCSIS 3.0 is such a cheaper upgrade than FiOS that it just doesn’t make sense for the telephone companies to compete. The duopoly we’ve had so far – which hasn’t done prices or competition much good – is about to morph into a cable monopoly.

Bottom line: Competition cannot be relied on to constrain cable. The cable companies have enormous economies of scale and apparently unlimited pricing power — prices keep going up. They have won and, at least at the moment, they’re facing little threat of rules from Washington.

I don’t like the phrase “net neutrality” any more than you do. How about “the ability to compete”? How about a standard interface for everything new you’re building? The cable companies have figured out that there is nothing stopping them, and their business plans may not mesh with yours. Especially if you’re not yet one of the other media conglomerates — and even they may be worried at this point.

Here’s the call to action, and it’s simple: Pay attention. This is why it matters what happens in Washington, because it’s time to consider reining in these businesses.

Susan Crawford is a member of the faculty of Cardozo Law School and also a Visiting Research Collaborator at Princeton’s Center for Information Technology Policy.

Infographic by Column Five Media