Blog Post

Comcast vs. Level 3: Netflix Didn’t See This Coming

Level 3 (s LVLT) didn’t mention Netflix (s NFLX) by name when it came out yesterday to accuse Comcast (s CMCSA) of erecting an Internet toll both, and Comcast’s dismissal of the accusation didn’t make any reference to the company either. Still, everyone following the business immediately knew what was at the center of the controversy: Those The Office streams we’ve all been watching at night, courtesy of the Netflix online video catalog.

Netflix has been busy ramping up its online video offering. The company has signed billion-dollar licensing agreements, and most recently introduced a streaming-only subscription tier for U.S. customers. That bet has been paying off; not only are two-thirds of the company’s subscribers now streaming content, but Netflix is also streaming more hours of content than it’s delivering via its DVD rentals. The network management solutions provider Sandvine said in October that Netflix now accounts for more than 20 percent of U.S. Internet traffic during evening hours.

CEO Reed Hastings and his team must have known that this could one day lead to a backlash from ISPs, and the company has been busy advocating for solid net neutrality rules to make sure your Netflix streams don’t get blocked. Netflix filed comments with the FCC in January in support of net neutrality regulation, and the company’s representatives have been back in Washington for a number of high-level meetings with the FCC throughout the year. Netflix filed some further comments as late as a month ago, but none of these interventions anticipated a scenario like the one playing out now.

In fact, a review of the Netflix comments available through the FCC’s website reveal the company has been most concerned about two issues: the possibility of managed services and their impact on the general Internet as well as the threat to competition posed by network operators that are also active in the content business. In its January filing, Netflix writes:

“There is substantial discrimination and consumer harm if a network operator uses its ownership affiliation with a program content provider, or even its bulk buying leverage with a video content provider, to deny attractive programming to a competing online video service. The concern that network operators will use their gatekeeper control over broadband access services to discriminate against unaffiliated content in a variety of ways is central to the Commission’s proposed open Internet policies, and a wide variety of discriminatory conduct that stems from such gatekeeper control should be cognizable under the net neutrality rules.”

Managed services were at the center of Netflix’ most recent comment filed in October:

“(T)he Commission should ensure that specialized services do not unreasonably erode capacity devoted to broadband Internet access services. Requiring service providers to offer some level of guaranteed capacity for broadband Internet services, at reasonable rates to consumers, will ensure that all comers — from today’s Netflix to the “next Netflix”— are able to reach consumers without obtaining the permission of network operators.”

However, nowhere in its filings does Netflix say anything about the possibility of a straight-up toll booth that forces the company to pay more for delivering video traffic based on the CDN or backbone provider it’s working with. The company simply didn’t see this coming, and it’s unclear yet whether it’s willing to take sides in the current conflict.

A spokesperson told me yesterday that there will be no statement from Netflix about the issue. Let’s see if the company changes its mind in case the FCC looks into the current conflict.

Image courtesy of Flickr user Scott Feldstein.

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15 Responses to “Comcast vs. Level 3: Netflix Didn’t See This Coming”

  1. IntheKnow

    The small MSO post is right. Bandwidth is not free, and just think how compounded this problem will be when you are talking about linear OTT and not just VOD. That’s a lot of data being moved.

    The cable company side of Comcast et al have done a great job of protecting their cable network – a walled garden where other video providers can’t just deliver down the cable pipe. And yet, Internet traffic – broadband, VoIP and IPTV/IPVOD – effectively come down that same pipe, with the difference being whether your cable is plugged into a CMTS device or QAM network device (today). So, as those worlds collide, and the QAM network content shifts by consumer demand to IP connected devices and the CMTS network infrastructure, including the MSOs own content services, how can anyone not expect the MSOs will still protect their video product walled garden? The networks are collapsing to IP. The MSO will have an IP video product. Just like overbuilders tried at first to just usurp the MSOs cable lines, Netflix is usurping the MSOs HSD lines.

    The net result – heavy Netflix users will pay more than $7.99. They will pay a higher tier of HSD service and if used like linear, are going to get shut down.

    Not only is bandwidth not free, but the MSO already gets to guarantee a level of service quality down that pipe for video and voice. Why shouldn’t it get to do the same for a video product on IP? It built the network into your home, after all.

    If you want it open and free, move to a community where a municipality built a fast local fiber network. Otherwise, prepare to keep paying the MSOs, one way or another.

    Unless of course, the Cable Act of 1996 is amended such that overbuilders and competing services can ride on top of the MSOs networks, so long as the MSO receives just compensation. If the government mandates that level of net neutrality, look for the operators to claim a “takings” of their property with requisite compensation. And again, who can blame them, since they paid to build it.

  2. Frankly, I’m puzzled why people believe that this is a policy issue, and more specifically the FCC’s domain. This scenario seems like a “restraint of trade” dispute that the U.S. Department of Justice would routinely explore.

    Why are new laws or new policies required? Why isn’t the DOJ the interested government agency in this case?

  3. For small cable systems, and last mile providers where bandwidth is prohibitively expensive, this is a shell game. It’s great Netflix can offer $7.99 unlimited movies at it’s location, but there is a large COSTLY distribution network in between that consumers believe is FREE.

    Facts, we are a small cable system on an island, 6Mbps of data (4 T1’s) costs us $3600/MO Yes that is three THOUSAND six HUNDRED dollars per month. There are no other options. So one Netflix subscriber that wants to stream HD at 7Mb should be able to for their $37.95/mo internet feed, and take out all the other customers?

    Come on people, grow up and realize BANDWIDTH COSTS MONEY, and people in small communities and remote areas are being paralyzed by this consumer misconception.


    • I don’t think most people expect or consider bandwidth to be free. They do expect to get unfettered access to whatever content they want via the Internet connection they pay for. If Comcast sells someone a 12Mbps connection with a 250GB/mo cap, it shouldn’t matter what content that customer accesses within the limits of the connection they’ve purchased. If Comcast wants to raise its revenue, it should raise the prices on its customers in accordance with the laws of supply and demand.

      It’s the possibility that Comcast could impede or penalize certain types of traffic for customers within the bounds of their Internet subscription that’s difficult to defend.

  4. Whether it’s content providers uploading data or content consumers downloading data, ISPs, like Comcast, should be able to price discriminate on the the quantity of data but not on the content. This would treat all content equally but recognize that some providers and consumers should pay more based on their heavy traffic. Such a regime would protect consumers, content providers, and ISPs.

  5. It seems odd that Level 3 would submit to Comcast and pay the fee without resistance. If they hadn’t, what could Comcast have done? If Comcast decided to not accept certain traffic from Level 3, it would be Comcast that received millions of customer complaints, not Level 3.

    • Netflix has a multi-CDN strategy. If Comcast had in fact blocked Level 3 traffic, then Netflix would have shifted that traffic elsewhere… it’s unlikely that consumers would have noticed much, unless Netflix was out to make a point.

  6. You may want to take a closer look at what is happening with Comcast and Level 3. This isn’t a toll both–it’s a totally normal reaction by Comcast, who saw the balance of traffic in its peering arrangement with Level 3 shift dramatically. Comcast is offering Level 3 the same terms it offered Akamai when Akamai delivered Netflix’s traffic. You may want to print an update, as just about every other site that called this a “toll booth” already has.