Level 3 Escalates Dispute With Comcast, Tries To Block NBCU Merger

Level 3 has raised the stakes in its dispute with Comcast (NSDQ: CMCSA) over payments for broadband connections. In a letter to the FCC, it has asked that the cable company’s proposed merger with NBC Universal (NYSE: GE) be used as leverage to get Comcast to agree to a variety of restrictions on the fees it can charge content carriers like Level 3.

The spat between Level 3 and Comcast began a few weeks ago, when Level 3 described new fees Comcast wanted to impose on it in shakedown-like terms, and called them an attack on idea of net neutrality, which requires ISPs to treat all traffic over their network equally. Comcast, in turn, said Level 3 had exaggerated and mischaracterized the dispute. It said the rift had nothing to do with net neutrality and was instead an ordinary commercial disagreement over what’s known as “peering”-the interconnection between two internet networks when one must carry the traffic of another. Comcast argues that Level 3 simply wants a cheaper deal than its competitors, because a new agreement with Netflix (NSDQ: NFLX) means Level 3 will be carrying a great deal more internet traffic.

Level 3 continues to allege that the fees Comcast wants to charge are extraordinary. It claims the cable company is using its “unique position” to “impose anticompetitive prices and conditions” for Level 3 and other “internet backbone providers.” Level 3 has suggested that Comcast’s ultimate goal is to leverage its market power as a “last-mile provider” to make companies that provide video content that compete with Comcast pay higher rates.

In an escalation of the dispute, Level 3 has now asked the FCC-which will vote on a net neutrality proposal tomorrow-to intervene in Comcast’s proposed merger with NBC Universal. Level 3 proposes that for the merger to move ahead, Comcast should have to agree to a five-year term in which it would be forced to sign interconnection agreements on “nondiscriminatory, fair and reasonable terms,” and not give any special advantage to its affiliates. It also suggests that Comcast should be forced to interconnect at no charge (aka “on a settlement free-basis”) with internet backbone companies that meet certain conditions.

Level 3 asks that the FCC also consider applying the same requirements to other broadband providers.

In response, Comcast says it has engaged for days now in good-faith negotiations with Level 3. But Level 3’s continued insistence that its disagreement is not a simple peering dispute “rings hollow,” writes Comcast Regulatory VP Lynn Charytan in the letter, which is posted on Comcast’s corporate blog.

“Beyond this, Level 3 proposes mandatory settlement-free peering for even radically unbalanced traffic — not only 3:1 or 5:1, but also presumably even 100:1. In other words, to preserve its own business model, which may be failing in the marketplace, Level 3 contends that it is perfectly fair to shift all the going-forward costs of sustaining exploding Internet growth onto one network in a two-network arrangement,” the letter says.  

Finally, Comcast says Level 3 shouldn’t even have raised this issue in the context of its proposed merger, which is now under review by government regulators. To do so is “grossly improper,” writes Charytan. The dispute and the industry-wide questions that Level 3 has brought up “have nothing to do with the NBCU transaction,” and shouldn’t delay it any further.