Forget Net Neutrality; Comcast Might Break the Web

The fight that erupted today between Level 3 (s lvlt) and Comcast (s cmcsa) involves an esoteric agreement between two of the Internet’s big players colliding with a series of equally arcane policy arguments, but at its core this fight is about money. Yet what began as a commercial dispute may end up fundamentally changing how the web works and who pays for it.

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) (s nflx) 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 (s akam) or Limelight (s llnw) 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 (s T) or Verizon (s vz) 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 (s goog) 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 (s twc). 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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