Level 3, Comcast in a Cat Fight Over Online Video

Updated: Level 3 (s lvlt), the middle-mile Internet provider that recently signed up as a primary content delivery network for Netflix (s nflx), has accused Comcast (s cmcsa) of violating the tenets of network neutrality. Level 3, in a press statement, said Comcast had sought an additional payment from Level 3 in order for the CDN to deliver content from its network to Comcast subscribers.

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 (s csco) 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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