2010-12-03 00:00:00 | Business OTT The Last Mile ISPs Distribution Three Screens Cooperation

Comcast vs Level3

Level3 took over the Netflix deal from Akamai. By undercutting Akamai’s pricing. That’s how they get their business, they buy market share purely on price. They have been offering CDN services at price points so low (isn’t price dumping illegal?) that there has to be a catch. And there is. Access providers are paying the bill.

I’ve been writing about this topic in general before, and it is my opinion that Level3 is falsely stating net neutrality abuse and is itself the cause of the problem with Comcast. Comcast wrote this to the FCC (which is the Goverment Communication agency in the USA).

Let’s go back to the basic principles of the Internet:

1) All networks are connected so information can flow freely. So logically, Level3 and Comcast are connected.

2) If you block access or frustrate services then you are breaching net neutrality. Comcast is not frustrating or blocking access. So they are not breaching net neutrality. I’m getting a bit (pardon my French) pissed off by companies yelling ‘net neutrality breach’ whenever they have no real valid arguments.

3) If another party generates traffic on your network, then they have to pay you. So if Level3 generates traffic on Comcasts network, they have to pay Comcast. This is what most CDNs do. We do. It is fair business. Everyone in the value chain has to benefit. If one party in the chain does not benefit, there is no value chain and then no one benefits. And an access provider is kind of a critical party in the value chain. You can’t do without.

4) If a third party has to carry that traffic for you, then you have to pay them. It doesn’t matter if the other party originates the content (CDN) or transfers the content (carrier). This is how Level3 makes it’s money.

5) If both parties generate traffic of equal size, they can agree to waive each others costs. This is called free peering. When Comcast and Level3 negotiated this free peering, they did this based on equality.

6) One party cannot enforce the capacity of the other party. E.g. Level3 cannot demand that Comcast scales their network to cope with the volumes that Level3 dumps into Comcasts network. Level3 cannot expect Comcast to scale their infrastructure to meet Level3′s volume demands, if Level3 doesn’t pay for the traffic.

7) If one of both parties grows their traffic ‘dump’, then there is no equality and free peering should be re-negotiated. In other words: Level3 is generating a lot more traffic since it became a CDN and now has to pay. Period.

So why is Level3 acting up? They expected to be able to dump their traffic for free into large telcos. With this expectation in mind, they assumed that they would be able to get large content contracts at extremely low rates. So they have this ‘great’ cheap deal but now their costs are rising. Which means that they could lose money on this business…

Who’s to blame?

Comcast? Nope. The Comcast point of view is fair (1) (2).

Level3? Absolutely. Didn’t they understand how the Internet works? Yeah right. This was their strategy and it didn’t work out. Other ISPs will follow Comcast. Try to explain this to the shareholders. Better blame Comcast.

Netflix? Yes, a bit. Of course it makes sense to get a contract from another CDN that is cheaper and promises a similar service. But Netflix could have known that aggressive low rates are not sustainable.

So what is going to happen? I expect Comcast and Level3 to make a deal. Where Level3 is going to pay. They should. As a result their margins (if any) on the Netflix deal will be extremely low, maybe even loss.

It isn’t said that Netflix and Comcast would be better off with another CDN. Some CDNs have been very aggressive in trying to negotiate free peering deals and free on-net server housing as well, which is even a greater risk: once a third party CDN operates servers on your ISP network, you lose control over traffic flows and the network. The largest risk for ISP’s but even for the Internet is that ISP’s are degraded to a dumb access pipe where a small number of commercial companies dominate global traffic flow. That is truly a net neutrality risk.

There is another issue. Comcast makes its money from ‘Triple Play’: broadband, cable tv and telephony. Comcast wants to offer three screens services, but of course still offered via their private walled garden. For them, online (OTT, ‘over the top’) video services like Netflix (Hulu, Apple TV, Google TV, and so on) are a threat to their cable TV business. Comcast has a short term interest in frustrating OTT. But walled gardens will lose from OTT. Eventually. Consumers want freedom in accessing content anywhere, on any device, at any moment. Not just Comcasts contracted content: any content. Consumers don’t want to be locked in anymore. Consumers are in control. You have to meet consumers demand or they will simply walk away from your service. So Comcast better embrace OTT instead of fight it. But how to monetize OTT? That is the real underlying question here.

If I were Netflix / Comcast I would arrange a meeting. A Comcast powered CDN will cut out the man in the middle, reducing costs. That is in Netflix’ interest. A Comcast powered CDN will bring revenues to Comcast so they can keep investing in their infrastructure and keep monetizing it. That is in Comcasts interest. A Comcast CDN will also better offload traffic in their network (instead of getting the traffic dumped) because it is much better distributed so the infrastructure is offloaded. Comcast will save money. Content flows over less hops as well, so the result is a better QoS. This is in the interest of Comcast, Netflix and the consumer. Everyone wins, well except maybe for the one who tried to squeeze out too much from their partners…

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== update ==

Level3 went on record with Dan Rayburn saying they are still going to be able to make money from the Netflix deal, even when they have to pay Comcast for the traffic into their network. That doesn’t change the dispute and the arguments though.