Comcast/Netflix Paid Peering Deal Raises Tough Issues for FCC, Observers Say

The paid peering deal between Comcast and Netflix is likely a harbinger of things to come, said experts in interviews this week. Many are calling for the FCC to start addressing paid peering and interconnection on the Internet, warning that future Netflix-like companies could be at a disadvantage if they can’t afford the same deals the big players get. Others think the government should leave well enough alone, pointing out that the Internet has bloomed free of regulatory oversight. Public interest and industry representatives don’t see the FTC taking any steps to curb the Comcast/Netflix deal (CD Feb 25 p1), but some said the new territory could use clear rules to avoid market-dominant ISPs overcharging.

A top Comcast executive defended the arrangement Tuesday. “Since the beginning of the Internet, companies like Netflix have paid to have their traffic transmitted to the Internet,” Executive Vice President David Cohen said on the Kojo Nnamdi Show on WAMU(FM) Washington. “Everybody who delivers traffic to the Internet pays somebody,” he said. “There isn’t anyone who gets traffic on the Internet without paying. They're just not paying us. They're paying Akamai, Level 3, Cogent, a wide variety of transit providers.” Now, instead of paying a transit provider, Netflix is paying Comcast, which will be in the interest of both companies, Cohen said. “By having the direct relationship, we can better work together to make sure that all of Netflix’s traffic needs are met by our network.”

Cohen doesn’t think this sort of direct payment system to ISPs will be a model for the future. “Unless you are a mega provider, the existing system of operating through [content delivery networks] CDNs and transit providers is working perfectly well and I don’t think that the Comcast/Netflix deal is a precursor of any type of a shift in the way in which Internet traffic is delivered to the Internet,” he said.

Observers said content providers paying ISPs to ensure better performance to their end-users is increasingly common, but because so many agreements aren’t public, it’s hard to know how commonplace the practice is. “This illustrates that we need more transparency in network interconnection,” said University of Pennsylvania’s Wharton School professor Kevin Werbach, a member of the FCC transition team when Barack Obama was first elected president. “There’s no good business reason why all Internet interconnection deals have to confidential, and the lack of information gets in the way of a well-functioning market.” There is no reason the Telecom Act Section 706 theory upheld in Verizon’s net neutrality win this year against the FCC “could not be used for interconnection between Internet-based providers, in addition to practices on the broadband access networks,” Werbach said. “The FCC could design a regime that allowed most interconnection and peering agreements to be done through market negotiations, while having the ability to address anti-competitive actions or disputes that the parties can’t resolve.”

Werbach has long pushed for FCC to address Internet interconnection. “Peering shouldn’t be regulated as thoroughly as interconnection in the legacy telecommunications world, but it’s time for the FCC to recognize that it can’t ignore this market,” he said. “At a minimum, there’s a great need for transparency about Internet interconnection practices. Only with data can the FCC determine whether and how it might need to act.” If the FCC continues to ignore Internet interconnection, powerful broadband ISPs could “unreasonably force content providers to pay what amounts to a tax, because users don’t have enough competitive options for broadband,” Werbach said. Small innovators won’t be able to build up a business because they wouldn’t be able to pay to reach broadband subscribers, he said.

Future Netflixes

The “Netflixes of the future” are in danger, said Columbia University professor Vishal Misra. The Comcast/Netflix announcement didn’t surprise him, as he has expected these sorts of paid peering agreements for years. “It’s actually rational for Netflix to pay” to ensure access, Misra said. But “it’s definitely not a good thing,” because smaller players will be disadvantaged as they can’t afford the same access, he said. “The thing that we need is real competition at the ISP level,” said Misra, who says he’s lived in New York City for 13 years and has never had more than one option for a wireline ISP. If lack of competition isn’t solved, smaller players will continue to be at a disadvantage, he said.

"We'll continue see greater distinctions between those who can ‘pay-to-play’ and strike peering deals -- and those who cannot,” said Open Technology Institute Senior Policy Counsel Sarah Morris by email. “We've seen these peering disputes play out over several years, and now one is finally getting resolved in an unprecedented way. At a time when consumers want more flexibility in the type of content they can access, it’s imperative that the playing field over which consumers access content online remains level and that paths for innovative, disruptive media to develop continue to exist.” The ongoing disputes surrounding peering indicate that this is “a bigger issue than the remaining transparency rule in the Open Internet Order can protect,” Morris said. “The FCC needs the clearest authority possible to examine the Internet as an ecosystem with many moving parts and many points where ISPs can leverage their gatekeeper status to consumers.” For Morris, that authority rests in classification of broadband as a telecom service, she said.

Paid peering will become more common because it provides a “middle ground” mechanism between transit service and settlement-free peering, said Constantine Dovrolis, associate professor of computer science at Georgia Tech. “Many of the peering disputes in the past were caused because one of the two parties was insisting on settlement-free peering while the other party was insisting on being the transit provider of the former,” he said. “With paid-peering, they have a middle ground to reach a mutually acceptable agreement. This makes a lot of sense if the price of paid-peering is less than the price of transit service.”

Something similar to local loop unbundling would ensure competition at the ISP level, Misra said. Leasing access to fiber not only would increase competition and lower prices for consumers, it would also give the larger ISPs “a way to recover the capital investment” they made in building out the fiber in the first place, he said. Unbundling is commonplace in Europe, he said: Misra lived in France for six months and had access to plenty of ISPs. Dovrolis thinks the government should intervene only if an ISP is deliberately degrading the performance of specific peering or transit interconnects, or classes of traffic, in order to force content providers to buy paid peering services. “Proving that this is the case, however, can be quite hard in practice,” he said.

To former FCC Commissioner Robert McDowell, the Comcast/Netflix agreement “appears to be a win-win-win deal for them and consumers,” he said. “They wouldn’t have risked striking a deal that would be harmful to consumers immediately before the regulatory approval of the Comcast-Time Warner Cable transaction.” McDowell, now a visiting fellow at the Hudson Institute, has long been against regulation of peering. “As Internet traffic grows exponentially, and traffic imbalances arise from time to time, the unfettered peering market has always found a way to accommodate these changes in ways that are mutually beneficial to all involved,” he said. “Politicizing the Internet’s evolution through regulation would be highly counterproductive.” Regulators “would be well served merely to observe the market’s experimentation at this point,” he said. “What develops could be terrific news for consumers."

FTC Involvement?

The FTC isn’t expected to use its broad Section 5 “uncompetitive business practices” authority to take any action on Netflix’s paid peering with Comcast, said Randolph May, president of free-market advocate Free State Foundation. “I'd be shocked if the FTC considered seriously taking any action whatsoever with regard to the Comcast-Netflix agreement.” Richard Bennett, a visiting fellow at the American Enterprise Institute’s Center for Internet, Communications and Technology Policy, said that “neither Comcast nor Netflix is complaining, so there’s nothing for the FTC to do other than play politics.” FTC Commissioner Maureen Ohlhausen has said the government should take a “wait-and-see” approach on the deal, stressing that there’s no way to know yet if it’s beneficial for consumers.

Public Knowledge senior staff attorney John Bergmayer wouldn’t mind seeing the FTC fill any “gap in the FCC’s current authority,” to stymie any paid peering abuse, he said. “When I hear a lot people talking about the FTC” taking on new authorities, “it’s often a pretext for saying we can get rid of the FCC,” or making it more of an administrative agency, he said. It’s good to have specialized agencies like the FCC with deep expertise, he said. Despite its good work, the FTC is a general purpose agency, said Bergmayer. Paid peering deals are not anticompetitive per se, Bergmayer said. “What’s to stop the ISP from charging rates that have nothing to do with costs?” he asked. A specialized agency with clear rulemaking authority would be best served to monitor any potential abuses, he said.

There’s little FTC precedent in this area, said Latham antitrust lawyer Thomas Rosch, a Republican FTC commissioner from 2006 to 2013. “The closest the FTC came to challenging any cable transaction was in connection with a cable deal by Comcast with Adelphia in Philadelphia in 2006.” Reorganizing in bankruptcy, Adelphia agreed to sell cable assets to Comcast and Time Warner Cable, while Comcast and TWC also agreed to swap various cable systems, according to an FTC commissioners statement (http://1.usa.gov/1fF9ieU). The swaps were designed so that large “clusters” of cable distribution networks in metropolitan areas came under common ownership, it said. The FTC ultimately closed its investigation with on a unanimous vote from the five commissioners (http://1.usa.gov/1lx0kCK).

The Comcast/Netflix deal differs from the Adelphia deal in that it’s a traffic carriage deal, May said. The deal is “not any form of combination of the two companies’ businesses in any broader respect,” he said, making it harder for the FTC to take any action. “Presumably it is not forever, but has a defined term, and then will be subject to renegotiation,” he said. Simply put, “there hasn’t been a similar deal in the past,” said Bennett.

The deal resembles those CDNs have been making with ISPs for years, said May. It’s “similar to many others that involve interconnection to exchange traffic in similar circumstances,” he said. When Akamai became the first CDN to strike a paid peering deal with Comcast, others followed, said William Norton, executive director of DrPeering International, a consulting firm focused on Internet peering, by email. “Over time, the other CDNs fell in line too and all started paying Comcast,” he said in a blog post on the issue (http://bit.ly/1g8ufcT). “Like a stack of dominoes, once the first one fell, the rest followed.” Expect to see the same thing happen among Netflix competitors, he said. Then “other content companies will follow suit, or use services that have already followed suit,” he said. “The ecosystem will have morphed again, demonstrating the magnificence and shifting shapes of this ecosystem organism."

Maybe not, said Bergmayer. He acknowledged that “we've set the precedent that Netflix pays Comcast directly,” he said, which could lead to similar deals. Bergmayer said that many other video streaming services -- such as upload services YouTube, owned by Google, and Vimeo, or specialty sites like Funny or Die and Crackle -- don’t require the same streaming situation as Netflix, which has no upload feature and singularly streams high-definition video. Even Netflix competitors like Hulu and Amazon Prime don’t have the same incentives, he said. “Netflix might come to a similar deal with Verizon or Time Warner Cable.” Bergmayer said Time Warner Cable’s incentive arises from its deal to be bought for about $45 billion by Comcast (CD Feb 14 p1), and that Verizon, with fewer than half the Internet subscribers of Comcast, doesn’t have the same leverage.

Bergmayer and May agreed Netflix got a good deal in its agreement with Comcast. The company is paying less than it did previously to CDNs, Bergmayer said. Bennett agreed: “Some pundits see Netflix as a victim, but they end up with a discount of 99.97 percent over the normal commercial transmission rate so it’s probably more sensible to view Netflix as the victor.” While Bergmayer still worries of the potential for abuse, May believes, “This one is good for the consumers all around.” (mschwartz@warren-news.com)