Interconnection Dispute Heats Up as Netflix, AT&T Battle Over Who Pays for Content Delivery
AT&T fired back Friday at a blog post by Netflix CEO Reed Hastings calling for the FCC to include “no-fee” interconnection agreements as part of its revamped net neutrality rules. “Strong net neutrality” would prevent ISPs “from charging a toll for interconnection,” Hastings wrote, and instead require them to “provide sufficient access to their network without charge” (http://nflx.it/1pgX4cd).
To “provide” access without charge is just another way of saying ISPs should pay to build facilities to accept all Netflix content, said Jim Cicconi, AT&T senior executive vice president-external and legislative affairs, in a blog post Friday (http://bit.ly/OFSUzx). Industry observers we interviewed generally agree that with the Verizon v. FCC court’s broad reading of its Internet powers, the FCC can now get involved in interconnection disputes. Whether the agency should do so as part of its net neutrality redux is where the dispute lies.
Business service costs are ultimately borne by consumers, Cicconi said. Hastings’s blog post “really comes down to which consumers should pay for the additional bandwidth being delivered to Netflix’s customers,” he said. “In the current structure, the increased cost of building that capacity is ultimately borne by Netflix subscribers. It is a cost of doing business that gets incorporated into Netflix’s subscription rate. In Netflix’s view, that’s unfair. In its view, those additional costs, caused by Netflix’s increasing subscriber counts and service usage, should be borne by all broadband subscribers -- not just those who sign up for and use Netflix service.” There is “no free lunch, and there’s also no cost-free delivery of streaming movies,” Cicconi said. “Someone has to pay that cost. Mr. Hastings’ arrogant proposition is that everyone else should pay but Netflix. That may be a nice deal if he can get it. But it’s not how the Internet, or telecommunication for that matter, has ever worked."
With Hastings’ blog post Thursday, Netflix became perhaps the most high-profile edge provider to ask the FCC for help in an Internet area that hasn’t traditionally seen agency oversight. Hastings characterized his company’s recent paid peering deal with Comcast (CD March 5 p1) as essentially the result of bullying tactics by the ISP, and warned that if it can happen to Netflix, it can happen to anyone. “Big ISPs are extracting a toll because they can,” Hastings wrote. “If this kind of leverage is effective against Netflix, which is pretty large, imagine the plight of smaller services today and in the future.”
Hastings said he wasn’t happy about the Netflix deal with Comcast. “Netflix believes strong net neutrality is critical, but in the near term we will in cases pay the toll to the powerful ISPs to protect our consumer experience,” he wrote. Now that Netflix has paid up, “our members are now getting a good experience again.” It’s in the long-term interest of ISPs to back strong net neutrality, Hastings wrote. “While in the short term Netflix will in cases reluctantly pay large ISPs to ensure a high quality member experience, we will continue to fight for the Internet the world needs and deserves,” he said. “Comcast has been an industry leader in supporting weak net neutrality, and we hope they'll support strong net neutrality as well."
As the FCC retools the net neutrality rules in the wake of Verizon, it “must allow ISPs the flexibility to engage in individualized negotiations with edge providers, subject to the proviso that an ISP not engage in commercially unreasonable conduct,” AT&T told the FCC in comments Friday. “Permitting individualized arrangements with ISPs often would benefit smaller, innovative edge providers by enabling them to overcome more established players’ large capital investments in physical infrastructure.” AT&T’s comments don’t linger on potential regulation of paid peering arrangements, except to note that the 2010 Open Internet Order “expressly disavowed any intent” to regulate those.
Interconnection Regulation Warranted?
"The Open Internet rules never were designed to deal with peering and Internet interconnection,” said Comcast Executive Vice President David Cohen in a statement replying to the Hastings blog entry. “Providers like Netflix have always paid for their interconnection to the Internet and have always had ample options to ensure that their customers receive an optimal performance through all ISPs at a fair price.” The “market-based solution” reached by Comcast and Netflix in fact “demonstrates the effectiveness of the market as a mechanism to deal with these matters,” Cohen said.
"The Netflix claim of ‘hey -- if they can do this to us, think what they can do to the little guy!’ is a total red herring,” said Geoffrey Manne, executive director at the International Center for Law & Economics, by e-mail. “Even if the ISPs were every bit as evil and nefarious as detractors claim, they wouldn’t care enough to do anything to the little guys. It is helpful rhetoric for Netflix to try to make this into a David v. Goliath thing, but that’s all it is -- rhetoric. This is entirely about big commercial companies and the well-worn strategy of trying to hamstring your rival with regulatory burdens."
"Don’t make it sound like you're trying to save all of us,” said Dan Rayburn, principal analyst at Frost & Sullivan, of the Netflix blog post. “Reed’s post is making it sound like they're championing for all of us consumers in America better rules and regulations. That’s not what they're doing. They're championing rules and regulations that will impact their business.” Netflix’s argument that this is about helping the little guys doesn’t hold up, because smaller providers don’t build their own content delivery networks, he said; it’s very expensive and it makes little financial sense unless a company has a huge scale. It’s hard to respond to Hastings’ post because of its lack of details, Rayburn said. Is Netflix asking the FCC to regulate based on price? Capacity? Quality of service? A minimum number of ports open? “I don’t know what they're suggesting, and that’s what scares me,” Rayburn told us. Would regulatory oversight apply to public interconnection, private interconnection, settlement-free interconnection? he asked. “They're suggesting nothing except a vague idea with no definitions.” That’s not the way to kick off a “very big fundamental change for the Internet,” he said.
Hastings’ post came just days after Level 3 General Counsel Michael Mooney accused ISPs of playing “chicken” with the Internet (http://bit.ly/1j4E3Mr). In followup entries responding to commenters, Mooney said Level 3 is “advocating for regulatory oversight over the interconnection between the Internet as a whole and last mile bottleneck access providers, and we feel that is appropriate because, as noted above, they control the only access to their subscribers.” Mooney quoted FCC Chairman Tom Wheeler’s oft-cited “see-saw” approach to regulation, in which Wheeler has said he'd be willing to act in the public interest when competition is low. “We think they have an appetite” to regulate in this area, “and that they should,” Mooney said.
New Rulemaking
Another option for the FCC, Mooney said, is to have “some sort of transparency requirement that shows consumers how their ISPs are behaving” regarding interconnection. The Open Internet Order’s transparency requirements were the one section the court did not strike down, so such a requirement as applied to interconnection would likely be upheld, many observers said. “That would be the most defensible regulation,” said Berin Szoka, president of TechFreedom. “It seems like the sort of thing the FCC will at least propose in this upcoming rulemaking -- and probably adopt, too.” The agency could also regulate interconnection under the Verizon court’s “expansive interpretation” of Section 706, as long as it does not impose common carriage status, he said.
The FCC last month established a new docket to address the net neutrality remand. “Comments filed within the next thirty days will be especially helpful,” the public notice said, causing industry observers to believe Wheeler intends to move quickly. Netflix submitted its blog entry into the record (http://bit.ly/1lauNXr). Transit provider Cogent filed comments Friday asking the FCC to use its Section 706 power to require broadband ISPs to “remedy any sustained state of congestion at interconnection points within their networks” (http://bit.ly/NAbJD3).
Cogent framed the quandary: How can the FCC prevent discriminatory conduct online short of Title II reclassification? “The way to achieve these goals is to adopt a rule that addresses sustained states of network congestion which, if left unchecked, are antithetical to the reasonable and timely deployment of broadband service,” Cogent said. Such a rule should authorize the commission to institute an enforcement proceeding upon evidence showing sustained congestion, it said. The rule should direct the broadband ISP “to show cause why it should not be required to implement promptly remedial measures to relieve the sustained state of congestion,” Cogent said. An NPRM could seek comment on how best to define a “sustained state of congestion,” it said. “This proposal, and the enforceable legal standard it would establish, does not impose requirements on ISPs that are akin to common carrier obligations."
Although the Internet was built on settlement-free peering, there’s nothing inherently wrong with moving to a paying system as long as big players don’t use their dominance anticompetitively, Cogent said. “It is conceivable that under this regulatory regime certain edge providers will negotiate arrangements with broadband ISPs by which they will pay for dedicated capacity or improved connectivity,” Cogent said. “In theory, such arrangements should not pose a problem. As long as a broadband ISP’s network is not congested at interconnection points to the degree that its customers are not able to reasonably access the open Internet, then the fact that one or more edge providers are paying for a ‘dedicated lane’ is not inconsistent with the reasonable and timely deployment of broadband service to all Americans.” If the dedicated-lane arrangement “is the product of anticompetitive conduct, then such conduct can and should be addressed by the antitrust enforcement agencies,” Cogent said.
Flexible net neutrality rules will actually “empower” the little guys, AT&T said. “By enabling smaller edge providers to negotiate special arrangements for the handling of their traffic, flexible net neutrality rules will empower start-ups to compete more effectively against more entrenched and well-heeled rivals,” it said. “By enabling ISPs to recover the costs of network upgrades not just from consumers but also from the edge providers whose applications benefit from such upgrades, flexible rules also will promote deployment of additional broadband infrastructure and improved features.” A “safe harbor” for “practices that, as a category, do not threaten the open Internet,” could offer greater predictability, the ISP said. Such practices should include “non-exclusive arrangements entered into with unaffiliated providers of Internet content, services, or applications,” AT&T said.
"Any re-adoption of the vacated Open Internet rules must, at the very least, not constrain Internet Service Providers from exercising broad and flexible network management capabilities,” said the Telecommunications Industry Association Friday (http://bit.ly/1lavorT). “Even the earliest implementations of the Internet did not require or intend for the network to treat all packets identically,” said the association of equipment manufacturers, and the Internet “continues to evolve and gain intelligence” with respect to traffic management, it said. “In light of this technology evolution, TIA strongly cautions the Commission against changes in its approach to network management practices by broadband Internet access providers.” Prescriptive rules prohibiting specific conduct, “particularly with respect to discrimination, could have the perverse effect of locking in current network management assumptions, and would likely diminish consumer welfare,” the association said.
Protecting Consumers?
"The Netflix situation shows that it’s not only in the last mile” where an ISP can “degrade their own customer’s experience and use that to charge a new toll,” said Matt Wood, policy director at Free Press. Hastings’ post was “really nothing more than common sense.” Yes, it stems from concern over Netflix’s own business model, “but it’s also good for users,” Wood said. This just shows that the ISP can degrade on the consumer-facing side or at a different point in the network, Wood said, arguing there needs to be regulatory oversight over it.
The lesson from the Netflix-Comcast fallout “is that interconnection is becoming a potential problem,” said Michael Weinberg, vice president at Public Knowledge. “It’s really important for the FCC to educate itself on how this market really works.” Netflix is likely the first edge provider offering a service at such a large scale, but other companies will surely offer similarly high-bandwidth services, he said. “The problems Netflix is running into today may be the kinds of problem companies may be running into in two to three years from now,” he said. “We have to start gathering information."
"In a future where the Internet is the primary video delivery media, but programming is purchased by consumers from multiple vendors ... it is unfair and unrealistic to expect that all of the ISP’s users should pay for each upgrade of inbound capacity required by a limited number of subscribers,” said Jonathan Lee, a former Justice Department lawyer who does work for carriers, in a blog post Friday (http://bit.ly/NAwvSZ). “The only reason Hastings’ argument has a scintilla of appeal to consumer groups is because consumers pay so much for cable today. If/when everyone will get video from their own over-the-Net service, then Netflix will better understand that if you're the one taking the people’s money, then you pay for any incremental additional costs to deliver your product -- and it’s your responsibility to make sure traffic hits the ISP’s network at a high enough speed to be useful to your customer."
In his blog post, Hastings called for “strong net neutrality” to prevent ISPs from charging a toll for interconnection, compared with the “weak net neutrality” that has existed. The Free State Foundation called the post “overwrought.” “Nowhere in his blog does Hastings ever acknowledge that Netflix alone is responsible for generating about a third of the traffic on the Internet on any given day,” May said. “Nor does he acknowledge that the rapid growth of traffic attributable to Netflix and other online video providers necessarily requires ISPs to continue investing billions of dollars in upgrading and expanding their networks.” Hastings would prefer that “all ISP subscribers” -- including those who are not Netflix subscribers -- “share the cost burden evenly, and that Netflix itself avoid any direct payments whatever,” May said. “As long as Netflix and others similarly situated think that the FCC possibly may provide a sympathetic forum for making such arguments ’sounding’ in net neutrality, quite naturally they will continue to do so without the least regard for concerns about economic efficiency or overall consumer welfare. The FCC should put a stop to it by saying that it is not going to regulate interconnection arrangements absent some demonstrated market failure.”