Level 3 Netflix deal not so Comcastic

Net Neutrality Having had a number of awful experiences as a Comcast broadband subscriber, I’m prepared to believe six terrible things about the company before breakfast. But I’m having a hard time buying the accusations currently being leveled against it by Level 3 Communications.

As most Concurrent Media readers probably know by now, Level 3 issued a press release Monday accusing Comcast of “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.” At issue is a demand by Comcast that Level 3 enter into the same sort of commercial agreement Comcast has with other CDNs to carry their traffic over its last-mile network.

Up to now, Level 3 has had a no-cost peering arrangement with Comcast because the amount of data the two exchanged was roughly equal. That changed this month when Level 3 secured an exclusive CDN deal with Netflix, which meant Level 3 is now sending far more traffic to Comcast that Comcast is sending the other way. According to Comcast, its standard policy is to seek a commercial (i.e. paid) agreement with other operators when the traffic flow between the two becomes so one-sided as to fall outside the rough parity principle of a traditional peering agreement.

Level 3, however, is now waving the bloody shirt of net neutrality, accusing Comcast of violating “the spirit and letter of the FCC’s proposed Internet Policy principles and other regulations and statutes,” and vowing to seek relief from the FCC.

Comcast fired back with a press release of its own accusing Level 3 of trying “to pressure Comcast into accepting more than a twofold increase in the amount of traffic Level 3 delivers onto Comcast’s network — for free. In other words, Level 3 wants to compete with other CDNs, but pass all the costs of that business onto Comcast and Comcast’s customers, instead of Level 3 and its customers.”

The battle has now been fully joined, with proponents and opponents of FCC action on net neutrality each seeing vindication of their position in the dispute.

I see a more mundane dynamic at work. To me it feels more like Level 3 made a bad deal with Netflix to win the business away from Akamai and Limelight and is now panicking over how to make the numbers work.  It must have come in at a pretty aggressive price for the CDN-service portion of the deal to get Netflix to consolidate all of its business with a single vendor. Typically, content providers like to spread their CDN business over at least two vendors, in case peaks in demand overwhelm their main CDN’s network and to keep everyone honest by playing vendors off against each other.

Level 3 also agreed to assume the full cost of storing Netflix’s entire streaming library. As I noted in a previous post, that’s a very nice deal point for Netflix, but for Level 3, not so much. Basically, it’s a big fixed cost against the Netflix deal that CDN’s do not typically take on and that will change the way the numbers work internally — not in a good way — for Level 3

The simplest explanation for what’s going on here is that Level 3 backed into a number for its deal with Netflix based on certain assumptions about what its own costs would be to deliver all of the services it promised, and is now discovering those assumptions were wrong. So now it’s looking for leverage with Comcast to try to get those costs back in line with its assumptions by invoking net neutrality.

The tell here is that Netflix has been silent about the dispute, at least publicly. If Netflix truly believed its streaming business were being threatened by Comcast for strategic reasons (as opposed to a simple price dispute), it, too, would be shouting from the roof tops about net neutrality and the perfidy of Comcast.

This sentence from Level 3’s own press release also tells you Netflix did not have its back in its dispute with Comcast:

“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.

If Netflix believed this was really a net neutrality issue, it would have had Level 3’s back. Instead, Netflix appears to have told Level 3 that any problem it was having getting a deal done with Comcast was Level 3’s problem, which forced Level 3 to cave.

Further reading:

50,000 Protest Comcast Attack on Netflix

Level 3 Accuses Comcast of Supporting a ‘Closed Internet’

The Next Round of Fighting Over Net Neutrality

Coalitions Coalesce To Criticize Comcast/NBCU