Netflix no longer neutral

Net Neutrality Not sure if the timing was intentional, but it is certainly fitting that Netflix general counsel David Hyman’s very-pointed op-ed on usage-based bandwidth pricing should appear in the Wall Street Journal on day after the FCC finally delivered its long-delayed net neutrality rules to the White House Office of Management and Budget, the final step before their official publication in the Federal Register.

Once published in the Register, the rules become legally effective, which in this case means they become legally contestable in court. Verizon has already tried to challenge the rules once, based on the FCC’s initial rulemaking vote, but was rebuffed by the court as premature. That, and perhaps other litigation, is no doubt ready to go the moment the rules come off the presses at the Government Printing Office.

Publication is also likely to spur renewed efforts on Capitol Hill to overturn the rules legislatively. The Republican-controlled House passed a bill earlier this year stripping the FCC of authority to impose the rules but the effort was blocked in the Senate. GOP opponents in the House recently tried to slip language blocking implementation by the FCC into an unrelated appropriations bill but that move, too, was spotted by Democrats in the Senate and the language was stripped from the bill.

Yet for all the sturm und drang around the rules, their practical impact in some areas they are meant to address is likely to be quite muted.

One of the primary arguments of net neutrality proponents was that regulation was needed to ensure that cable and IPTV-based broadband providers do not discriminate against competing, OTT video services such as Netflix. And as written, the FCC rules explicitly prohibit last-mile ISPs from discriminating against any application or service based on the content of the bits.

Yet as Hyman contends in his op-ed, ISPs can achieve the same anti-competitive ends without resorting to blatant discrimination among bits. The most effective — and increasingly popular — tool is usage-based pricing:

With online-content delivery providers like Netflix and voice services like Skype experiencing explosive growth, competitors see consumption-based billing as a convenient way to slow that growth by making the use of online services more expensive.

This anticompetitive aspect is particularly apparent when one stops to consider that AT&T’s U-verse is a television service delivered as Internet data traversing a network. Similarly, Comcast is testing its own Internet-based television platform in Massachusetts. So it’s no surprise that bandwidth caps would not apply to the data—e.g., TV shows—that AT&T and Comcast are delivering via broadband, but only to a third party’s data—e.g., TV shows from Netflix.

Bandwidth caps with fees piled on top are a lousy way to manage traffic. All of the costs of supplying residential broadband are for supporting peak usage. Bandwidth consumed off-peak is completely free. If Internet service providers really wanted to manage traffic efficiently, they would limit speeds at peak times. If their goal is instead to increase revenues or lessen competition, getting consumers to pay per gigabyte is an excellent strategy.

Far from prohibiting such practices, the FCC expressly condoned usage-based pricing in its net neutrality rulemaking as a legitimate means of “traffic management.”

Though Hyman doesn’t mention it in his op-ed, Netflix has also been caught in another, potentially anti-competitive choke point in the interface between its CDN providers such as Level 3 and last-mile access providers like Comcast. By demanding higher tolls from Level 3 to pump its bits — most of which are coming from Netflix — onto its last-mile network, Comcast will be able, ultimately, to raise the cost to Netflix to reach Comcast broadband subscribers.

As I’ve noted previously, the FCC’s net neutrality rules do not cover the CDN-to-last-mile connection and thus do nothing to protect OTT video providers against the potentially anti-competitive effect of higher tolls.

Netflix largely kept a low profile throughout the first phases of the net neutrality debate, despite it becoming an unofficial poster-child for many net neutrality advocates. But in recent months it has grown more outspoken on the legal issues surrounding network management practices.

In April, Netflix CEO Reed Hastings sent a letter to House Republican raising concerns about “peering” issues between CDNs and last-mile providers and suggesting the FCC needs to be given more authority to regulate network management practices, not less:

Today, some ISPs charge to let bits onto their networks, despite these bits having been requested by their own consumers. As long as we pay for getting the bits to the regional interchanges of the ISPs’ choosing, we don’t think ISPs should be able to use their exclusive control of their residential customers to force us to pay them to let in the data their customers desire.

[snip]

We do not believe that the [Congressional Review Act] is the appropriate vehicle to address concerns Congress may have with the FCC’s actions as utilizing the CRA would, in essence, strip the FCC of any power to preserve an open Internet.

Friday’s op-ed by general counsel Hyman, in such a high-profile outlet as the Wall Street Journal, marks another notable escalation in Netflix’s involvement in the debate over network management and net neutrality.

Ironically, though, Netflix’s increasingly vocal fretting over network management practices could serve to underscore what some commentators have seen from the beginning as a fundamental flaw to the whole regulatory approach to net neutrality.

The issues raised recently by Netflix are fundamentally issues of competition, and could perhaps be better addressed in the context of anti-trust law, under the auspices of the Federal Trade Commission or the Justice Department, rather than as matters of telecommunications policy to be regulated by the FCC.

Some GOP members on the Hill, in fact, have suggested just that.

“This committee has long been concerned, on a bipartisan basis, about allegations and fears that the incumbent telephone and cable companies who provide a majority of this country’s Internet service could abuse their power in the Internet service market to discriminate against certain websites, content, or platforms, to anticompetitive effect,” Rep. Bob Goodlatte (R-Va.), chairman of the House IP subcommittee, said at a hearing back in February. “I believe that the right approach is a light touch that focuses on punishing anticompetitive behavior, enforcing antitrust laws, and even potentially tweaking those laws to ensure that they still operate as intended in the digital age.”

With the battle over net neutrality and the FCC likely to be renewed on the Hill shortly, Netflix could get drawn even deeper into the fight.