The end of net neutrality?

Who is responsible for jeopardising net neutrality? Capacity investigates.

The Federal Communications Commission (FCC) gave operators a lifeline when it implemented the existing set of net neutrality laws back in 2010.

By excluding peering, interconnection arrangements and network management provisions from the laws, operators and ISPs remain free to charge content companies for connection to their networks. With content companies now arguing that these fees go against net neutrality altogether, there is pressure on regulators to amend the rules.

When Capacity approached market leader Verizon for a reaction to a possible amendment to net neutrality laws, the company’s executive director of media relations, Edward Mcfadden, stated defiantly: “US policymakers have consistently indicated that peering and interconnection negotiations do not fall under the net neutrality open internet rubric.”

In truth, peering and interconnection agreements have played a valuable role in the development of the internet over the past 20 years. To the untrained eye, the internet may well appear like one big global network, but underneath the confines of the “world wide web”, there are tens of thousands of partnerships in place between companies that connect different networks, enabling faster connection, higher throughput rates and lower latency.

Content providers argue that the way the internet now works is very different to 1994 and the frameworks that are presently in place are simply not sustainable anymore. Carriers continue to question why they have to foot the bill. An AT&T insider who did not wish to be named told Capacity that “there’s no cost-free delivery of streaming movies – someone has to pay that cost”.

Weak net neutrality

Disagreement over net neutrality was brought back to light by the media on 23 February this year, after an agreement was announced between Comcast and Netflix. What was in fact a simple video content delivery agreement between a content aggregator and an ISP snowballed into a deal that many market watchers declared as signifying the end of net neutrality as a whole.

In a blog post, published a month after the Comcast tie-up, Netflix CEO Reed Hastings threw further fuel on the fire by hitting out at large ISPs for attempting to charge content companies for access to their networks.

“This weak net neutrality isn’t enough to protect an open, competitive internet,” he stated.

Following this, questions were raised over the sanctity of the deal, with analysts suggesting that Comcast had signed a cut-price agreement with Netflix to create a good impression in the eyes of the US population and regulators, as it attempts to push through a deal to acquire Time Warner Cable (TWC) for $45 billion.

Comcast, in fact, had been in talks with Netflix for over two years to establish an arrangement for the delivery of its traffic, before an agreement was surprisingly struck weeks after announcing its intentions to acquire TWC. Hastings claims that without stronger net neutrality laws, large ISPs will be able to demand fees from content companies that can continue to escalate dependant on service, “driving up costs and prices for everyone else because of their market position”.

Advocates for the principle of net neutrality are likely to agree with his comments, and while paid peering agreements comply with FCC provisions, they may not always be neutral. Netflix has the financial muscle to pay these interconnection fees, but there are smaller content innovators in the market that cannot.

Stuck in traffic

Dan Rayburn, a principal analyst at Frost & Sullivan who has served as an outspoken voice on the subject of net neutrality, slammed Hastings’ comments, telling Capacity that the agreement is not worth anywhere near the amount of traffic that Netflix sends over the Comcast network.

“Netflix has more traffic than anyone and this deal is only worth $10-12 billion,” says Rayburn. “There are not 10 other Netflix-type companies on the market that they can sign up and suddenly they will have a $100 billion business.”

According to Rayburn, the deal simply cuts out the middle man, meaning Netflix now no longer has to pay a third-party CDN for access to the Comcast network, which could end up saving them money in the long run.

“There are a lot of people running around claiming that ISPs are doing this because they want to create a new revenue stream,” says Rayburn. “Where exactly are they creating this from? There are less than 10 companies who have their own CDN for video who all have relationships in place with ISPs.”

The fact that many of the larger OTT players in the market have already built their own CDNs – including Facebook and Twitter – further underlines his point.

Maintaining an open internet

For the premise of net neutrality to be maintained, internet providers are restricted from subjecting any content service to blocking or throttling (reducing the flow of data). These rules also extend towards the banning of pay-for-play, where operators ask for payment to allow access to their networks at certain times, such as during peak periods. Netflix, for example, will encounter high volumes of traffic every time it releases a new episode of the most popular TV show at the time.

Despite these restrictions, US company Level 3 – which provides broadband transit between content providers and last-mile ISPs – has warned against the amount of power ISPs are gaining through paid peering.

The company has accused ISPs of playing “chicken” with the internet by refusing to increase the size of their networks unless their fees are paid. For Level 3, deals between content companies and ISPs can reduce its role in content delivery, with the company therefore delivering fewer bytes to a company like Netflix.

Sunit Patel, Level 3’s EVP and CFO, told Capacity that the increasing power incumbents and ISPs have over networks could ultimately prove detrimental to consumers.

“Broadband providers leveraging their control over the last mile of the internet to extract monopoly rents is not in the best interest of consumers,” he suggests.

Patel says Level 3 remains committed to an open internet, and the company tries to use advocacy wherever possible to “leverage last-mile ISPs in the best interest of consumers”. Market analysts are again at odds over the issue, and whether it actually has anything to do with the end user.

Richard Karpinski, senior analyst at Yankee Group, claims the issue should not “always devolve into debate about whether carriers are harming consumers”. Instead, he believes it is up to the companies to find a solution that works for both parties: “Online and mobile video delivery is a complex ecosystem that – when mature – will be as convoluted as the advertising business.”

Added value proposition
Karpinski argues that a business model similar to that of online advertising could emerge between content providers and content aggregators, where every company advertising on a site will pay for brand recognition, display space and target data.

“Content providers and aggregators will have to make pragmatic business decisions about whether paying for better content delivery is necessary to their business model, how much they can afford to pay for it and whether they should incur these costs or pass them on to consumers,” he says.

Patel agrees, and believes it is now becoming a “tug of war” between last-mile providers and content operators. He notes that many content companies are also running successful advertising models, and this could further damage their reputation with the ISPs.

“Some of those broadband providers are dealing with this competitive threat by congesting the internet,” he says. “Many broadband providers believe they deserve growth in their revenue and market cap and some of that growth is being shifted to the companies providing the content.”

For a model to suit both parties, Rayburn argues that companies such as Netflix and Level 3 need to identify ways in which they want net neutrality laws changed and how the internet should be regulated.

“These companies are providing nothing in the way of clarity to the topic,” he says. “In fact, they are actually doing the opposite and muddying the conversation by using vague, generic and high-level terms, with no definition of what they mean or how they think they should be applied.”

Rayburn says that simply demanding “a fair and open internet” has little merit, and “there needs to be an alternative model suggested to the government and the FCC if these companies continue to moan about it”.

Analysts continue to urge content providers to offer an alternative solution. But with the issue now spanning over four years, a quick-fix solution that satisfies all parties is unlikely to emerge soon.

“We have generally worked out agreements with companies that continue to use our transit services,” explains Patel. “There are some incumbents out there that are looking to get paid, and they are perpetuating a congested internet by refusing to upgrade capacity without payment of their arbitrary tolls. We do not believe that paying for peering is the right way – net neutrality is the message we deliver.”

Patel says that the model simply does not work for a company like Level 3, because of huge traffic imbalances that come with carrying video traffic. As a middle-mile provider, Level 3 could theoretically carry 1,000 bytes over 1,000 miles, before passing the data on to a cable company, which will then carry it for one mile and deliver it to the end user. Through the peering arrangement, they could both be paid the same amount.

“End customers that request access to video content will pay their broadband provider for access to the service, and often an ISP will only have to carry that content a short distance,” he says. “The traffic imbalance occurs when we are carrying those bytes for a lot longer than they are.”

No free lunch
While the spat between content companies and ISPs continues, it is difficult to identify which of the parties is actually committed to the principle of net neutrality.

Comcast, which has adopted the same line as Level 3, tells Capacity that it has “always been committed to maintaining an open internet”. David Cohen, EVP at the company, said in a written response that it has “always supported the FCC’s Open Internet rules, because they struck the appropriate balance between consumer protection and reasonable network management rights for ISPs”.

The FCC’s Open Internet rules are designed to create a set of regulations which treat all internet traffic in the same way, and was intended to strike a balance for net neutrality. Cohen believes, however, that peering and internet interconnection should not fall under the auspices of net neutrality, which “have been an essential part of the growth of the internet for two decades”.

He says: “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.” AT&T also claims it built its broadband business based on the principle of internet openness, and, like Comcast, endorses the FCC’s original rules.

The company claims “there is no free lunch” in response to Hastings blog post, and in its own blog, it went on to outline the investments it would need to make if video streaming continues to drive bandwidth consumption to ever-increasing levels.

Between 2012 and 2013, AT&T says Netflix increased its subscriber base by 33%. This could mean delivering 20Tbps as opposed to 10Tbps, requiring additional capacity in the network to deliver the increased volume of traffic.

If Netflix had to deliver its own traffic, he points out that the company would have to build additional ports and capacity to accommodate it. The company may also be required to build additional ports and transport capacity to accept the new volume. As bandwidth demands increase, AT&T says that all service providers will also be forced to invest in more network fibre to increase capacity. AT&T goes on to state that “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 telecoms for that matter, has ever worked”.

Your content is blocked

In February this year, the FCC once again took on the convoluted issue of net neutrality, and confirmed plans to write new laws in a bid to stop ISPs from blocking or slowing down a website. The move came about after Verizon won a court case against the FCC, which enabled the company to discriminate against certain content that competes with its own service.

According to the FCC, it will tailor the new laws towards removing barriers for infrastructure deployment, in a bid to encourage investment in broadband, in addition to maintaining the underlying ideology of net neutrality.

For Rayburn, this is an issue that should have never gone to court. “This is a business problem between multiple companies and all of them need to sit down and solve it,” he says.

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