Level 3, Comcast spat could get ugly
Level 3 has gone public with an argument it’s having with Comcast over network transmission fees. The disagreement highlights how the popularity of over-the-top content is upsetting established business models.
Level 3’s specific accusation is that Comcast is trying to overcharge Level 3 for access to Comcast’s networks. Level 3 tossed in allegations that Comcast is violating network neutrality principals and abusing its market power, charges designed to be particularly damaging to Comcast as it seeks governmental approval to buy NBC Universal. In response, Comcast accuses Level 3 of duplicity.
The argument is a rare public airing of tensions generated by the rise of online content distributors, such as Netflix. In fact, Netflix is the specific issue in the spat between Level 3 and Comcast.
Netflix is moving toward a streaming-only model (it recently introduced a streaming-only tier at $7.99 per month, $2 less than its least expensive DVD-plus-streaming tier). Netflix had been using several companies, including Level 3 and Akamai, for transmission, but it recently cut a deal with Level 3 to become its content delivery network (CDN), handling the bulk of its traffic, starting next year.
Level 3, in subsequent negotiations with Comcast, told Comcast what the operator must have already surmised: More streaming traffic is coming its way, and it’ll be coming through Level 3’s network.
Comcast demanded higher payment from Level 3 for carrying the traffic, and got it. Level 3 characterized this as the first-ever demand from Comcast for a recurring fee to carry Internet movies and other content.
A statement circulated by Level 3’s chief legal officer Thomas Stortz, said: “While the network neutrality debate in Washington has focused on what actions a broadband access provider might take to filter, prioritize or manage content requested by its subscribers, Comcast’s decision goes well beyond this. With this action, Comcast is preventing competing content from ever being delivered to Comcast’s subscribers at all, unless Comcast’s unilaterally determined toll is paid – even though Comcast’s subscribers requested the content. With this action, Comcast demonstrates the risk of a ‘closed’ Internet, where a retail broadband Internet access provider decides whether and how their subscribers interact with content.”
Level 3 said it agreed under protest to pay in order to avoid service interruptions, but that it will be complaining to regulators and policymakers.
Comcast senior vice president of external affairs and public policy Joe Waz fired back on Comcast’s official blog  that Level 3 has now become a CDN, and in its negotiations with Level 3 Comcast treated it like any other CDN.
Comcast’s position is that when traffic flow between two companies is roughly symmetrical, no-cost transmission is justified. He explained the traffic between it and Level 3 will soon become asymmetrical, with Level 3 getting the advantage of a 5:1 imbalance, and that justifies the charges. In short, Comcast is accusing Level 3 of wanting transmission for free.
“Level 3’s position is simply duplicitous,” Waz said.
In one of the first comments on the matter, Citadel Securities said that in its opinion, Comcast is justified. The MSO is treating Level 3 the way it treats any other CDN; Citadel cited Comcast’s relationships with Akamai and Limelight.
Unlike Akamai and Limelight, however, Level 3 operates its own network. It is trying to exploit its peering relationship with Comcast and avoid being treated as a CDN, Citadel opines.
“In our view,” the Citadel analysts wrote, “Comcast is not discriminating against this type of traffic; rather it is simply requiring Level 3 to adhere to the same type of commercial arrangement as the other CDNs it works with.”
But Wall Street and Washington do not always see entirely eye to eye, and the Wall Street view doesn’t have to be definitive.
If Level 3’s argument is given credence among regulators, it should complicate Comcast’s attempt to buy NBCU. Some of the most vigorous opposition to the merger comes from competitors, including small cable operators and satellite TV distributors, that fear the combined entity will abuse its increased market power unless conditions are imposed preventing it from doing so.
The argument comes down to who pays. Does Comcast have to absorb the costs associated with increased traffic, or will Level 3? Of course, Level 3 would be justified in passing the costs along to Netflix, and Netflix to its customers.
Comcast could be legally correct but could still lose if the argument gets framed as Comcast versus its own subscribers.