Results tagged “FTC”

December 23, 2014 1:07 PM

The Netflix/Comcast Dispute Pt. 3: Did Netflix Mislead Its Customers?

We've, so far--in parts 1 and 2 of this series--looked at some of the justifications Netflix provides for providing inferior service to its customers served by Comcast for months on end, beginning at some time in 2013.  See, e.g., this Netflix ex parte letter, at p. 2. also, slides 33/34 of this ex parte presentation.   We could finish up by taking a look at each side's claim that the other was the real "cause" of the congestion--but that would miss the point of whether interconnection rules, or the lack thereof, were responsible for consumer service disruptions in this case.

Absent any truly shocking new information coming to light (such as learning that Netflix's contract with Cogent was intended to harm consumers, for example, by expressly forbidding Cogent from purchasing supplemental capacity to relieve congestion for its retail customers), it doesn't matter which party is "right" as a matter of Internet policy.  Rather, the immediate question is whether consumer disruption was the unavoidable consequence of this "policy dispute" (though it was unclear whether the dispute between Netflix, Cogent, and Comcast was a "policy," or ordinary business, dispute when it was settled).  

Netflix Knew Congestion Would Impair It's Service

In its Terms of Use for its customers, Netflix designates that Delaware law control any dispute with its customers.  See, Netflix Terms of Use, para. 11.b.  As was mentioned in the blog  dealing with the Cogent-Comcast interconnection agreement, Delaware law holds that "[a] party does not act in bad faith by relying on contract provisions for which that party bargained, where doing so simply limits advantages to another party."  

Thus, Netflix should/would have anticipated that Comcast would "rely[] on contract provisions for which [it] bargained."  Given that Comcast's actions were entirely predictable (and not in bad faith), Netflix would also have known that adherence to its "principle" (of not paying the ISP for transit) would lead to service-affecting levels of congestion for its customers.  So, if Netflix knew that the combination of its planned course of action and Comcast's predictable reaction would cause its customers to receive congestion-degraded service, did Netflix have any obligation to its customers under Section 5 of the FTC Act?

Was Netflix's Failure to Disclose Congestion an Unfair or Deceptive Practice?

Section 5 of the FTC Act prohibits "unfair or deceptive acts or practices" that affect commerce.  An act or practice may be found to be unfair where it "causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition."  See, FTC Unfairness Statement.   The FTC is likely to find an act or practice to be deceptive if "there is a representation, omission or practice that is likely to mislead the consumer acting reasonably in the circumstances, to the consumer's detriment." FTC Deception Statement

It seems fairly clear that Netflix's provision of compromised service, without disclosure, was an "unfair practice" in the sense that consumers could not have anticipated, or avoided injury.  Moreover, it would be hard to speculate that Netflix's actions--of not notifying consumers to expect degraded service--had some countervailing consumer benefit.  Thus, let's look at whether Netflix also engaged in a deceptive act or practice.  

Netflix Knew It Was Selling Inferior Service.  According to Netflix, for the entire history of its streaming service, someone (a 3d party CDN) has always paid the ISP for the incremental capacity necessary to ensure its traffic was delivered without congestion. Florance Declaration  ¶¶ 29-41.  Furthermore, as even Comcast points out, Netflix's decision to artificially limit its transit vendors--based on Netflix's "principle" of not paying for ISP capacity or paying anyone that does--meant that these vendors' capacity between their networks and Comcast were bound to become overwhelmed, resulting in congestion.  See, e.g., Declaration of Kevin McElearney, Comcast, at ¶¶ 23-25  

Netflix has established that its Comcast customers received a "substandard" grade of service even though the consumer was paying for, and expected, the "standard" grade of service.  Florance Declaration ¶¶ 51-55.  Nonetheless, Netflix kept selling service to Comcast customers, knowing that--as long as its transit vendors' lacked sufficient throughput capacity at points of interconnection with Comcast--each incremental customer would contribute to the service degradation experienced by all Netflix/Comcast customers.  

Netflix Deceptively Failed to Disclose Its Comcast-Specific Service Level.  The FTC, in its 1983 Deception Statement, states that "the practice of offering a product for sale creates an implied representation that it is fit for the purposes for which it is sold." Deception Stmt., n.4.   The FTC has further explained that,

Where the seller knew, or should have known, that an ordinary consumer would need omitted information to evaluate the product or service . . . materiality will be presumed.
Id. Under the circumstances, and without knowing the extent, length, or degree of degradation to expect, it was impossible for an "ordinary" Comcast broadband consumer to evaluate prospective Netflix service.  Thus, Netflix's knowledge of, and omission of, relevant information about Netflix's Comcast-specific congestion service impairment was "material" and, therefore, deceptive.  

Consumer Protections Can't Be Ignored and Be the Basis for Interconnection Rules

Netflix tells the FCC that, "when Netflix's traffic was congested it did everything in its power--short of paying Comcast an access fee--to alleviate the congestion . . . ."  Netflix Petition to Deny at 62. (emphasis added).  The notion that Netflix "did everything in its power"--short of doing the one thing it knew would resolve its service disruptions, and what it ultimately did do--is fallacious, and simply another way of stating that Netflix did just what it intended to do.  

If the FCC believes that consumers will benefit from interconnection rules, it should adopt rules after careful consideration.  But the Commission should not to deceive itself into thinking that "consumer welfare" is served by preemptively granting concessions to prevent behavior that is otherwise flatly proscribed by existing consumer protection laws.

December 19, 2014 12:22 PM

The Netflix/Comcast Dispute Pt. 2: Was Netflix Surprised?

As we mentioned yesterday, Section 5 of the FTC Act prohibits companies from engaging in "unfair or deceptive acts or practices."  A lot of the FTC's inquiry focuses how a reasonable consumer would expect to be treated.  Today we'll look at Netflix's contention that, as an OVD, Comcast has an incentive to discriminate against it.  We'll also look at whether Netflix, when it changed its manner of distribution to customers of large ISPs (i.e., most U.S. customers) in 2013, observed ordinary distribution practices for providers of video streaming service.  

If Netflix seems to be the victim of a discriminatory refusal by Comcast to continue to provide uncompensated inbound capacity to Netflix's transit providers (notwithstanding the parties agreed-upon limits of settlement-free capacity), then it couldn't have expected congestion would affect its service. Similarly, if Netflix used normal industry practices for distributing streaming video service, then it could not have foreseen that its service would fail to meet reasonable consumer expectations--and could not have been expected to disclose to these consumers that their grade of service would be below "normal."  

Does Comcast Have an Incentive to Discriminate Against Netflix?

Demonstrating the "incentive/ability to discriminate/exclude" is an essential allegation for any complainant to establish as part of a credible theory of unilateral harm to competition by a dominant firm.  In its Petition to Deny the Comcast-TWC Merger, Netflix attempts to satisfy this element by reciting general statements by the DoJ and FCC to justify settlement conditions in prior mergers.  Netflix recites theoretical statements that an integrated MVPD/ISP (i.e., Comcast) "may" have the incentive discriminate against an OVD.  Netflix seems to be hoping the Commission will assume that it is that hypothetical OVD/discrimination target; and, given that Comcast ("Satan's ISP®") is involved, it's doubtful the FCC will question Netflix's implied victimization.
 
Netflix Service Is a Complement to MVPD Service.  Netflix never directly says that it has been the target of discrimination by Comcast.  Even if we assume that Comcast would--irrationally, according to this GigaOm analysis--favor its lower margin service over its higher margin service (to which Netflix is critical), there is no evidence that Netflix's streaming video service is a substitute for Comcast's subscription video service. 

Instead, all available evidence suggests the contrary--that Netflix offers a complementary service.  Netflix's CEO has said as much, as have the cable companies and satellite companies that want to make Netflix accessible on their set-top boxes, and the large ISPs that offer "free" Netflix service as a marketing tool to attract new customers to their higher tiered services. 

Thus, it is unlikely that Comcast would intentionally degrade such an important complementary service as Netflix, because any devaluation of a complementary service damages the value of the other complementary component (Comcast).  Moreover, if Netflix believed that it was the target of anticompetitive tactics by Comcast, it would not have waited for a merger before complaining to--or filing a complaint with--the FCC or the DoJ. 

Did Netflix Use Reasonable Methods to Deliver Streaming Videos?

Since various parts of the FTC's unfair or deceptive analysis focus on practices that a "reasonable" person might consider unfair or misleading, let's try to get an idea of how other online streaming content is delivered--as the quality of other similar services informs consumers' reasonable expectations regarding online streaming video quality.  Since Netflix's customers noticed that Netflix's congestion-affected service was below their expectations, let's look at how other providers of online streaming video distribute the quality consumers expect of "streaming video service" generally.     

WWE Network.  The same week that Netflix announced its direct interconnection agreement with Comcast, the WWE (World Wrestling Entertainment) launched the WWE Network--a 24/7 online channel broadcast in 720 HD.  Moreover, because the WWE was, for many years, the largest consistent source of MVPD pay-per-view revenues, it would seem that the cable companies would not want to see this content successfully migrate from the MPVD platform to the Internet.

The WWE Network has received generally good reviews with respect to its streaming performance; and no complaints of ISP discrimination have surfaced.  The WWE Network is delivered through a partnership with MLB Advanced Media.  MLBAM, in turn, uses the Akamai and Level 3 CDNs. 

Free Porn.  As the Tony award winning musical, Avenue Q, reminds us (and the FCC is well aware), "[t]he Internet is for porn."   When you stop smirking, consider that many estimate that the volume of adult site traffic is comparable to Netflix's share of Internet traffic. See here, and here.  Moreover, like the WWE Network, the migration of adult videos to the Internet has hurt cable companies' PPV revenues.     
 
Mind Geek is the largest of all streaming adult video providers; its CTO says the company is one of the top 5 consumers of Internet bandwidth in the world.  Mind Geek uses "two of the largest CDNs in the world" to carry its traffic--not that much different from the way Netflix distributed videos (when it cared about congestion).

The "Next Netflix." Every smaller streaming site that I looked at, and which discussed their Internet transit partners, used more transit networks than Netflix.  Many providers that focus on hosting video streaming also offer multiple "CDN-style" server sites at multiple points within major ISP service territories.  See, e.g., Rackspace (9 transit networks & 219 edge locations) and AdultHost.com, which "ensure[s] congestion free" content delivery by: 1) sending packets over the "least congested" route (vs. shortest, like BGP), 2) uses at least 7 different Internet transit networks.    

So, it seems unlikely that Comcast tried to degrade Netflix's traffic by deliberately allowing its transit providers' interconnection points to congest.  Similarly, it doesn't seem like Netflix even used the same standards of distribution that a free porn monopoly provides viewers.  Thus, it was plausible that Netflix knew its customers in Comcast's territory were in for a prolonged period of substandard service.  In the next post, we'll look at the possible implications under the FTC Act. 


***Relevant Facts***

Here is a brief recitation of the relevant facts for purposes of our discussion.  Unless otherwise cited, the facts are taken from the Declaration of Ken Florance http://apps.fcc.gov/ecfs/document/view?id=7521825167 , Netflix's Vice President of Content Delivery, submitted in support of Netflix's Petition to Deny the Comcast-TWC Merger (FCC Docket No. 14-57).

For most of the history of Netflix's streaming video delivery service, Netflix believes that Comcast has required Netflix's third party vendors to pay an additional fee to cover some (or all) of the cost of Netflix-specific capacity augmentation at interconnection points.  Netflix describes 3 instances between 2009 and 2010 where it believes CDNs needed to purchase additional capacity to alleviate congestion issues. Florance Declaration ¶¶ 29-41.

Netflix acknowledges that the volume of its traffic does increase demand for ISP-bound capacity at its vendors' points of interconnection with Comcast.  Moreover, these costs are incremental and specific to the particular point of exchange between Netflix's Internet transit vendor and the ISP.  Florance Declaration at ¶ 46. 

When its traffic was carried on third party CDN networks, Netflix was aware of the costs being incurred on its behalf, but "in the short term Netflix was insulated from a sudden price increase." Florance Declaration at ¶ 39.  While Netflix was using CDNs, its performance over cable systems seemed uniformly better than even on the most advanced telco systems.  http://techblog.netflix.com/2011/01/netflix-performance-on-top-isp-networks.html

While its service was good using 3rd party CDNs, Netflix explains that, "[a]fter the Akamai, Limelight, and Level 3 CDN congestion episodes [2009-2010], Netflix began transitioning its traffic from CDNs (all of whom, we believed, were paying Comcast's new terminating access fee) to transit providers in our continued effort to avoid terminating access fees."  Florance Declaration at ¶ 40.  (dates in brackets added).  Thus, in February, 2012, Netflix signed an agreement with Cogent for Internet transit service.  Cogent began transitioning traffic to Netflix in August 2012.  Florance Declaration ¶ 41.

Based on customer complaints about service quality, Netflix's service deteriorated immediately upon switching to Cogent transit and progressively deteriorated over the next year. Florance, at ¶ 51.  However, beginning in October 2013, Netflix reports a very high level of customer dissatisfaction and cancellations, due to "Netflix's inability to do anything to change the situation."  Florance ¶ 52 (emphasis added).


 
Continue reading The Netflix/Comcast Dispute Pt. 2: Was Netflix Surprised?
December 18, 2014 4:31 PM

The Netflix/Comcast Dispute: Interconnection "Principles" vs. Consumer Rights?

[Note: This is the first post, in a series, in which we'll look at the Netflix/Cogent/Comcast congestion episode from earlier this year.  The focus will be on understanding this event from a different perspective than most of us may have thought about it before.  This series looks further into the question I raised in my last post which is: are existing laws--adequately enforced--sufficient to protect consumers?  For purposes of readability, the full citation of relevant facts has been placed at the end of this post.]

In my last post, I started to look at whether the protracted congestion--and associated consumer service disruptions--caused by the recent Netflix/Cogent/Comcast interconnection dispute indicated that the traditional voluntary agreement structure of the Internet was broken, or whether existing laws might not be enough to prevent protracted consumer disruption.  In a recent article, Prof. Susan Crawford, an advocate for all things Net Neutrality, also highlights the frustrations of customers caught in the middle of the Netflix/Cogent/Comcast dispute,

No federal, state, or local government exercises any oversight over this handful of interconnection points. No Better Business Bureau watches over how your requests for data are being treated.
Prof. Crawford is right to question why consumers got stuck with the short end of this wholesale dispute.  But, I disagree with Prof. Crawford's assumption that new laws--specific to the issue Netflix and Cogent blame for the protracted congestion--are needed. 

As noted in the last post, more specific contracts, and quicker enforcement by wholesale partners are one way to prevent extended periods of consumer frustration.  Similarly, there are also existing laws designed to protect consumers from intentional, or knowing, actions of third parties that prevent consumers from receiving services they believe they are purchasing.

The FTC has expressed concern that it will lose jurisdiction over Net Neutrality-related matters if the FCC decides to reclassify broadband as a Title II service (the FTC Act specifically exempts "common carriers").  Even though I was aware the FTC had asserted jurisdiction to handle Net Neutrality complaints, I didn't really think about the how important the FTC could be. . . until I started looking really closely at the Netflix/Cogent/Comcast congestion episode from earlier this year.   

"It's About the Principle"

When Netflix filed its Petition to Deny the Comcast-TWC merger  in August, I was interested in learning the circumstances that led to Netflix's direct interconnection agreement with Comcast.  I expected to see a pretty basic recitation of how Comcast kept unreasonably increasing interconnection prices, thereby forcing Netflix into lower quality interconnection arrangements.  

Instead, though, the brief spends a lot of time establishing that Netflix's principle--of not paying the ISP any portion of the costs of delivering its content to its customers--was the exclusive factor it relied upon in choosing vendors to deliver its customers' traffic.  The absence of any comparison of various input prices/vendor alternatives available to Netflix seemed odd.  The notion that Netflix was defending a not-purely-economic principle seemed odder still. 

The antitrust analytical framework (which was the ostensible basis for Netflix's opposition to the Comcast-TWC merger) recognizes economic efficiency, and not any unique firm-specific view of how an industry should work.  Yet, Netflix has never indicated that its decisions were based on immediate cost/price effects.  It has even clarified that the costs being imposed by the ISPs are not significant, nor has it raised prices for customers served by the offending ISPs.  See, e.g., this blog post.  Level 3 made the same argument in 2010--that it's not the cost, it's the principle. See this Ars Technica article.   

Prof. Susan Crawford, in the article mentioned above, also observes:

The FCC will find that the money amounts involved in these deals are low at the moment. It's the naked threat posed to the future that is the problem. . . .
The "naked threat posed to the future" may or may not be cause for concern, but--if this threat does not limit the immediate ability of a firm to deliver service--can a firm's reaction to such a threat excuse its performance under its customer contracts?  

It's possible that, for many months at least, Comcast customers (and those of certain other ISPs) were paying for service that Netflix knew to be substandard.  If Netflix failed to take any action to provide the grade of service for which its customers were paying, or to let prospective customers know they would be receiving degraded service for an indeterminate period, then it's possible that enforcement of existing laws might prevent future consumer abuses.    

The Federal Trade Commission Act

Section 5 of the FTC Act prohibits "unfair or deceptive acts or practices" that affect commerce.  An act or practice may be found to be unfair where it "causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition."  See, FTC "Unfairness Statement."  The FTC is likely to find an act or practice to be deceptive if "there is a representation, omission or practice that is likely to mislead the consumer acting reasonably in the circumstances, to the consumer's detriment." FTC Deception Statement

The standards for unfairness and deception are independent of each other. While a specific act or practice may be both unfair and deceptive, the FTC may find a violation of Section 5 if the act or practice is either unfair or deceptive.

In the next post, we'll look at what happened and whether Netflix's 2013 change in the way it delivered content to the country's largest ISPs seemed reasonably calculated to efficiently deliver content to customers, or, if not, whether it seemed designed to promote another goal.  


***Relevant Facts***

Here is a brief recitation of the relevant facts for purposes of our discussion.  Unless otherwise cited, the facts are taken from the Declaration of Ken Florance  , Netflix's Vice President of Content Delivery, submitted in support of Netflix's Petition to Deny the Comcast-TWC Merger (FCC Docket No. 14-57).

For most of the history of Netflix's streaming video delivery service, Netflix believes that Comcast has required Netflix's third party vendors to pay an additional fee to cover some (or all) of the cost of Netflix-specific capacity augmentation at interconnection points.  Netflix describes 3 instances between 2009 and 2010 where it believes CDNs needed to purchase additional capacity to alleviate congestion issues. Florance Declaration ¶¶ 29-41.

Netflix acknowledges that the volume of its traffic does increase demand for ISP-bound capacity at its vendors' points of interconnection with Comcast.  Moreover, these costs are incremental and specific to the particular point of exchange between Netflix's Internet transit vendor and the ISP.  Florance Declaration at ¶ 46.  

When its traffic was carried on third party CDN networks, Netflix was aware of the costs being incurred on its behalf, but "in the short term Netflix was insulated from a sudden price increase." Florance Declaration at ¶ 39.  While Netflix was using CDNs, its performance over cable systems seemed uniformly better than even on the most advanced telco systems. 

While its service was good using 3rd party CDNs, Netflix explains that, "[a]fter the Akamai, Limelight, and Level 3 CDN congestion episodes [2009-2010], Netflix began transitioning its traffic from CDNs (all of whom, we believed, were paying Comcast's new terminating access fee) to transit providers in our continued effort to avoid terminating access fees."  Florance Declaration at ¶ 40.  (dates in brackets added).  Thus, in February, 2012, Netflix signed an agreement with Cogent for Internet transit service.  Cogent began transitioning traffic to Netflix in August 2012.  Florance Declaration ¶ 41.

Based on customer complaints about service quality, Netflix's service deteriorated immediately upon switching to Cogent transit and progressively deteriorated over the next year. Florance, at ¶ 51.  However, beginning in October 2013, Netflix reports a very high level of customer dissatisfaction and cancellations, due to "Netflix's inability to do anything to change the situation."  Florance ¶ 52 (emphasis added).    



Continue reading The Netflix/Comcast Dispute: Interconnection "Principles" vs. Consumer Rights?