On Sunday, the Wall Street Journalreported that Apple was in talks with Comcast to provide a new type of streaming TV service. The report was vague on the specific service except to note that: 1) the parties were "talking," 2) an Apple device-to-be-named-later was going to be used, 3) the service would involve a "managed" (or guaranteed bit-rate) transmission path over Comcast's ISP, and 4) would require a significant investment by Comcast.
Predictably, the Twittosphere erupted with the swift condemnations due any speculative service that whiffs of net neutrality blasphemy. If the speculation involves Comcast, then it wreaks of blasphemy.
The Meandering Meaning of Net Neutrality
But, what is the "dogma" of net neutrality? Is it the FCC's 2005 Internet "Freedoms?" Is it the Open Internet Rules that were vacated--no blocking and no unreasonable discrimination? Public Knowledge just told the FCC that the two biggest "threats" to the Open Internet are ISP data caps and "peering"/interconnection disputes. PK at pp. 6-10.
If net neutrality can be said to have any consistent premise, it is best depicted metaphorically in this 14 second, Geico commercial.
The ISPs are like "Mr. Tickles." The whole rest of the Internet stakeholders are represented as the man in the portrait holding Mr. Tickles.
Yet, firms like Cisco, who on Monday announced a 2 year and $1 billion commitment to cloud services, as well as competitive over the top companies like Amazon, Hulu, and yes, Apple TV, continue to want to invest in cloud services. In other words the leading Internet infrastructure equipment maker fully expects that--even without rules--the ISP (Mr. Tickles) will continue to "hold still" and not "git all cattywampus" on them.
The Flimsy Factual Bases for "Concerns" About the Open Internet
First, let's acknowledge one point on which everyone should be able to agree. The "open Internet" is valuable to every consumer, and every seller, that touches the Internet economy. In fact, the rise of the Internet economy seems to be proof that the "open Internet" is so important that virtually every aspect of that "openness" is already guaranteed by existing contracts between the thousands and thousands of Internet stakeholders.
But, those that think rules must be necessary to ensure the continued openness of the Internet must have some reasons, right? Well, if we look closely, the concerns that have been advanced in past FCC proceedings have been largely based on theoretical predictions that haven't really materialized.
The first FCC concerns about "peering" (i.e., settlement-free Internet interconnection) vs. "transit" (i.e., "paid" interconnection) were expressed by Internet backbone competitor GTE in the MCI/WorldCom merger. See paras. 147-150. The FCC adopted GTE's concern, which was that the combination of WorldCom's UUNet and MCI's backbone would have had no "peers." Thus, because a combined WorldCom/MCI would have been able to require "paid peering" by any other ISP or backbone seeking to use its network, the post-merger firm could raise the costs of any new entrant.
This disaster was averted when MCI agreed to divest its Internet backbone to Cable and Wireless. In fact, the divestiture to C&W was considered a huge failure, and MCI's alleged bad faith failure to satisfy the concerns of the Department of Justice was a primary concern behind the DoJ's challenge to WorldCom's proposed acquisition of Sprint 2 years later. In short, the remedy didn't work, but was apparently unwarranted, anyway.
"Net Neutrality, Broadband Discrimination"
In 2003, Professor Tim Wu argued, in the above-titled paper, that "[c]ommunications regulators over the next decade will spend increasing time on conflicts between the private interests of broadband providers and the public's interest in a competitive innovation environment centered on the Internet." With the exception of Comcast's protocol-specific BitTorrent throttling in 2007, these concerns have largely failed to materialize. Notably, Prof. Wu never mentions the FCC's previous (and PK's current) concerns about peering as a cause for concern.
Broadband ISP "Incentives" to Discriminate, Circa 2010
In the Open Internet Order, the FCC largely parrots Prof. Wu's concerns that broadband ISPs have the incentive and the ability to discriminate against "over the top" providers offering services that compete with the voice and/or subscription video services sold by the ISPs. The FCC first establishes, using the ISPs' own statements, that consumers view certain online applications as substitutes for voice and subscription TV service. Order, para 22.
Then, the FCC simply assumes from comments of groups advocating rules (and not ISPs or voice/video competitors) that, of course the ISP has incentives to discriminate against online alternatives. Yet, the record contained no data supporting the FCC's conclusion (showing, e.g., higher profits in TV/voice than broadband Internet). Order, paras 23-24.
Public Knowledge expressed no concerns about data caps and peering in the 2010 docket.
The Problem with Apple TV . . .
Supposedly, Apple wants Comcast to help it deliver some kind of super-cool IPTV that will actually make you want to buy video service from Comcast (vs. get it on the Internet). As part of this service, Apple wants Comcast to offer Apple TV a guaranteed quality of Internet access, so that its video content would not be affected by general congestion issues that can otherwise cause videos to buffer. And that higher quality access, even if not exclusive to Apple, is a problem . . .
Is The Problem With "Net Neutrality"
My fear is that "net neutrality" is no longer about just a reasonable set of minimal consumer expectations designed to keep the Internet creepy enough to hold the Interest of consumers and the NSA, while at the same time keeping it wholesome enough to prevent SkyNet from becoming self-aware by 1997 (or whatever similarly-fevered nightmares the rules protect us from).
Without a presumptive tolerance for commercially-reasonable service deviations, net neutrality becomes a fetish devoid of any utility. If we can't limit proscribed conduct to only practices or agreements that unreasonably restrict Internet "output," then how do we know whether rules are serving consumers or requiring everyoneto serve a concept that may have limited benefits?
Yesterday, Neflix CEO Reed Hastings published this blog post, arguing that "strong" net neutrality rules would not require Netflix to pay for the costs to augment its inbound ports to Comcast's ISP gateway (it did last month). I have no problem with Netflix buying something from Comcast, and then complaining about having to pay for it. It kind of makes Mr. Hastings seem like every other Comcast customer, no?
But (to paraphrase "the Nature Boy" Ric Flair): you may not like it, but you better learn to love it, because it's the best thing going, brother. What I mean is this. We're all appreciative of Netflix's success, but we would like more companies like Netflix. This means that it's possible to imagine a day when people don't buy subscription TV service from their ISP at all.
Yesterday, I talked about the difficulties that the present system that prevents broadband-only customers from getting access on any terms to in-market streamed games (if those games are available only through an RSN). When these problems are resolved, consumers will presumably be able to buy content from a number of sources online, in addition to the HD channels you can get over the air (which covers most local NFL, a good amount of college basketball/football, and some baseball).
In a future where the Internet is the primary video delivery media, but programming is purchased by consumers from multiple vendors, it is unrealistic for video providers--who will be getting paid by consumers to deliver the service being sold--it is unfair and unrealistic to expect that all of the ISP's users should pay for each upgrade of inbound capacity required by a limited number of subscribers.
For example, at the end of last year, Netflix probably had about 33.5 million users (based on this article). The total number of broadband customers at the end of last year was around 84.3 million, based on this recent report from Leichtman Research. So, at present, Netflix would have 100% of ISP customers pay for a service that only 40% are signed up for, and an even smaller percentage use Netflix service intensively enough to require the inbound capacity upgrades.
On its face, Netflix's request doesn't seem huge when it and YouTube may be the only really large video content providers. However, even if only Netflix switches IP transit vendors or CDNs, every so often, the ISP will have to make the investment again because not all backbones handle Netflix traffic.
Moreover, in a world where the traditional "cable" company is selling a much smaller amount of programming than today--and the average consumer may be buying Netflix-style, over the top video from 4-5 independent providers--it seems more unfair for the ISP to be required to charge all of its customers for service only some will use.
The only reason Hastings' argument has a scintilla of appeal to consumer groups is because consumers pay so much for cable today. If/when everyone will get video from their own over-the-Net service, then Netflix will better understand that if you're the one taking the people's money, then you pay for any incremental additional costs to deliver your product--and it's your responsibility to make sure traffic hits the ISP's network at a high enough speed to be useful to your customer.
The bottom line is that consumers want more "Netflix's" and less subscription TV, and the fairest way to apportion inbound capacity costs is to bill the incremental cost causer--which is the party collecting the revenues from the customers that are using the service which requires in-bound capacity upgrades. To do otherwise, is to simply re-adopt the unfair cable price structure of the existing pay TV market (everyone pays for the people that use the most high cost--a/k/a "sports" programming).
When you're the only widely used alternative to Comcast, you get a lot of sympathy--as Netflix does, and often deserves. But, business arguments disguised as "public policy" arguments don't work unless they work for all users. In the past, Netflix has also shown an indifference to costs that its heavy users impose on general, lighter use Internet customers. But these arguments are near term winners for Netflix that don't get all members of the public into a better place; understandable, but not persuasive, arguments that the government should reject.
Last week, a lot of attention was focused on a dispute between Comcast and Level 3. The facts of the dispute seem to be reflected in each party's ex parte letter to the FCC. Here is Level 3's version, and here is Comcast's version.
What seems not to be in dispute is that Level 3 acquired additional demand for data destined for delivery to Comcast's broadband customers as a result of Level 3's acquisition of content delivery business from Netflix. Comcast asserts that Level 3's increased demand for capacity would impose additional, unplanned capital costs on Comcast in order to accommodate Level 3's increased capacity demands. When Comcast asked to be paid for these additional ports, Level 3 contended that Comcast was violating the Commission's principles of net neutrality by price discriminating against traffic that Comcast knew was originated by a rival video content provider. Comcast responded that Level 3's demand for additional, asymmetric capacity was a violation of the parties' "peering agreement."
While neither Comcast's nor Level 3's description of their disagreement seems to accurately characterize what is happening between the parties, it is not surprising that each party's characterization of the dispute uses its own self-serving nomenclature to cast itself in the best light. What is notable, though, is that both parties' choice of nomenclature centers around the customary means of commercial Internet traffic settlement--among large transiting carriers--known as "peering."
Peering is essentially another name for "bartering." For "barter" to be the equilibrium method of traffic exchange, it is necessary that the parties be involved in the same business (Internet traffic transit and termination), offer each other roughly the same potential value (which neither party has on its own), and--over some temporal period--provide each other the same real value. In other words, over time each peer must offer a combination of scope and capacity, which despite daily fluctuations, ends up providing the other with "fair" value without the need for additional consideration.
So if the amount of one carrier's traffic that it sends onto another carrier's network exceeds a certain allowable asymmetry (say 2:1) over time, then that carrier is "using" more of the other carrier's capacity and must become a "customer." "Customers" of Internet backbone service purchase transmission carriage, or "transit", on the network of the backbone provider they wish to purchase capacity. It is worth noting that in almost every case that there is a peering relationship, even peers (from time to time) will have to purchase transit on another operator's network to preserve their own peering relationships. So even "peering" is not pure barter. This is a rough simplification of how the "tier 1" Internet backbone "peering" system developed and works, but, to be clear, even "peering" isn't free.
Even given this limited description, it seems that that both Comcast and Level 3 have publicly characterized their dispute inaccurately. Comcast--for purposes of Internet traffic carriage--is (for most routes) not Level 3's "peer." Level 3 has an extensive worldwide network capable of addressing well over 100,000 traffic destinations. Comcast does not. However, neither is Level 3 (as a content delivery network, or "CDN") a "peer" of Comcast (as an Internet service provider, or "ISP"). This is what makes the dispute interesting, and lets the elephant into the room. How much longer will the "peering" method of capacity trading continue to be considered the "norm?" One thing seems certain, and that is that barter (peering) rarely remains the default equilibrium in any market over time.
While it is always tricky to try to compare and draw inferences from one industry to another, let's be nutty enough to try. One example comes from an antitrust case I have previously discussed on this blog: Aspen Skiing. Let's focus just on the facts of that case. There were three mountains in Aspen that skiers found attractive--they wanted to ski multiple mountains on their trip to Aspen, but they found it inconvenient to purchase multi-day lift tickets from multiple operators. To better serve their customers, the two operators of the three mountains decided to come up with an "All Aspen" ticket for one fixed price. In other words, as competitors they cooperated to bring a consumer-friendly offering to market. This "peering" system worked . . . until it didn't--which gave rise to the antitrust case. And, while the winner of the antitrust case got monetary damages, the "All Aspen" peering equilibrium never returned.
The history of bank ATM networks are a similar story. Banks wanted customers to use machines rather than tellers, in order to lower their costs. To make using machines attractive, banks invited many local banks into their "networks" so that customers would see the value of being able to get cash from any machine in the network--regardless of bank owner. The banks operated the networks on a non-profit basis, with each paying an annual fee to share network costs and a nominal fee when their customers used another network member's ATM (they also received a nominal fee when another bank's customers used their ATM). Notably, no customers were ever charged in the early days of ATM networks, rather the banks acted as, more or less, a barter cooperative. As we all know now, this system, too, worked . . . until it didn't. Banks with a greater number of ATMs felt they were offering a greater service, and began charging non-customers to use their ATMs. Thus, from the perspective of end-users, one-time "peers" became "customers."
As carriers of information and telecommunications--regardless of technology--begin to resist "traditional" defined roles, they seem inexorably on course to resist "peering" as a method of traffic exchange. Network owners want to be paid for the use of their networks--and they largely function that way now. The amount of traffic subject to "peering" as a means of settlement seems to be bound for decline--as the amount of "same traffic" (like world wide web traffic) declines.
This is the truly interesting issue highlighted by the Comcast-Level 3 dispute. There are a number of questions that must be answered. If Comcast's broadband users are "pulling" capacity onto Comcast's network, should the heaviest users of services like Netflix pay the costs of accepting that additional demand? Does overall demand capacity really matter as much as where in the terminating network the capacity is needed? Who controls cost causation? Do the "traffic destinations" have an incentive to share network capacity planning with networks seeking to deliver traffic to their end users, such that the most cost efficient outcome for both networks and their customers is achieved?
These are the questions that must be resolved in the new world of non-peers exchanging capacity-based traffic. This isn't a bad thing, and the industry--diverse as it is becoming--may have the incentives to develop efficient answers to these problems. However, shedding "tears for peers" and trying to shoehorn disputes into frameworks that no longer fit is not going to produce a system of settlements that is satisfactory to all market participants, and accommodative to future traffic generators, transit providers, and traffic terminators.