Two weeks ago, AT&T announced plans to bring its "GigaPower," very high-speed (300Mbps and up), broadband Internet service to 38 new markets in 2016--on top of the 18 markets that AT&T already has up-and-running on the service. A day later, Google Fiber announced on the company's blog that it was exploring expanding its service (available in 3 cities/markets, but under construction in 6 more) to Chicago and Los Angeles. Both announcements were widely reported by the news media, which has favored a "fiber race" narrative ever since both AT&T and Google announced--on the same day--their respective plans to deliver gigabit speed Internet service to Austin, TX.
Thus, analyst Jeff Kagan compares the strides of "the two heavy hitters in ultra-fast, ultra high speed, gigabit Internet services." In the Washington Post, reporter Brian Fung observes that, "AT&T is benefiting tremendously from a chain reaction that Google initially began," though he concludes that, "Google's early lead in the fiber race [is] being eaten away by AT&T's traditional advantage in building networks."
But, while the "fiber race" narrative may add an element of human drama to the otherwise impersonal dynamic of broadband competition, Google's fiber-to-the-premise ("FTTP") network is not the first that AT&T would be compared with in the media. It is, however, the first time the media has favorably compared AT&T to a FTTP-based service provider--and this is the more interesting aspect of the story.
AT&T Starts the "Fiber Race"
As AT&T's service name--"U-Verse® with GigaPowerSM"--suggests, AT&T started building its gigabit speed network long before Google Fiber. In 2004, AT&T observed that, by using a fiber to the node ("FTTN") architecture (which deploys fiber to the last traffic aggregation point prior to distribution to the customer's premise (the "node")), it could quickly provide better-than-DSL speeds (i.e., 6Mbps vs. 3Mbps) to the maximum number of customers, and position AT&T to be able to progressively replace copper with fiber as bandwidth demand moved from the network core to the edge (residential consumers). In 2005, AT&T decided it would call its IP network "U-Verse" and service was launched in 2006. See this 2006 timeline/summary from AT&T.
To illustrate how FTTN is designed to evolve, consider the tremendous surge in demand for wireless data over the last 10 years. To expand capacity, AT&T has created more cell sites, and has steadily added fiber to replace the copper lines that "backhaul" traffic from the cell sites to its backbone network. This means that, in some areas, AT&T can use new fiber in order to "groom" existing U-Verse neighborhoods onto new broadband distribution nodes closer to the customer--thus reducing the copper loop length, and enabling faster DSL transmission speeds.
It's No FiOS
In 2005, Verizon began deploying its FTTP network, FiOS, and--although Verizon's FTTP would take longer to deploy (to reach a similar percentage of customers) the network itself was/is considered the gold standard. Thus, among "experts," in the media, and, by self-described "wonks," its early years, AT&T's U-Verse network was always being compared--unfavorably--to FiOS. U-Verse was the "Jan Brady" of broadband.
An industry newsletter, from 2007, reports that (at the FTTH (Fiber to the Home) Council meeting in late 2006), "AT&T, with its FTTN deployment, showed that it was thinking along the same lines as Verizon . . . [b]ut many in the audience were skeptical about whether AT&T could even deliver HDTV with its fiber-plus-VDSL plant." (emphasis added) A year later, when AT&T increased its broadband Internet speed from 6Mbps to 10Mbps, one tech news site reported, "AT&T Bumps U-Verse Top Speed to 10Mbps, Verizon Chuckles." Months later, at the end of 2008, AT&T almost doubled its top speed --to 18Mbps . . . and was still ridiculed.
As recently as 4 years ago, Susan Crawford--who framed the President's views on telecommunications policy--had already counted AT&T out of the "broadband" market. In an essay in the New York Times, Crawford argued for the regressive application of Title II regulations for broadband services (which the FCC adopted this year) on the basis that cable was a monopoly, unlikely to be challenged by U-Verse, which "cannot provide comparable speeds because, while it uses fiber optic cable to reach neighborhoods, the signal switches to slower copper lines to connect to houses."
Perceptions Are Not Reality
Fortunately, for AT&T, its consumers (the people that pay for the network) disagreed with the critics. In fact, almost a year before Prof. Crawford had discounted U-Verse as a competitor to cable, consumers were telling Consumer Reports that U-Verse was among the best choices (with, of course, FiOS) for bundled broadband, TV, and phone service. Only a month after Crawford's essay, AT&T verified the Consumer Reports survey, reporting that consumer U-Verse revenues increased by an impressive 44% in 2011.
By the end of 2013, despite the early skepticism about "whether AT&T could even deliver HDTV with its fiber-plus-VDSL plant," AT&T's U-Verse passed Verizon's FiOS in numbers of video customers served. AT&T's network and top Internet speeds have consistently improved every year, with its top U-Verse speed increasing to 75Mbps a year ago. Not surprisingly, consumer adoption of U-Verse broadband Internet service has also steadily improved--growing at 30% annually over the last 5 years.
Finally, while the eye of the media has been on FTTP deployments like Google
Fiber, it's what has been happening in copper that has almost-certainly
put AT&T in position to provide super-fast Internet access more
quickly--and in more places--than any other ISP. Over the last 6 years,
advances in DSL technology have allowed for faster transmission speeds--very close to those supported by fiber--over legacy facilities.
Having been "counted out"--or never counted "in"--by the media has some advantages. One of these benefits is all the positive publicity AT&T is now getting from publications that may have never expected something they associate with an "innovative" "edge" company--like super-fast broadband--to be done better by a "monopoly" "ISP."
But, it's difficult to overcome perceptions--particularly when these perceptions have been fed by the FCC. The Washington Post article, cited above, looks for an explanation for how AT&T was able to overcome "Google's early lead in the fiber race." Given the perception of Google's early lead, it would be hard for AT&T to convince anyone that it started the race before Google. Instead, the article quotes AT&T's Jim Cicconi as saying, "[w]e're pretty good at this, and we've had a lot of years to get good at it." That's as good an explanation as any.
In the last post, we discussed how the broad new regulatory framework that the FCC's Net Neutrality/Broadband Reclassification Order imposes on ISPs is predicated on a few, demonstrably erroneous, presumptions about the incentives of broadband ISPs. Contrary to the FCC's assumptions, the evidence demonstrates that broadband ISPs have a powerful economic incentive to efficiently increase output of their most profitable product--broadband Internet access.
But, incentives--and their impact on how consumers receive content today, vs how consumers would like to receive that same content--could use some further fleshing out. After all, if someone didn't have an incentive to keep your favorite content off the Internet--you wouldn't be paying the same company two fat bills--for TV and broadband Internet--every month, would you?
Internet Consumers Love Content, and ISPs [Don't] Love to Sell It
While consumers love the high quality content that broadband providers offer through their MVPD service, TV distribution is not a profitable service for many broadband ISPs and is not the most profitable service for any broadband ISP. See, e.g., this recent AP article, citing SNL Kagan figures, that cable companies earn 60% cash flow margins on broadband service vs. 17% on video service.
But, even though most wireline ISPs would rather not be in the pay-TV business, there is a strong correlation between consumers that purchase pay-TV service and those that purchase broadband Internet service. In the AP article cited above, Comcast says that about 70% of its video customers also purchase broadband Internet service. For non-incumbent cable companies, the correlation may be much higher. See, e.g., Randall Stephenson, Statement to House Judiciary Committee, June 24 2014, at 3 (More than 97% of AT&T's video customers also purchase another AT&T service.) The fact is that broadband ISPs believe they must offer pay-TV service in order to compete for the best broadband Internet customers.
Big Content Loves Consumers' $$ . . . Just Not Consumers
As noted in the last post, the big content companies do not seem to be as responsive to consumer demand as broadband ISPs. In fact, companies like CBS, Comcast, Disney, Fox, Time Warner, Viacom, and various cable/satellite-owned regional sports networks generally don't make their "linear" (sports, news, and primetime) programming available online at any price, unless the customer is also a TV subscriber.
And, it's not cheap to be a TV subscriber. In its most recent Video Competition Report the FCC notes that, in 2012-2013, the price of the most popular tier of channels increased at a rate 3x the rate of inflation for the same year. 16th Annual Video Competition Report, table 5. (5.1% vs. 1.7% inflation) Comcast recently disclosed that its programming costs increased by almost 7.8% in the past year--almost 10x the inflation rate! According to Nielsen, consumers now purchase an average of 189 channels per month, but watch only 17.
The FCC [Still] Doesn't Understand that Incentives = Profit
It's clear that, despite the evidence, the FCC still believes that, for most ISPs, it's more profitable to distribute programming for "Big Content" than it is to produce and deliver their own broadband Internet access service. That's the only explanation for why Chairman Wheeler would offer this counsel to ISP/MVPDs at NCTA's recent INTX show:
History proves that absent competition a predominant position in the market such as yours creates economic incentives to use that market power to protect your traditional business in a way that is ultimately harmful to consumers. . . . Your challenge will be to overcome the temptation to use your predominant position in broadband to protect your traditional cable business.
Remarks of Chairman Tom Wheeler, NCTA-INTX 2015, (as prepared) at 6.
Chairman Wheeler points out that MVPD's spent $26 billion on programming in 2013, but he doesn't mention that as this number grows, MVPD profit declines. Wheeler Speech at 3. According to data relied on by the FCC, programming costs (as a percentage of revenue) were the highest in 2013 that this expense had ever been. 16th Annual Video Competition Report, at ¶ 89. Meanwhile, also in 2013, the same companies invested even more in the means of production for broadband Internet service ($28 billion (according to U.S. Telecom data) vs. >$26 billion (which includes non-ISP DBS firms' spending on content).
If Profit = Incentive, Who Profits from Keeping Content Off the Internet?
Chairman Wheeler is correct in his (implicit) premise--that the parties that benefit most from the status quo do not tend to willingly embrace disruption of the status quo. But, the Chairman is mistaken about who benefits from maintaining the inefficient, and artificial, separation of the function of content delivery into the "MVPD" business and the "broadband Internet." If the FCC ever thought to ask itself why these two businesses were still separate businesses at all, the Commission might want to "follow the money."
The table above compares profit margins (income/sales) of the largest
ISPs and the largest providers of MVPD content over the past 4 years. Looking at the relative profitability of content distribution, versus broadband Internet/MVPD--and recognizing, as noted earlier, that the ISPs would be more profitable without their MVPD businesses--then there's really no question that the group which benefits most from the "traditional cable business" is not the ISPs/MVPDs, but rather, Big Content.
But, even though Chairman Wheeler's assumptions about ISP's incentives are mistaken, he correctly observes that,
The Internet will disrupt your existing business model. It does that to everyone.
Wheeler Speech at 6. But, if you're a big content guy, at least he wasn't talking to you--you still get to distribute your content through the free-from-Internet-competition biosphere of the federally regulated MVPD model. It could be worse, look at Netflix's profit margins . . . The graph above was part of a Seeking Alpha article by Amit Ghate. Of course, the Big Content companies would probably expect to earn much better profit margins than Netflix, because they have more--and better--content. But, still, how much better?
Until now, the Big Content companies have been lucky that the FCC thinks their content needs to be protected from the ISPs. At some point, though, its always possible that the FCC--or Congress--could start questioning whether parts of the existing pay-TV regulatory scheme are insulating content from the disruptive forces of the Internet. If I was a content company, though, I would only get worried when they stop inviting me to secret meetings about MVPD mergers.
In its recent Net Neutrality/Broadband Reclassification Order, the FCC justifies the need for the Order's pervasive regulations in essentially one statement, "broadband providers (including mobile broadband providers) have the economic incentives and technical ability to engage in practices that . . . harm other network providers, edge providers, and end users." Order ¶ 78. The Commission's discussion of the ISPs' incentives/ability to harm consumers and other market participants is almost as conclusory.
The FCC appeared focused on a result that required it to presume an uncompetitive broadband market. Supporting its premise, the FCC relies on citations from its 2010 Order, and some gerrymandered market shares, in which it defines "markets" by arbitrary selections of speed vs. consumer demand substitution. See, e.g., Order, n. 134. By ignoring broadband market performance, the Commission not only failed to understand that ISPs were unlikely to be the problem, but the FCC also missed a chance to conduct a more circumspect analysis of whether consumers could truly access the content of their choice online.
The FCC Didn't Consider Broadband Market Performance
The FCC states that, "[b]roadband providers may seek to gain economic advantages by favoring their own or affiliated content over other third-party sources." Order ¶ 82. The Commission offers less than a handful of specific examples ISPs "act[ing] to harm the open Internet." Order, n. 123.
Only in the Madison River example, was the ISP clearly seeking to favor its own service (long distance voice termination). It is worth noting, though, that the reason Madison River had an incentive to favor its circuit switched voice was because--as a rural ILEC--the FCC set Madison River's rates well in excess of cost; so its incentive was created by one FCC regulation and then preempted by another (later) FCC regulation.
Nonetheless, the best indicator of a market is performing competitively is whether it is responding to consumer demand by adding capacity, or whether it simply raises prices and takes more profits. Broadband speeds have consistently moved higher, actually following the Moore's Law trajectory. And, the Commission notes, broadband capital investment reached levels in 2013 that had previously only been seen during the telecom bubble. Order ¶ 2. Moreover, connected devices, bandwidth speeds, and user adoption of streaming services has soared. Order ¶ 9.
The FCC Didn't Consider the Evidence on ISP Incentives
The Commission recognizes that, "the growth of online streaming video services has spurred further evolution of the Internet." Order at ¶ 9. But, untethered by evidence to the contrary, the FCC leaps to the [wrong] conclusion that, "these video services directly confront the video businesses of the very companies that supply them broadband access to their customers." Id.
Almost a year ago, AT&T Chairman Randall Stephenson, explained why this theory didn't make sense for most ISPs. In his prepared testimony for the House and Senate Judiciary Committees about the AT&T's proposed acquisition of DirecTV, Stephenson states its motivation to acquire DirecTV is about trying to earn any profit on TV,
Today, 60 cents of every video dollar we earn goes straight to programmers, before we spend a penny to market our service, install a set top box, send a bill, or answer a customer's call. As a result, our video product is, on its own, unprofitable.
Statement of Randall Stephenson, CEO and President, AT&T Inc., before the House Judiciary Committee, June 24th 2014 at p. 3 (emphasis added). Thus, the FCC's theory--that ISPs have an incentive to prevent consumers from accessing video content online, because the ISP would prefer to sell them the same content at a loss to the ISP--is simply untenable.
Even if the ISP does earn a profit on video, it would still not have any incentive to discourage their broadband customers from accessing online video content, unless it earns a greater profit from its video service than from its broadband service. This is not the case for Comcast, whose broadband revenues and company profits continue to boom, despite continued losses of video subscribers.
So, if the FCC's theory doesn't even make sense for the Prince of Darkness, then ISPs are unlikely to be the problem. But, why don't consumers have access to more content over the Internet?
Traditional Linear Content Owners Don't Have the Same Incentives As ISPs
Even though the three largest streaming video providers (Amazon, Hulu, and Netflix) have expanded their content through original programming, and consumers have embraced online streaming video, the fact is that consumers still don't have access to that many more online programming choices than they did in 2010. If you compare the most popular streaming sites in 2011, with what's available today, the only significant new entrants are Sling TV and HBO Now. Unfortunately, cord-cutting is more of a media headline than a consumer phenomenon.
At times, the FCC has seemed to (sort of) recognize the problem. A little over a year ago, Chairman Wheeler was telling broadcasters that he was looking out for them with strong net neutrality protections, and that they should embrace Internet distribution of their programming. Except for the few broadcast channels that are part of the Sling TV package, the Chairman's speech fell on deaf ears. Chairman Wheeler didn't seem to appreciate that--because the FCC ensures the broadcasters fat margins on retransmission fees (much like Madison River's terminating access margins)--they have no incentive to expand output!
Similarly, Chairman Wheeler understood that the linear content market had failed last summer, when he asked the CEO of TWC to resolve disputes between TWC's regional sports network (RSN), which carries the Los Angeles Dodgers, and other MVPDs serving the Dodger's home television market. Because of pricing disputes, when Chairman Wheeler wrote to TWC, a large majority of Dodgers' fans--4 months into the 2014 baseball season--could still not watch the team on TV.
Chairman Wheeler probably thought he understood TWC's incentives pretty well--the company had a merger with Comcast pending before the Commission--when he asked TWC to respond in a competitive manner to consumer demand. But, RSNs have powerful economic incentives to restrict output. Thus, Chairman Wheeler was, again, mistaken about incentives. TWC's merger with Comcast has come and gone, but 70% of the Los Angeles viewing market still cannot watch the Dodgers on TV or online.
A Question of Incentives
As of Friday, Chairman Wheeler was [still] telling cable ISPs they should "overcome their temptations" to favor their TV businesses over their broadband Internet services. Meanwhile, in an L.A. Times article yesterday, broadcast programmers candidly noted that, despite using public spectrum to distribute their content, they plan to favor even more of their own content over third party sources. Perhaps the Chairman was talking to the wrong group?
By now, you probably understand that I think the FCC would have been wise to spend some time thinking about whether the industries it regulates have incentives that are aligned with consumer welfare. Had the FCC thought about it, they probably didn't need to impose such pervasive regulations on ISPs. Likewise, if the FCC's rules are distorting the incentives of traditional TV programmers, then the FCC should eliminate these rules, also.
On the other hand, what if traditional linear programmers simply like their FCC incentives more than those of the competitive broadband Internet, and are simply in "harvest" mode (restricting output/raising prices in the face of a slow decline in demand)? Broadcasters aren't (usually) ISPs, so who will police them?
Certainly not the FCC. But, to be fair, neither have the DoJ or the FTC looked into the matter. However, some parties are looking out for consumers . . . and the answer may surprise you. We'll discuss further in the next post. .
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
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.
A few weeks ago, President Obama, acting on some seriously bad advice, formally urged the FCC to, among other things, consider regulating Internet interconnection agreements. The "facts" that brought an ordinarily well-functioning market, based on two decades of voluntary agreements, into the President's regulatory cross-hairs were, of course, the highly-publicized disputes surfacing earlier this year involving Netflix, Cogent (one of Netflix's primary Internet transit vendors), and Comcast (at first, and then a series of other large ISPs).
The only thing that is clear at this point is that there is a lot more information for the FCC to gather, especially from Netflix and Cogent. The information that is available strongly indicates that the Comcast episode (and each subsequent ISP-specific iteration) was an anomaly, and not likely to repeat itself. This, alone, should tell us to be wary of rushing to supplant a competitive market with regulation.
Moreover, because of the unique nature of this congestion event--and the fact that such an event had not happened before--the FCC must try to understand everything it can about this event before the Commission even thinks about adopting new rules. Comprehensive rules are only the answer if the problem is that market participants have no ability/incentive to reach mutually-beneficial voluntary agreements.
Yet, in the present case, the parties were able to reach voluntary agreements; Netflix with Cogent, and Cogent with Comcast. Therefore, before the Commission concludes that carrier-to-carrier agreements cannot work, it must ask: why didn't the voluntary interconnection agreements produce a timely, efficient outcome in the present instance?
The Relevant Cogent-Comcast Congestion Facts
For our purposes, we only need to focus on a limited set of facts. We'll take our facts exactly as presented by Netflix and Cogent (in their bid to obtain regulatory concessions in the FCC's review of the Comcast/TWC merger). Specifically, we will refer to the Declaration of Ken Florance, Netflix's Vice President of Content Delivery, and the Declaration of Henry Kilmer, Cogent's Vice President of IP Engineering.
--In February, 2012, Netflix signed an agreement with Cogent for Internet transit service, which it would use to deliver traffic coming off CDN agreements later that year. Cogent began transitioning traffic to Netflix in August 2012. Florance Declaration ¶ 41.
--Cogent does not provide specific information about its settlement-free agreement with Comcast, but we can discern: 1) the agreement applies to traffic falling within a certain inbound/outbound ratio, 2) the agreement has been in place since sometime in 2008; and 3) for the first 5 years of the agreement, the parties were able to abide by the mutually-agreed-upon terms without issue. Kilmer Declaration ¶¶ 17, 55, 61-64 and the attached Letter from Arthur Block, General Counsel, Comcast Corp. to Robert Beury, Chief Legal Officer, Cogent, dated June 20, 2013 ("Block Letter").
--Cogent also points out that: 1) it does not believe Comcast is its "peer" and that Cogent only agreed to exchange traffic with Comcast on a settlement-free basis because of Comcast's "market power," and 2) Cogent does not believe there is any reasonable basis for "in/out ratio," which defines the range of traffic volumes subject to exchange on settlement-free terms. Kilmer ¶¶ 42-45, and ¶¶ 55-60.
--According to the Block Letter, Comcast states that, in a capacity planning meeting in the fall of 2012, Cogent told Comcast it did not anticipate needing additional capacity in 2013. Kilmer at pp. 17-18 of 18.
--In a recent ex parteletter, Cogent only disputes that it affirmatively represented that it would not need additional capacity in 2013. Here at 3. Cogent does not dispute that it failed to provide any advance notice to Comcast that it anticipated needing additional capacity.
Good Faith and Bad Faith in the Performance of Contracts
In contract law, there is a general presumption that parties to an agreement will perform their duties fairly and honestly, so as not to deprive the other party of the benefits of their bargain. This presumption is a part of every contract, and is called the implied covenant of good faith and fair dealing.
The converse of the implied covenant of good faith is, of course, bad faith. Bad faith, however, goes beyond simply failing to perform a substantive provision in a contract. Rather, it is defined as an "intentional dishonest act . . . misleading another, entering into an agreement without the intention or means to fulfill it, or violating basic standards of honesty in dealing with others."
Defining bad faith in novel circumstances can be difficult, but Professor Stephen Burton, in a Harvard Law Review article in 1980, observes that parties frequently relinquish "future opportunities" to enter into contracts, and these same parties also have some discretion as to how they perform the contract. Therefore, Professor Burton explains, "[b]ad faith performance occurs precisely when discretion is used to recapture opportunities foregone upon contracting." This test has become a widely-employed benchmark for determining bad faith by state courts. (The Burton article is not available online, but here is a great article by Prof. Robert Summers discussing the Burton test and Good Faith generally).
Did Cogent Exercise Bad Faith By Intentionally Disregarding the Terms of Its Settlement-Free Interconnection Agreement with Comcast?
As an experienced provider of Internet transit services, Cogent would have known how much Netflix traffic it could carry and still be within the terms of its settlement-free interconnection agreement with Comcast. Instead of limiting the amount of traffic it would accept from Netflix, Cogent went ahead and agreed to accept as much as Netflix wanted to send. Considering, as well, Cogent's expressly-stated contempt for the traffic ratio (which limited Cogent's future opportunities), it is impossible not to construe Cogent's willful disregard of the traffic ratio as an attempt to "recapture opportunities forgone upon contracting."
While Cogent tries to insist that Comcast was being unreasonable by asking Cogent to observe the terms of the parties' agreement, the Delaware Supreme Court, not long ago, affirmed 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." Here, n. 26. The opinion of the Delaware Supreme Court is relevant because many firms, including Netflix, designate Delaware in contracts designating a choice of law.
Fool Comcast Once . . .
It seems obvious, in retrospect, that Comcast could not anticipate--and was not willing, or prepared, to deal with--Cogent's level of bad faith performance. It is clear from Comcast's response to Cogent's escalation letter, in June 2013, that Comcast has no intention of treating Cogent's persistent disregard of a crucial term as a "total breach." Comcast asks only that Cogent purchase transit for that amount of traffic which exceeds the parties agreed-upon ratio.
But, when Cogent refused Comcast's option for preserving the original agreement, while accommodating Cogent's demand for greater capacity, Comcast would have been within its rights to give Cogent notice of its intent to terminate direct interconnection with Cogent. Because, if Comcast's customers were hitting The Pirate Bay a little too hard (demanding more Cogent-bound capacity), that's what Cogent would have done.
In 2008, Cogent apparently decided that its settlement-free interconnection agreement with European ISP TeliaSonera had become unappealingly one-sided. Cogent (probably?) provided whatever notice its agreement with Telia required, and then--fairly suddenly (according to reports)--Cogent simply stopped carrying Telia's traffic.
In hindsight, Comcast would have best served its customers by simply terminating the agreement. Though, this course of action would have led to a temporary disruption in service--as Cogent's customers sought other alternatives--it would not have led to the protracted degradation in service that consumers instead had to suffer.
Nonetheless, the existence of this event will make the system of voluntary network interconnection that comprises the Internet less vulnerable to a future bad faith breach in a critical portion of the supply chain. Parties to future voluntary interconnection agreements are now much more likely to craft agreements so as to insure against protracted periods of deteriorated service. A few isolated instances of bad faith should not cause the FCC to abandon its faith in the fundamental structure of the Internet as we know it.
On September 4th, in a speech to the startup-focused group, 1776, Chairman Wheeler gave a speech where he discussed consumer broadband deployment and competition. The Chairman seemed to be of two minds about the state of broadband competition.
On the one hand, the Chairman praised the valuable benefits that competition has yielded, in terms of spurring ISPs to deploy new, and upgrade old, networks in order to increase the speed and availability of broadband Internet to more Americans. The White House has previously recognized broadband competition as producing better networks and faster speeds.
However, after recognizing the value of these new last mile networks, Chairman Wheeler also concludes that the present state of competition is simply not adequate to ensure that consumers can realize all the benefits of these networks,
Looking across the broadband landscape, we can only conclude that, while competition has driven broadband deployment, it has not yet done so in a way that necessarily provides competitive choices for most Americans.
Chairman Wheeler began by introducing the graphic below. The chart shows, by percentage of households, the number of providers offering service at not only the FCC's currently-defined "broadband" speed (4Mbps down/1Mbps up), but also 3 additional, speed-defined, categories--10Mbps, 25Mbps, and 50Mbps.
The Chairman explained that 10Mbps was the minimum speed that a household would need to stream one HD movie, and allow for simultaneous Internet use from other devices. Wheeler also proposes changing the definition of "broadband" to 10Mbps downstream for purposes of participation in the Connect America fund.
The Chairman further argued for changing the definition of broadband, because "only wussies use less than 10Mbps/month, and the United States will not subsidize wussy Internet usage."  The 25Mbps and 50Mbps levels of service, Wheeler predicts, will quickly become the standards, as households continue their inexorable march toward dedicated, fully redundant, OCn SONET service.
Wheeler observes that, at the 4Mbps and 10Mbps tiers, most Americans have a choice of no more than 2 service providers. Moreover, the situation only deteriorates at higher speeds, "[a]t 25 Mbps, there is simply no competitive choice for most Americans." Speech at 4 (emphasis added).
The poor picture of broadband competition that the Chairman paints has created situations where "public policy" (read: FCC regulation) must intervene to protect consumers and "innovators" from firms with "unrestrained last mile market power." In these situations, he says, "rules of the road can provide guidance to all players and, by restraining future actions that would harm the public interest, incent more investment and more innovation." Speech at 5.
Title II Just Got Trickier
As most are aware, the FCC is currently evaluating public comments on its "rules-of-the road-for-broadband-ISPs" NPRM, in which the Commission is also considering whether to reclassify broadband Internet service as a "telecommunications service" under Title II. Supporters of reclassification often contend that it would not compel the FCC to impose any obligations on ISPs, beyond the general statutory duties of fair dealing imposed under Sections 201 and 202 of the Act.
Title II Is Different for Dominant Carriers. The obligations of any specific common carrier under Title II, however, depend on that carrier's classification within Title II for the relevant telecommunications service. Consistent with what Title II proponents argue, "non-dominant" carriers have few, if any, company-specific obligations.
On the other hand, carriers classified as "dominant" have to abide by additional obligations that stem from both the statute, as well as a more specific application of the general terms of the statute, because the FCC cannot assume compliance with its general statutory obligations for the dominant carrier service.
Thus, dominant carriers' rates can be regulated by the Commission, and they must file tariffs, subject to FCC review, describing their terms of service. Moreover, dominant carriers have longer review times and more stringent standards for initiating new, and retiring old, service offerings.
Finally, once imposed, dominant carrier regulations are all but impossible to get out from under. At the end of 2012, U.S. Telecom filed a Petition with the FCC, seeking to have its members (holding less than a 50% market share in a declining segment) declared "non-dominant" for voice service. The FCC has still not acted on U.S. Telecom's Petition.
Implications for Cable ISP's Higher Speed Services
The one thing that Chairman Wheeler could not have expressed more clearly is his belief that cable is the only alternative for broadband service at or above 25Mbps. Thus, if the Commission were to reclassify broadband Internet service as a telecommunications service, it would be difficult for the Chairman to explain why the incumbent cable providers are not dominant in the provision of higher speeds of consumer broadband service.
The specific Title II provisions, and Commission rules (such as the Computer Inquiry rules), that would apply to the cable companies' dominant telecommunications services would depend in large part on how the Commission chose to reverse the Cable Modem Order. Although, with respect to the Computer Inquiry rules, in particular, it seems highly unlikely that the Commission would revisit its earlier unwillingness to "in essence create an open access regime for cable Internet service applicable only to some operators." Order at � 46 (emphasis added).
Whither the Dominant Carrier ISP?
If we pause for even a second to consider the Commission's reasoning in refusing to apply Computer II to broadband over cable, it becomes very clear why Title II regulation is not the answer. The easiest way to avoid the incremental hassles that come with being "the firstest with the mostest" is don't be that guy.
What's that, dear broadband network? You could offer the fastest broadband on the market, but because some additional regulation intended to "simulate" competition means you'll earn less than you would on the "slower" speeds? Well, the easy answer would be: don't offer the higher speeds!
This almost seems like that classic case where rent control regulations have the paradoxical effect of creating artificial shortages for the regulated service, limiting access for the very people the laws were supposed to help. But, I'm sure that could never happen here...
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?
And if you say to me tomorrow Oh, what fun it all would be then what's to stop us, pretty baby but what is and what should never be -Led Zeppelin, "What Is And What Should Never Be"
With profuse apologies to Led Zeppelin for blaspheming their iconic song title to do a telecom policy blog, this is essentially what Google announced to DC policy makers, via its corporate/policy blog, on Wednesday--except that the policymakers and the press didn't hear the last line. But, boy, did they eat up the first few . . . you can tell that Valentine's is in the air.
I say the "announcement" was targeted toward policy makers, because absolutely no relevant business information was provided in the announcement--you know . . . costs, prices, projected revenues, technology to be used, etc. No vendors, competitors, or even Google's Clearwire partners (a venture from which--according to news reports--Google has been backing away) were interviewed or consulted. No, but that's OK, because this wasn't a business "announcement."
What the "announcement" really says is how much political clout Google carries in Washington. On a day when the Gub'ment is closed for a fourth consecutive day, some of the most important Government officials involved in technology policy were intrigued enough to very quickly issue "statements" in reaction to Google's blog post.
For example, the New York Times story actually contains a "statement" from Chairman Genachowski reacting to the Google blog post, and the statement reacts to Google's announcement like it were an "official" announcement--like a firm commitment to enter a market in a specific way, explaining product terms and prices, entry timing, costs, and projected revenues. The Hill even contains a statement from Senator John Kerry, Chairman of the Senate Commerce Committee's Subcommittee on Communications, Technology, and the Internet. Moreover, just about every story you'll read really "drank the Kool-Aid." From the articles I saw on line, only Computerworld got it right.
But what gives me the right to question Google's ambitiously-admirable, but vaguely-defined, "experiment", the belief of the bulk of the press, and some of the most important officials in Washington? Well . . . there's this small problem of the facts and the logic. First, Google's blog never says exactly how they plan to offer this 1 gigabit/sec (1,000 megabit/sec) broadband service at a "competitive price." Second, the whole theory seems to contain a pretty glaring logical flaw: wouldn't Google deciding to become a broadband ISP allow other Broadand ISPs into Google's monopoly business?