Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
Last year at this time, we started a series of articles called “All I want for Christmas” (the RCR Wireless reprints are found here and here). However, the wish list will have to take a breather because we have two gigantic announcements on our hands: a) the Level 3 Communications L.L.C./Comcast Corp. dispute, and b) the Verizon Wireless 4G LTE “Rule-The-Air” announcement. This week, we address the Level 3/Comcast dispute and what it means to wireless, and mid-week we’ll address Verizon Wireless’ business-oriented LTE announcement.
Level 3 started out the news this week with the following Monday morning paragraph:
“On November 19, 2010, Comcast informed Level 3 that, for the first time, it will demand a recurring fee from Level 3 to transmit Internet online movies and other content to Comcast’s customers who request such content. By taking this action, Comcast is effectively putting up a toll booth at the borders of its broadband Internet access network, enabling it to unilaterally decide how much to charge for content which competes with its own cable TV and Xfinity delivered content. This action by Comcast threatens the open Internet and is a clear abuse of the dominant control that Comcast exerts in broadband access markets as the nation’s largest cable provider.”
Wow – that’s stronger than a triple-shot latte. Comcast is quick in the draw, however, contending to the FCC:
“As we explained yesterday, despite Level 3’s effort to portray its dispute with Comcast as being about an ‘open Internet,’ it is nothing but a good old-fashioned commercial peering dispute, the kind that Level 3 has found itself in before. Notwithstanding Level 3’s claims, this is not about online video, it is not about ‘paid prioritization,’ it does not involve putting ‘toll booths’ on the Internet, and it is not about net neutrality. Indeed, if anything, it is Level 3 that is seeking ‘non-neutral’ treatment that would favor its network traffic over those of all its competitors.”
Comcast’s full reply to the Federal Communications Commission can be found here. So what’s happening in this dispute, and is there a “right” answer? And what does any of this have to do with net neutrality, especially wireless net neutrality? Rather than get into the company tit for tat, let’s look at the issue from the content supplier and the end user perspectives.
Content suppliers want to deliver traffic to as many current and potential customers as possible for as little money as possible. When content providers are small, they turn to content delivery networks, or CDNs, to pick up their traffic at a couple of locations across the country and deliver this content to potential customers. Level 3 operates a CDN as do others such as Akamai Technologies, Limelight Networks and Amazon.com Inc. They charge content providers by the “peak bit” to deliver their content to the masses.
As content companies get larger (and Netflix Inc. has become quite large), they tend to want to control their own network. With Netflix consuming 20-25% of total Internet traffic, they have clearly reached this point (whether their engineers have been able to keep up with the traffic is another matter). The critical elements to content companies are (in order): a) latency (how quickly content is delivered to the end user); b) packet loss (which impacts overall availability of the service; c) jitter (which is important to video – minimal jitter needed); and d) price. Netflix charges customers $8 per month for unlimited access to their library over the Internet.
Comcast is also in the business of content distribution. It’s not always IP-based, but last night’s Big 12 Championship was delivered to me over a private video distribution network. Contrary to many reports, this is not about movie distribution alone, but about content distribution. Comcast distributes content to the home. So does Verizon Communications Inc., and so does AT&T Inc. through U-Verse. As we have documented many times in this column Verizon, Comcast and U-Verse were under no obligation to spend billions to enable connectivity to our neighborhood. They are under no obligation to increase my peak download speed to 50 megabits per second (what a Christmas present, Time Warner Cable! Glenn Britt, you are my Santa!).
If I choose to subscribe to a higher bandwidth speed, there is an expectation established through the pricing of the product that I will receive faster speeds (uploads and downloads). They can stick as many caveats in their terms and conditions, but, provided I am not connecting Mobile Symmetry production servers to my cable modem and using it to drive traffic from my home in a way different from the way Time Warner’s (or AT&T’s or SureWest’s) engineers intended, I’m generally in the clear.
That usage includes Netflix. It includes ESPN web services. It includes Skype Ltd. And, as much as it pains the cable companies, it also includes Hulu.
Here’s the summary of cash flows in the Netflix/Level 3/Comcast video distribution network:
1. Netflix pays Level 3 to distribute content (per megabyte, peak consumption base). Netflix no longer pays the U.S. Postal Service.
2. Level 3 pays Comcast something (they were paying nothing outside of basic connection fees; now they are paying for 20 ports according to the Comcast filing).
3. Comcast’s expenses rise as bandwidth consumption rises and revenue from Akamai falls (note – much of this was a traffic shift from Akamai to Level 3, not growth per se).
4. Comcast’s Video on Demand product might suffer some marginal revenue loss because of the attractiveness of the Netflix offer (these are good margins, but not as good as more high-speed Internet customer margins).
5. Customer pays Comcast or AT&T for high-speed data (more for higher speeds).
6. Customer also pays Netflix (to cover the costs of content as well as network distribution) per month for unlimited movies.
The customer is paying between $55 and $70 per month for high-speed Intenet plus Netflix. The variable costs to distribute this content (Level 3 plus Comcast) are likely less than $7 per month (and that’s with a lot of attributed variable costs). And the network costs are sunk (but Comcast took the risk and investors expect a return on that investment).
The next logical question is “Why didn’t Netflix go to Comcast directly?” “Why have a middleman?” Literally, in the large data centers (I’ll use the Westin Center in Seattle as an example), Netflix servers sit on floor six, suite XXX. Level 3 routers sit on floor four, suite XXX. And Comcast’s sit on floor five, suite XXX. Today, the traffic goes from floor six to four to five then out to Comcast’s customers. Why not go from floor six to five, at least for Comcast destined traffic?
Assuming that a discussion occurred (and this is highly likely given the growth of IP traffic is occurring faster than the growth of experienced IP engineers), this highlights cable’s growing pains. Either a) There was a retail bias that couldn’t see the value of increased high-speed Internet traffic versus the current high-margin video on demand; or b) The “left hand” of the IP engineering budget didn’t want to trigger the “right hand” of a new business relationship (bundling Netflix in premium high-speed Internet bandwidth packages
would spur adoption, increase customer satisfaction, and increase profitability). Cable (and telcos in general) can’t help but resist change, even if it results in higher profitability and increased competitiveness.
Bottom line: The Level 3/Comcast squabble wouldn’t have happened had Comcast approached Netflix directly. The traffic is there to justify the investment, but the “regional” and “retail” thinking of cable companies needs to evolve. Both Comcast and Netflix are large enough to directly connect, and they should do so where it makes sense to do so.
How does this affect wireless (which is why evaluating this with the LTE announcement is useful)? Keep Netflix in place, or imagine a video-based Pandora application. Substitute high-speed Internet with LTE. Substitute Comcast with Verizon Wireless. It’s the precursor of the future debate as tablets and even smarter phones take hold.
This is not a debate about neutrality, but about relationships and well-rounded business acumen. Should the FCC have to get involved (and they likely will), it’s because of carrier shortsightedness, not capacity constraints.
Jim Patterson is CEO & co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. He was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen years in telecom and technology. He welcomes your [email protected].
