Reconstructing Rules Based on Former Assumptions Won’t Address New Threats to Viability
By Fred Dawson
March 25, 2014 – With no clear idea of what the rules governing net neutrality will be the market is racing ahead with what amounts to a redefinition of the Internet that likely will require an entirely different approach to the regulatory question.
So far, recent deal making following court rejection of the FCC’s reasoning on the issue has adhered to what the dealmakers consider to be a fair interpretation of the overturned rules. But, in the process, by complying with what Netflix CEO Reed Hastings calls “weak” net neutrality, they are locking in a two-tiered system that defines two Internets – the high-cost managed network Internet and the unmanaged version, which itself is moderately tiered based on whether and to what level of sophistication website owners utilize CDNs.
Hastings’ views have prompted rejoinders from various parties on the network service provider side. But in many respects the back and forth over weak versus strong net neutrality is beside the point of what needs to be considered in the emerging era of video dominance.
Hastings, in a recent blog post about his dissatisfaction with having to pay Comcast for direct interconnection to the MSO’s high-speed metro backbones, argues this is the wrong way to go, since it puts Tier 1 ISPs in a position to arbitrarily set high transit tolls for any provider who wants to deliver HD-quality video to connected TV sets and other devices. The advertised throughput consumers are paying their broadband access providers for should be the guarantor of data rates no matter how much ISPs have to spend to eliminate any bottlenecks at the transit points, Hastings says.
“This weak net neutrality isn’t enough to protect an open, competitive Internet; a stronger form of net neutrality is required,” Hastings asserts. “Strong net neutrality additionally prevents ISPs from charging a toll for interconnection to services like Netflix, YouTube or Skype, or intermediaries such as Cogent, Akamai or Level 3, to deliver the services and data requested by ISP residential subscribers. Instead, they must provide sufficient access to their network without charge.”
Netflix has seen significant declines in quality of reception in places where it relies on those third-party intermediaries, including homes served by Comcast, Hastings says. Average prime time throughput from October through January dropped from about 2.1 megabits per second to 1.51 mbps on Comcast networks, from 2.25 mbps to 1.82 mbps on Verizon’s FiOS networks and from 1.85 mbps to 1.59 mbps on AT&T U-verse networks, according to Netflix statistics reported by The Wall Street Journal.
“Netflix performance has been constrained, subjecting consumers who pay a lot of money for high-speed Internet to high buffering rates, long wait times and poor video quality.” Hastings says. In contrast, he adds, “Some major ISPs, like Cablevision, already practice strong net neutrality, and for their broadband subscribers, the quality of Netflix and other streaming services is outstanding.” This is the case abroad as well, where Netflix has been expanding rapidly, he says.
While direct interconnection with Comcast has resulted in a return to a “good experience” for Netflix customers, he concludes, “If this kind of leverage is effective against Netflix, which is pretty large, imagine the plight of smaller services today and in the future….Without strong net neutrality, big ISPs can demand potentially escalating fees for the interconnection required to deliver high quality service.”
Hasting’s demand that ISPs and, by extension, all their subscribers pay the costs for additional ports and transport capacity are akin to the post office raising postage costs for everyone to cover the costs of the Netflix mail business, says Jim Cicconi, senior executive vice president for external and legislative affairs at AT&T. In a blog response to Hastings, Cicconi says, “It would’ve been neither right nor legal for Netflix to demand a customer’s neighbors pay the cost of delivering his movie. Yet that’s effectively what Mr. Hastings is demanding here, and in rather self-righteous fashion….If there’s a cost of delivering Mr. Hastings’s movies at the quality level he desires – and there is – then it should be borne by Netflix and recovered in the price of its service.”
Right now the big ISPs have the upper hand with expectations that Netflix will soon be paying AT&T and Verizon and possibly others for direct connection into ports on their transport facilities. “Netflix believes strong net neutrality is critical, but in the near term we will in cases pay the toll to the powerful ISPs to protect our consumer experience,” Hastings says, stressing that he does not view this as a violation of net neutrality as spelled out under the defunct regulations. “When we do so, we don’t pay for priority access against competitors, just for interconnection.”
Both Verizon and AT&T have acknowledged they’re in talks with Netflix to set up direct connections. Verizon CEO Lowell McAdam, appearing on a recent edition of CNBC’s “Squawk on the Street,” averred such a deal would be a “good opportunity” for Verizon and Netflix. AT&T said in a statement that it is “in discussions with Netflix to establish a more direct connection between our networks, similar to agreements we have with others.”
“In order to keep the Internet vibrant, we have to make the investments,” McAdam said. “If someone comes in with a lot of load on the Internet, video for instance, you have to get that to an efficient place.”
Indeed, notwithstanding Hastings’ protestations, such deals are becoming commonplace between big ISPs and Internet content providers, according to industry experts. “This is how the Internet works, and it’s not about providing better access for one content owner over another,” writes analyst Dan Rayburn, executive vice president of StreamingMedia.com. “It simply comes down to Netflix making a business decision that it makes sense for them to deliver their content directly to Comcast, instead of through a third party.”
Hastings makes a point of citing peering relationships among ISPs as examples of charge-free interconnects, sarcastically suggesting Netflix would be willing to operate on the same terms by ensuring data comes back to it at roughly the same level that it sends data. “But when we ask them if we too would qualify for no-fee interconnect if we changed our service to upload as much data as we download – thus filling their upstream networks and nearly doubling our total traffic – there is an uncomfortable silence,” he says.
Verizon CFO Fran Shammo, speaking in early March at the Deutsche Bank Media, Internet and Telecom conference in Palm Beach, Fla., noted such peering agreements were made on the assumption the traffic exchanges between ISPs would be mutually beneficial. As quoted by Home Media Magazine, Shammo said ISPs “never contemplated someone dumping as much volume into a peering point as, say, a Netflix,” which, he noted, accounts for close to a third of primetime Internet traffic.
But if, as Shammo suggested, such deals with Netflix are “where the industry will end up,” the question for net neutrality becomes one of preserving enough bandwidth for consumption of free video and everything else at other than a second-class level of experience. Netflix may be dominant now, but its traffic is just the tip of the iceberg when it comes to the intentions of myriad MVPDs, TV networks, CE manufacturers and big OTT players to deliver their own branded TV experiences to the connected user.
Shammo himself highlighted this trend in his remarks at the Deutsche Bank conference when he noted Verizon has established a platform for OTT delivery of high-value content in the wake of its purchase of Intel’s pay TV platform. Along with preparing to extend its FiOS TV service over fixed and wireless broadband as far as content rights will allow, the carrier, as previously reported, is also building a wholesale cloud operation, Verizon Digital Media Services, designed to provide CDN and video processing support for other parties to use in delivering end-to-end OTT premium services.
“We are preparing ourselves for whatever happens in that ecosystem,” Shammo said. “We will be able to take advantage of it.”
To cite another example, discussions between Apple and Comcast recently reported by The Wall Street Journal point to the possibility that Comcast would allocate some portion of its network capacity to provide a managed IP broadband network service for Apple to use in delivering a content package to people who buy Apple set-tops. This would be a separate subscription service from the legacy pay TV and IP TV Everywhere bundles provided by Comcast,
Such moves raise the question of what happens to open Internet bandwidth as opposed to managed network IP bandwidth when Comcast, Verizon, AT&T and any other carrier acts as a wholesale provider of last-mile carriage and other services to OTT providers while using their networks to deliver their own pay TV services in legacy and IP versions, especially when everything on the IP side, live and on-demand alike, is delivered in unicast mode. All of this might follow the prescriptions of net neutrality, assuming new rules mirroring the old ones are written in ways acceptable to the courts. But what rules will be in place to ensure there’s enough access bandwidth left over to support a high-speed open Internet service?
Adopting Hastings’ “hard net neutrality” won’t address this problem. In fact, it’s hard to imagine how Netflix would prosper as the managed Internet video service floodgates open without moving to something like the Apple model.
Federal rules mandating that a proportion of any carrier’s fixed or wireless capacity be allocated to the open Internet might be beyond the politically acceptable bounds of regulatory authority in the U.S. But it might turn out the preservation of an open Internet is so essential to the public interest that such prescriptions become the price carriers must pay for the privilege of using public airwaves and terrestrial rights of way.