Did Level 3 Know What It Was Getting Into?

It's not uncommon for a content distribution network (CDN) to pay additional fees if the amount of traffic being swapped between peering entities grows completely out of whack, people in the CDN business tell Light Reading Cable. In fact, they say such fees should be expected.

Companies weren't willing to comment on the record on the spat between Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Level 3 Communications Inc. (NYSE: LVLT) that boiled over on Monday, but two sources within the CDN industry say Level 3 is chirping because it's starting to face the financial realities of growing into a larger CDN that will be using a primary rail to route gobs of video-tagged Netflix Inc. (Nasdaq: NFLX) traffic. (See Level 3: Comcast Erected Web Video 'Toll Booth' .)

"It's not out of the ordinary," a CDN industry source said of the fees. "With Netflix traffic, they're going to be bigger, and they're going to have to pay for it. Level 3 never realized there was going to be a fee for this."

But that's not how Level 3 is presenting its case. It's arguing that Comcast is violating network neutrality rules by demanding a stipend for Web video traffic that's being delivered to Comcast -- essentially installing a "toll booth," as Level 3 puts it.

Comcast, in turn, denies that it's discriminating against certain types of traffic, claiming instead that Level 3 is inaccurately associating network neutrality with the regular peering terms that other CDNs have agreed to.

Level 3 chief legal officer John Ryan responded in kind today, saying in a statement that Comcast's portrayal of the issue "miss[es] the point," all but calling Comcast's moves a war on over-the-top service providers such as Netflix.

The fundamental issue, he said, "is whether Comcast, as the largest cable company in the country with absolute control over access to its cable TV and broadband access subscribers, has the right to unilaterally set a 'price' for that access that effectively discriminates against competitors of Comcast’s cable and Xfinity content," he said, with Netflix considered to be the prime competitive example.

But not everyone is buying Level 3's argument. Citadel Investment Group LLC analyst Vijay Jayant issued a research note today that backs Comcast's position.

CDN providers Akamai Technologies Inc. (Nasdaq: AKAM) and Limelight Networks Inc. (Nasdaq: LLNW), which, unlike Level 3, don't own backbone networks, "continue to pay Comcast fees for use of Comcast's network as part of a standard industry practice," Jayant points out.

Jayant also points to a 2007 Light Reading report that seems to demonstrate that Level 3 might have entered the CDN fold with unrealistic expectations. Level 3 had forked over $135 million for Savvis (Nasdaq: SVVS)'s CDN operation, hoping to lure lucrative business from the likes of Google (Nasdaq: GOOG) and YouTube Inc. by providing a cheaper option.

"We're the only CDN with a Tier 1 IP backbone," Tom Boasberg, then the VP of Level 3's CDN business, said at the time. "We're not paying anyone else interconnection costs to interconnect with other IP providers to deliver content." (See Savvis to Sell CDN and Level 3 Looks for Big CDN Push.)

From free to paid
Comcast and Level 3 have had a basic, settlement-free peering deal in place for regular backbone transit, but, the CDN sources say, Level 3 is now faced with a fundamental business problem as it sells itself as a CDN to other customers, including Netflix.

With a flood of video traffic on the way, Level 3 will need a way to foot the bill. Level 3 has already acknowledged that the Netflix deal will require more infrastructure -- in addition to doubling storage capacity, it plans to add 2.9 Tbit/s of CDN capacity, which is in addition to the 1.65 Tbit/s that was deployed in the third quarter of 2010.

Comcast says it simply sought out (and apparently got) a new, paid delivery peering arrangement when it became apparent that Level 3 was suddenly going to be delivering five times as much traffic to Comcast as the MSO would be delivering to Level 3.

Comcast called Level 3's statement on Monday "duplicitous," and, based on the company's history, some analysts think that label is apropos.

Sanford C. Bernstein & Co. Inc. analyst Craig Moffett said Level 3 "did precisely the same thing [as Comcast] when it ended its peering relationship with Cogent Communications Holdings Inc. (Nasdaq: CCOI) [in 2005], and has been a vocal advocate in the past of paid commercial relationships when traffic being exchanged is significantly asymmetrical." (See Internet Peering on Thin Ice? and Level 3, Cogent Kiss & Peer Up.)

In fact, Comcast's rebuttal to Level 3 yesterday quoted from Level 3's own statement about the Cogent matter. (See Level 3 Tweaks Cogent.)

Eyes of the FCC
At another time, this public airing of differences might be quickly reported and then just as quickly forgotten. (Be honest: Do you remember Cogent vs. Telia Company ?) But right now, the Federal Communications Commission (FCC) reportedly is getting ready to present new network neutrality rules, and Comcast is trying to get its NBC Universal takeover approved without being weighed down by regulatory caveats.

In a press conference after an FCC meeting today, agency chairman Julius Genachowski said it was too early to comment on the Comcast/Level 3 tussle, but he added that the FCC "was looking into it," according to Multichannel News.

— Jeff Baumgartner, Site Editor, Light Reading Cable

Page 1 / 2   >   >>
spc_markl 12/5/2012 | 4:17:11 PM
re: Did Level 3 Know What It Was Getting Into?

The idea that somebody as shrewd as Level 3's CFO, Sunit Patel, was ignorant of these potential financial implications seems ridiculous.


Jeff Baumgartner 12/5/2012 | 4:17:10 PM
re: Did Level 3 Know What It Was Getting Into?

But there still seems to be a lot of surprise coming from the Level 3 camp, like this sort of thing was unexpected, when apparently this is how cdn biz gets done. It certainly looks like someone missed something along the way. JB

Jeff Baumgartner 12/5/2012 | 4:17:10 PM
re: Did Level 3 Know What It Was Getting Into?

Good question, but it's probably more fun to proclaim that the Internet's sky is falling because of these discussions/differences. But interesting to hear the FCC weigh in on it (or at least note that it would look into it) when there's been no formal complaint filed with the agency (yet).  JB


More FCC-related stuff:  Comcast sent a letter to the FCC that it would be open to meet with Level 3 at the agency "if that will facilitate a better understanding of the matters at issue."   So they don't seem to be more than confident about their position on this one.


cnwedit 12/5/2012 | 4:17:10 PM
re: Did Level 3 Know What It Was Getting Into?

Thanks for the details, Jeff. I wonder if any of this kind of information is going to make it into the hysterical coverage of Comcast's latest Net Neutrality "blunder."

rjmcmahon 12/5/2012 | 4:17:10 PM
re: Did Level 3 Know What It Was Getting Into?

It's important to separate the last mile providers such as Comcast from the middle pipes providers such as LVLT and Cogent.  The former enjoys a natural monopoly with little to no competition along with regulatory capture while the latter have to truly compete in a competitive market.  In the context of basic economics, Comcast arguing that they are equivalent to Cogent is facetious.

rjmcmahon 12/5/2012 | 4:17:09 PM
re: Did Level 3 Know What It Was Getting Into?

Is seems obvious that Comcast is protecting their "walled garden" video offerings from competition by extracting monopoly rents from Netflix's middle pipe providers.  With respect to leveraging a natural monopoly, it's not much different then what VZ did to Sprint (and others) with wireless backhaul. If we allow "the monopolists and the captured regulators" to collapse the whole thing into a few national providers for both content as well as distribution (a la teresterial TV in the 50s-80s) we'll be taking one giant step backwards and our kids really should be ashamed of us ;)

Jeff Baumgartner 12/5/2012 | 4:17:09 PM
re: Did Level 3 Know What It Was Getting Into?

That certainly seems to be the argument Level 3 is trying to put forth here by trying to wrap this into a net neutrality debate, and it's going to get lots of attention... okay... it already has.  Of course, getting Comcast to offer an admission of any sort that this has something to do with protecting their own OTT content is another thing. Still, it's hard for anyone to argue that Netflix isn't a threat to the cable business in more ways than one, which is part of the reason why Level 3's side of the argument can't be ignored, either.  JB


rjmcmahon 12/5/2012 | 4:17:08 PM
re: Did Level 3 Know What It Was Getting Into?

Netflix isn't a threat to Comcast/cable because they don't control the broadcasting rights.  Any deal that Netflix negotiates with Disney, Viacom, et. al. is a deal Comcast could also get.  In reality, Comcast will out negotiate Netflix as they have market power via their natural monoply while Netflix really doesn't have any durable competitive advantage.


rjmcmahon 12/5/2012 | 4:17:08 PM
re: Did Level 3 Know What It Was Getting Into?


LVLT doesn't connect to tens of millions of homes so calling them a last mile provider really is playing semantic games which makes discussion/debate difficult.  Comcast is basically doing the same thing with their Cogent analogy.  I'd say let's describe things as they really are and go from there.

paolo.franzoi 12/5/2012 | 4:17:08 PM
re: Did Level 3 Know What It Was Getting Into?


The thing is that Level 3 IS a last mile provider...for Netflix and this is the entire point of the argument.

Netflix lots out (and they pay level 3 for this) and little in.  The form of compensation described here is exactly what happens in the phone world.  If you are the source of a lot of calls, you end up sending a check into the system to compensate for those who receive lots of calls.

That is where you are missing in your analogy.  If your endpoint is in 1 or more Equinix Data centers (where for example my networks are), then your last mile providers are NOT the normal people that you think about.  You keep refering to consumer last mile providers, not business ones.



Page 1 / 2   >   >>
Sign In