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Did Level 3 Know What It Was Getting Into?

Jeff Baumgartner
11/30/2010
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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

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paolo.franzoi
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paolo.franzoi,
User Rank: Light Sabre
12/5/2012 | 4:17:02 PM
re: Did Level 3 Know What It Was Getting Into?


bmenezes,


 


Yep.


 


seven


 

OldPOTS
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OldPOTS,
User Rank: Light Beer
12/5/2012 | 4:17:03 PM
re: Did Level 3 Know What It Was Getting Into?


This pricing becomes even more complicated as there are many private/enterprize internets (for privacy and better service) that send some traffic over "the internet".


This is also done for both backup, overflow and based on economical/business choices, connecting business locations; sales offices, customers, manufacturing and surver/computer sites.


The "Internet" is not just used for home customers but for businesses of all sizes.


OP


PS -Been there done that - those cost allocation meetings are hellish

OldPOTS
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OldPOTS,
User Rank: Light Beer
12/5/2012 | 4:17:04 PM
re: Did Level 3 Know What It Was Getting Into?


I think before it is over the choice will be a tiered system for the receivers(homes), with a "video" tier. Or as rj discussed a cost at the source(Netflix). Or both


But all of these will require agreements to spread the wealth/cost to the long/mid haul providers.


Good explination Seven!


Happy bussy hour after Christmas


OP

bmenezes
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bmenezes,
User Rank: Light Beer
12/5/2012 | 4:17:04 PM
re: Did Level 3 Know What It Was Getting Into?


So Seven, if I understand your response to schley, the apparent economic impact to Comcast in this particular situation is: 1. Higher capital costs for metro bandwidth upgrades to keep current customers happy; 2. Higher "opportunity costs" from the use of this capital to keep existing customers happy rather than spending it on upgrades intended to draw new customers; 3. Static revenue with which to help fund that capex, absent the new fees Comcast wants to impose on Level 3. 


That sound right?

schley
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schley,
User Rank: Light Beer
12/5/2012 | 4:17:05 PM
re: Did Level 3 Know What It Was Getting Into?


Jeff (and or Jeff's readers): Can somebody answer a fundamental question here? What are the economics at work behind traffic exchanges from CDNs? In other words, does Comcast (or any last-mile retail IP distributor) face higher costs to distribute large amounts of data from Level 3 or anyone else? How so? Does the surge of IP traffic cause sudden and immediate needs for capital upgrade of the Comcast network? Does it require Comcast to bear higher operational costs, hire more people, what? Conversely, if Level 3 stopped distributing large amounts of traffic into Comcast's network next week, would Comcast's profitability improve, or would its capital requirements decline, as a result of the absence? I really don't understand the underlying economics behind peering and who pays what. Could use a brief tutorial if anybody's game.

paolo.franzoi
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paolo.franzoi,
User Rank: Light Sabre
12/5/2012 | 4:17:05 PM
re: Did Level 3 Know What It Was Getting Into?


rj,


Your mistake is to call Level 3 a mid-mile provider.  In this case, they are last mile provider.  They are directly connected to the content source Netflix.  You are ignoring that FACT.  And it is a fact.  You are trying to portray them in their more traditional role as a backbone provider, but this is a different business for them than normal.  Thus, the cost issues.


Also, you are mistaken about the spam business.  There is a trend of moving to SaaS providers for spam filtering.  The reason is to keep the spam bandwidth off your local network pipe.  We have had Business DSL customers that have had dramatic bandwidth reduction by moving from a spam filtering appliance to a hosted SaaS offering.  Note - I am in the spam filtering business.


 


schley,


If Comcast does not build out its metro distribution, then Comcast's customers can not get effective access to the content provided by the CDN.  There is this entirely wrong headed belief that there is the maximum oversubscription in the network is in the access.  That is simply not true and has not been true since there has been wide deployment of cable modems and DSL.  So, as lots of bandwidth traverses a network there is plenty of last mile capacity to absorb much more bits than the metro and the long haul can deliver.  Imagine it this way...a town of 50,000 people (call that 10,000 homes) gets a 10 Mb/s service.  If they all try to use the service at the same time, then the metro area for a small city needs to be 100Gb/s.


Most peering arrangements are based around the idea of symmetry...where I hand off almost the same amount of traffic to you as you do to me.  In this model, you are collecting about the same amount of money from your traffic sources as I am in bulk.  If I am distributing unicast video as a CDN, then I am sourcing Netflix videos.  The reverse channel for this is very small so, there is a bandwidth imbalance.  So, if my customers want access to your content I have to provide all kinds of metro bandwidth and connectivity to allow them to reach you efficiently.  I have to do this or they might go to my competitor (and this is certainly an arguable point).  Now all of that upgrade comes at no monetary gain for me - other than keeping my existing customers.  So, the extra charges are for all the extra capacity to be able to keep the end customers happy.


Part of the problem is that all the pricing models were built on very low bandwidth utilization by end users.  The providers (Comcast is a good example of this) are concerned by machine to machine communications - like P2P and video streaming as it ups the network utilization dramatically even if it does not require an uptick in access bit rate (which is where they get paid today).  Comcast has started to put in bandwidth caps (they currently are running at 250 GBytes/month).  This is the current way of dealing with this larger utilization.  My personal view is this is pretty inefficient, and we shall have to see how it evolves.


seven


 

rjmcmahon
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rjmcmahon,
User Rank: Light Beer
12/5/2012 | 4:17:07 PM
re: Did Level 3 Know What It Was Getting Into?


Symmetry between a last mile pipe provider and a middle pipe provider is obviously flawed as it puts all the power in the hands of the last mile provider.  So peering between these two has to be regulated.  Noam's third way seems a good approach to me.

rjmcmahon
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rjmcmahon,
User Rank: Light Beer
12/5/2012 | 4:17:07 PM
re: Did Level 3 Know What It Was Getting Into?


Sure, I've thought it out.  I'd suggest a reread of Noam's third way. 


Here's the problem with "sender pays."


"These pipes have a long history of monopolistic pricing and restrictions of access. The logic of economic behaviour would lead them to charge content and applications providers as they send out packets, even when these are requested by the end-users. Indeed, the pipes are likely to entice end-users with low subscription fees, and then hit the providers with high charges, because they have [no] other way to reach a particular end-user after he's made his choice of a last-mile pipe. They will then have to charge those consumers for their use. As a result the internet ceases being mostly free to end-users beyond their monthly connectivity fee. Instead, [we] will often have to pay each time [we] click on a website, thereby reducing the use and excitement of the internet."



This issue is most obvious with email where sender pays basically nothing and hence spam swamps the real stuff.  We tolerate this (with the help of spam filters) because we don't want to invert the model, giving communications gatekeeping to the pipe monopolist.  Obviously, in cellular we pay and pay and pay and the net result is that a few oligarchs get rich and the rest of us lose out significantly.  I really don't think superimposing the cellular model on what we today define as "the internet" is a good strategy.

paolo.franzoi
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paolo.franzoi,
User Rank: Light Sabre
12/5/2012 | 4:17:07 PM
re: Did Level 3 Know What It Was Getting Into?


 


Your right Comcast does not connect to Netflix so it is clear that Level 3 is using its position in the data centers.


You really have not thought about this have you.  It is not a semantic game.  In the phone world, if you sourced a lot of traffic you owed money to the carriers that were the sinks.  Why?  Because originators of traffic got paid.  If the traffic burden was symmetric, then the payments cancelled.  This is the same thing.  If you source 10x the traffic that you take in, you are making 10x the revenue.  You did realize that Level 3 is getting paid to carry and distribute the traffic right?  The same thing holds, you source traffic - you owe money to the sinks.  Because you are getting paid by your customers.


seven


 

Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 4:17:07 PM
re: Did Level 3 Know What It Was Getting Into?


This is interesting: Global Crossing has put out a statement challenging Comcast's position:


http://blogs.globalcrossing.com/?q=content/traffic-balance-not-issue


Specifically, Global Crossing is challenging Comcast's statements about the peering process and traffic balance. The company is also asking the FCC to start a workshop to discuss the principles of peering. We've posted the press release:


http://www.lightreading.com/document.asp?doc_id=201218&site=lr_cable

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