Did Level 3 Know What It Was Getting Into?

Jeff Baumgartner
LR Cable News Analysis
Jeff Baumgartner, Senior Editor, Light Reading

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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