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

bmenezes,


 


Yep.


 


seven


 

OldPOTS 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 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 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 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 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 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 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 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 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

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?

Seven,


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.


seven


 

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


 

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


ADD:


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.

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.


Mark

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