The battle between the video giants -- one cable, one streaming -- moves from the screen to the fiber.

In a press release today, Level 3 laid out the issue at hand. Comcast (CMCSK) made Level 3 "an offer it couldn't refuse." Either pay up or Comcast would block its services.

"On November 19, 2010, Comcast informed Level 3 that, for the first time, it will demand a recurring fee from Level 3 to transmit Internet online movies and other content to Comcast's customers who request such content. By taking this action, Comcast is effectively putting up a toll booth at the borders of its broadband Internet access network, enabling it to unilaterally decide how much to charge for content which competes with its own cable TV and Xfinity delivered content. This action by Comcast threatens the open Internet and is a clear abuse of the dominant control that Comcast exerts in broadband access markets as the nation's largest cable provider.

This sets a scary precedent. If Comcast can charge an extra fee to Level 3 for hosting Netflix (NFLX) content, it could (and probably will at some point) charge Google (GOOG) to stream YouTube movies or Apple (AAPL) to broadcast iTunes content. Because Comcast owns the last mile, they hold the keys.

What does this mean for consumers?

This particular action by Comcast will probably reach customers in the form of increased rates for Netflix customers. Netflix has to pay more for Level 3's services so the gouging is passed to consumers.

Ironically, this move comes on the very week that President Obama's FCC Chairman Julius Genachowski will announce whether he'll fulfill Obama's promise to protect the open Internet and Net Neutrality -- which would prevent this type of corporate abuse.

For its part, Comcast claims that it is now carrying a significant amount more of Level 3's traffic without any additional compensation. Previously, Comcast had a deal with Netflix's content delivery network, Akami to share the costs of delivering the content. Now that Netflix went to Level 3, it will no longer see that revenue.

"Level 3 has misportrayed the commercial negotiations between it and Comcast," Joe Waz, Comcast's senior vice president for external affairs, said in a statement. "This has nothing to do with Level 3's desire to distribute different types of network traffic. Comcast has long established and mutually acceptable commercial arrangements with Level 3's content delivery network competitors in delivering the same types of traffic to our customers."

It should be interesting to see how this plays out next week.

A follow on to my post, because it's got me thinking about "Network
Neutrality". What we have is old world scenarios not matching the
new world order. Let's do some diagrams.

The way things used to be, scenario #1:

Segment A Segment B Segment C Segment D
| | |
Server---> <---ISP #1---> <---ISP #2---> <---Client

Back in the day, the server operator paid for segments A and B, the
client paid for segments C and D. The peering between the two ISP's
was about making sure the costs of Segment B and Segment C were
approximately the same, in the aggregate.

The first evolution of this was for the folks running the servers
to "merge" with ISP #1, creating a generation of data center based
content "ISP"'s, typically located in or near major US exchange
points. In essence this made the picture look like scenario #2:

Segment B Segment C Segment D
| |
Server ISP---> <---ISP #2---> <---Client

This made a lot of folks like ISP #2 unhappy. Their segment C costs
remained the same, but by consolidating and shrinking the costs of
segments A and B into a much shorter B the server side folks were
seen as not taking their fair share of the costs. This lead to
peering friction between these folks.

The server folks cried foul, after all it cost millions to build
out infrastructure in all of these locations, so while their backbone
cost was not as high, they were eating a lot of cost in space and
power and servers.

The second evolution though was the CDN, which in fact didn't do a
backbone at all. They said rather than buy colo space, or build
our own colos all of which is expensive, we'll take the money we
would have spent on colo and give it directly to ISP #2, for space
and power very near the end users. This gives us scenario #3.

Segment B Segment C Segment D
| |
Rest of the Internet---> <---ISP #2+--> <---Client
|
+--> <---Server

The ISP #2 guys loved this, finally a way for them to cut backbone
costs, and in fact the server folks were willing to pay them for
the privilege.

Now, what does this have to do with network neutrality? Well, I've
never seen a good definition of what the term really means, but
there seems to generally be a feeling that folks should be able to
gain access to consumers (the Clients) on more or less a fair and
level playing field. That sounds like a great concept, but the
problem comes when you look at the reality of scenarios #1, #2, and
#3 above. I don't want Network Neutrality to come at the expense
of making one or more of these scenarios impossible. We don't want
to say you can never do #3 just so everything is fair. However the
costs of these three scenarios are neither the same intotal, nor
are they divided the same.

If my speculation is right here what various business folks have
gone and done in the Comcast/Level 3 situation is to replumb a
scenario #3 setup into a scenario #1 setup, effectively rolling the
clock back to a previous time. This will cost everyone more money,
as more bits move further. Strangely, in may in fact be more fair
in that both sides pay more similar costs, but they are in fact,
higher costs.

In essence Comcast/Limelight&Akamai had figured out how to do this
for a $1 cost to Comcast and a $1 cost to Akamai, and now Level 3
is doing it in a way that costs them $2 and Comcast $2. Level 3
says it is fair because they pay the same cost, Comcast says it is
not because their costs are raised. Comcast offers Level 3 the $1
solution, but it's not L3's business model so it would cost them
$3 to go set that up, and they think that is unfair.

This situation thus finally allows me to articulate something that
has been rambling around in my head for years, but only now makes
sense. The only way you can create a network neutrality model that
is fair to all players is to regulate the market into a single
scenario. If you picked any one of the above and forced everyone
into it, then you could also enforce that anyone could play for the
same price. However, as long as we allow the different scenarios
it can never be fair, someone in scenario #1 will always have
different costs than in scenario #2 or #3. It's a sort of "separate
but equal" that never turns out to be equal.

The funny thing about peering to me has always been that everyone
keeps their dealings as secret as possible. They don't want to
disclose costs, interconnect locations, speeds or other details.
Everyone wants to believe they are getting a better deal than the
next guy due to their amazing negotiations, and they don't want to
give up that advantage. The reality is though that all parties are
using the secrecy of these dealings to hide the myriad of ways they
screw each other and their competitors because they don't know there
are better deals to be had elsewhere.

Perhaps better than Network Neutrality would be a situation where
any time two networks interconnected they had to disclose the
location, speed, and amount of money changing hands to be compiled
in a searchable, public database.

Comcast: We bent over backwards to help Level 3! (those bastards)

By Nate Anderson | Last updated <abbr title="December 1, 2010 5:30 PM" class="timeago datetime">about 2 hours ago</abbr>


Level 3's inflammatory Monday afternoon press release, in which it basically accused Comcast of trying to whack Netflix streaming traffic and flout net neutrality principles, certainly started a fire. Within hours of issuing the press release, the head of the FCC's Wireline Competition Bureau was on the phone with Comcast, giving the company the business end of her Question Stick. What exactly was going on here, she wanted to know.

So Comcast told her, and in a follow-up letter (PDF), made its answers public for the world to read. That's because, in Comcast's view, the entire dispute is “nothing but good old-fashioned commercial peering dispute" and Level 3 is being "entirely disingenuous."

The entire blowup was extraordinary, because Level 3 has been in commercial arrangements with Comcast for years. It apparently decided to risk whatever goodwill it had built up on its attempt to drive a hard bargain that would put Level 3 in a better position than content delivery network competitors like Akamai and Limelight.

A rash bid

Why take the risk? In Comcast's view, Level 3 may be in over its head with its new agreement to deliver all of the Netflix streaming video traffic. The argument is that Level 3 won the Netflix contract away from other CDN providers by providing a surprisingly low bid, one that it now has to back up with a good deal from the major US Internet providers.
“Level 3 has low-balled its way into a new business deal that will significantly increase the amount of Level 3's traffic Comcast would carry,” says the cable giant, “and suddenly wants to seriously disrupt settled economics of Internet traffic to meet its new business plan. Its position is not based on any principles of fair play on the Internet, but instead is merely the result of its rash bid to carry Netflix traffic at radically low rates, based on the flawed assumption that it could use its Tier 1 Internet backbone status to cram its CDN traffic onto others' networks on a settlement-free basis.”

Indeed, because Level 3 is such a major Internet backbone provider and has historically run only a smallish CDN operation, Comcast has actually been the one paying Level 3 for certain interconnections in the past.

But the Netflix deal alone is so massive that Level 3 has suddenly become a major CDN player. Comcast says that it was approached by Level 3 two weeks ago, just after Level 3 signed the Netflix deal, and was asked for 27 to 30 new interconnection ports using the two companies' existing interconnection agreement (that is, Level 3 would pay nothing more for adding up to 30 direct 10GigE connections to Comcast's network).

Comcast “was able to scramble and provide Level 3 with six ports (at no charge) that were, by chance, available and not budgeted and forecasted for Comcast's wholesale commercial customers.” After providing these six additional ports, Comcast concluded that the existing settlement-free peering agreement with Level 3 was still (barely) valid, but if Level 3 really wanted another 21 to 24 ports, this was simply too much traffic. Level 3 would have to pay for those ports like any commercial paid peering customer.
Comcast also notes that nothing about any of these new ports was contingent on the type of traffic coming across it. That is, the company was concerned only about traffic volumes, not content.

Comcast's peering and transit policies are available on the company's website, and those policies make clear that settlement-free peering is only available to a company that can “maintain a traffic scale between its network and Comcast that enables a general balance of inbound versus outbound traffic.”

Level 3 did not respond to our inquiries.