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Netflix Isn’t Helping

April 22nd, 2014 by · 22 Comments

It’s official, Netflix opposes the Comcast/TWC merger. I’m not sure why that question had to be asked, I’m sure any number of people could have ghost-written the answer they gave in advance. 

That we have Netflix as the de facto standard bearer in a public discussion about peering is something that should give other network operators pause. Netflix’s priorities are their own, and their arguments aren’t necessarily aiming for the common good of transit networks and CDNs.

Netflix is playing the squeaky wheel here. They are trying to improve their bargaining position in further interconnection deals with last mile operators by simply stirring a pot Comcast doesn’t want stirred. It’s a time-honored tradition of course in M&A regulatory battles. But it’s pre-empting the healthier discussions we might be having and drowning out other voices.

The problem here is not that Netflix has to pay Comcast. Netflix has to pay someone unless it has the network assets and other leverage to balance the scales, like Google largely has done. Paying Comcast for peering isn’t by itself an issue. What they’re paying Comcast may not even be an issue, it may be entirely fair (if opaque) and the right thing for both sides.

The problem the industry faces is that we have no means of properly monitoring potential abuse. Everyone may play fair today, but tomorrow is always another day.   The world of peering and interconnection has never been a place where the word ‘fair’ applied, but perhaps that is the one thing here we can and should find a way to change.

While Level 3 and some others have been promoting bit-mile peering as a new paradigm, Comcast and AT&T and Verizon and the rest seem to like it exactly as it is.  They like it because it has no rules, only guidelines, sharp elbows, and pain thresholds.  It isn’t being abused now any more than it ever has, but I fear for the system when the spotlight goes away.  And it will go away, and sooner than later.

We need to have a discussion about peering ratios and what they really should mean in a world where nearly all traffic is or soon will be video. Sooner or later there will be no mathematically possible way for any non-consumer-last-mile network operator to balance the traffic they exchange, except of course by having zero traffic.  When that threshold is crossed, are all other network operators to be declared evil parasites getting a free ride?

We need to have a discussion about how such video traffic can be one party’s ‘fault’ in a two-party transaction and not the others’.  The whole narrative where growing traffic that ought to be celebrated is ‘blamed’ on folks is just unhealthy for the entire sector.  Traffic growth should be a good thing.

We need to have a discussion about just how hard it is to build last mile networks cost effectively when the profits seem so much easier to attain. Or is that because they are cherry picked as Verizon has done with FIOS etc? If content providers must contribute to network investment, does that mean last mile operators will commit to hooking up everyone with gigabit connections? I didn’t think so.  How far does the needle need to be skewed toward the last mile to make network investment worthwhile *everywhere* on the global network infrastructure, and how do we keep it from going too far?

Whether Comcast buys TWC or not is just barely peripheral to this. Comcast would obviously be bigger, and hence have more clout. But stopping the merger doesn’t materially change the issues at hand in the interconnection world, they are already here.

Categories: Cable · Internet Traffic · Video

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22 Comments So Far


  • JPW? says:

    Why don’t we just do “destination IP on my AS = Free, Transiting across my network to some other AS = $”? This makes a lot more sense than ratios, and should be pretty easy to implement. Long haul transit networks would still make money, retail networks would be encouraged to peer wherever they can, everyone wins. Maybe I’m missing something, I’m not a layer 3 guy.

  • ID ten T says:

    Amen, great post.

  • Cable Apologist says:

    “We need to have a conversation about just how hard it is to build last mile networks cost effectively when the profits seem so much easier to attain.”

    CAPs have had ~30 years to cost effectively build last mile networks and start cashing in on the “easy” payday. With no universal access requirements, and with cities doing contortionist maneuvers to accommodate competition, I can only think of maybe two private sector players having made a meaningful entrance into the consumer wireline access market for phone/video/internet.

    Surely if it’s such a sweet opportunity, there would be more suitors? At under $1000/subscriber in annual revenue, it only pencils out if you have REALLY deep pockets and a lot of patience.

    What am I missing?

    • Cost Causation Lover says:

      Cable Apologist, gee, maybe your analysis completely ignores an incompetent antitrust department at the DOJ and an FCC that spent (and spends) its energies resolving issues that are 10 years past relevance instead of tackling today’s and tomorrow’s communications infrastructure challenges.

      What would this industry and competition look like today if NYNEX and Bell Atlantic were not permitted to merge, but instead were forced to enter and compete against each other? What would have happened if SBC & Ameritech & PacBell & BLS were not permitted to merge? My guess is, this industry would look a lot different. Most likely, ILECs would have acquired CLECs as part of a market entry strategy and then invested heavily in infrastructure in the neighboring markets to win eyeballs.

      Instead, ILECs merged, dug their heels in their (now larger “home” markets), wiped out practically the entire CLEC industry and then entered into a duopolistic battle with cable companies in every major city.

      We don’t need regulators to micromanage the minutae of this industry, but we do need them to get the big decisions right.

      (Warning soapbox speech below)

      Regulators and politicians LOVE BIG!! Why? Because “big” pays. Big makes large contributions and big creates a place for regulators/politicians/staffers to land when they go through the revolving door. We love to talk about capitalism and competition but in virtually every industry regulators side with inorganic growth and consolidation: big oil, big pharma, big airlines, big banking, big accounting, etc. We prefer “big” to actual competition. Maybe it’s because competition doesn’t leave sufficient margin dollars to pay exorbitant fees to politicians and to hire regulators who talk tough but regulate with a soft touch, I don’t know.

      • Cable Apologist says:

        CCL,

        Rather than address my argument that entry into the wireline consumer telecommunications market carries a naturally high barrier to entry, you bemoan the lack of regulation, ignoring how much those winds have shifted in 30 years.

        “ILECs would have acquired CLECs as part of a market entry strategy and then invested heavily in infrastructure in the neighboring markets to win eyeballs.”

        Well, they did…VZ+MCIP. Q+OnFiber. T+NPNT. WIN+PAET. But none of those competitive players had any meaningful play in the consumer space. And few ever will, because not too many venture capitalists want to chase a 15-20 year payback building into homes.

        How many $100B networks need to be built on top of each other before a truly competitive access marketplace exists? Or should we just nationalize it?

        • Cost Causation Lover says:

          Cable Apologist, I have addressed the issue of high barriers to entry several times over the last few years under the pseudonym of Cost Causation Lover or Cost Causation.

          The entire meaning behind Cost Causation Lover is that content providers are not the cost causers on the network but users are. It’s the user that wants to stream an HD movie. Therefore, if users are consuming too much data, the eyeball owning network operators should recover the cost from them because they’re the cost causer, not the content provider that is merely fulfilling the request.

          But let’s not get sanctimonious here about how cable companies got their start.

          Comcast and its supporters publicly wrap themselves in capitalism and Ayn Rand free markets, but nothing could be further from the truth. They neglect the unmistakeable fact that in each market Comcast operates, it was first granted EXCLUSIVE franchise rights by municipalities. What does that mean? Well, it means, if you (Comcast) build it, we the municipality will guarantee you that no one else can come in and build a competing cable network.

          Now that Comcast and other cable operators have the infrastructure in place, they say to regulators let the free markets operate naturally. Comcast’s idea of competition is a duopoly against the other carrier that built its network with its own history of exclusivity rights.

          My comments on this can be found here and several other places at Telecom Ramblings…

          http://www.telecomramblings.com/2012/04/on-net-neutrality-could-a-1-800-model-really-work/#comment-7696

          http://www.telecomramblings.com/2012/05/is-comcast-violating-the-nbcu-consent-decree-already/

          • Cable Apologist says:

            I’m not making an objectivist argument. Any cable operator, or facilities-based telco, will readily acknowledge that their business model depends on access to the public right of way.

            Franchise grants have never been free, nor are they perpetual. They typically include universal access and other public benefits.

            Surely you can acknowledge that cities are doing all they can to attract new FTTx investment, including forgoing some of the typical public benefits in lieu of healthier competition, and even giving away real estate to accommodate necessary infrastructure.

            I’m not arguing that any of that is BAD. New entrants can only drive innovation. I’m simply highlighting that even under ideal circumstances for a new player, the ROI is way long term, and not the sweet deal Rob makes it out to be.

  • Cost Causation Lover says:

    I seriously don’t know what NFLX is doing. Post CMCSA/TWC announcement NFLX enters into some super-secret transit arrangement with CMCSA whereby NFLX agrees to pay a premium for their time-sensitive packets. Now they decide to oppose the merger with the very carrier they voluntarily entered into an agreement with.

    If I’m a regulator, I’ve got to ask NFLX WTF??!! Did someone hold a gun to your head and order you to enter into this agreement w/CMCSA? If not, can we assume that if we get you the same terms with TWC, you’ll go away?

    My guess is that NFLX knows (and knew when they executed that agreement with CMCSA that) they’re going to have to enter into similar transit agreements with every other Eyeball Owning Network Operator (EONO). And these agreements may all be quite different and, perhaps, less economical.

    Here’s the problem I see, if I’m a regulator reviewing this merger, my job isn’t to solve net neutrality, but, at most, Netflix’s (and other similarly situated content providers’) interconnection challenges w/CMCSA which, in the case of NFLX, as far as I can tell, was negotiated in good faith and entered into voluntarily by both parties.

    I think NFLX’s strategy to oppose this merger after voluntarily entering into a premium packet agreement was too cute by a half and I think regulators will ultimately look for other content providers for a stronger case to reject or impose net neutrality merger conditions.

    In my (probably misguided) humble opinion, NFLX’s decision to enter into an agreement with CMCSA after the TWC merger announcement was miscalculated. I only hope some other heavy-weight content providers with DC influence (and there’s plenty of them) will take a more public opposition to this merger.

    I’ve said it for a few years now and I know I sound like a broken record, but we’re not far away from an FCC Notice of Inquiry (NOI) followed by a Notice of Proposed Rulemaking (NPRM) on the creation of a Switch Packet Access Regime (SPAR) modeled off of the decades old voice switched access structure.

    So get those slide rules out, break out the spread sheets, crank out the cost models, familiarize yourself with Judge Greene’s Modified Final Judgement (MFJ), and bring in the economists, engineers, accountants and lawyers b/c we’re in for nothing short of a few long years of hard fighting before Web 3.0 takes the shape of telecom industry circa 1985.

    • 2319412499 says:

      I suspect that Netflix was unaware of the pending acquisition announcement of TWC by Comcast. That said they likely believe the regulatory climate is going to get challenging for the deal to go through so they presume they will be better off voiding the contract and re-signing post regulatory concessions being made. I am sure theres a clause in the contract b/w Netflix and Comcast to allow both parties to break based upon material events.

      • Cost Causation Lover says:

        Netflix is the metaphorical Judas of the content community.

        The NFLX/CMCSA transit deal was announced 10 days AFTER the CMCSA/TWX merger announcement so getting a judge to invalidate it seems highly improbable.

        My opinion is the content community sees this NFLX/CMCSA deal as the giant betrayal turd to net neutrality principles that it is. It’s not just a betrayal to their content community peers but, more importantly, to their subscribers who Netflix unabashedly rewarded with higher subscription rates. (Yes, the higher rates are for new subscribers, but they also said they would raise their rates for current subscribers after a “generous period” whatever that means.)

        My only question about the super-secret NFLX/CMCSA transit agreement surrounds the clause that permits NFLX to publicly bash the CMCSA/TWC deal which, I suspect, reads something like this:

        “Comcast agrees to permit Netflix to publicly assail, attack and bash the impending merger between Comcast and Time Warner Cable in order to save what little respect Netflix has with its content community peers; provided that Comcast is permitted to laugh, tease, shake its head in befuddlement and wave this agreement to regulators as evidence that Netflix voluntarily entered into this transit arrangement knowing full well it stood in stark contrast to the very principles Netflix’s CEO has publicly espoused.”

        The cord-cutters had a lot more respect for Reed Hastings and Netflix pre-agreement than post. For some strange reason Netflix has convinced itself that 3 shows and a mediocre streaming film library can justify a 25% price increase from 7.99 to 9.99.

        • JPW? says:

          “Now they decide to oppose the merger with the very carrier they voluntarily entered into an agreement with.”
          I think it’s a stretch to say that was voluntary. They could either pay Comcast for peering, or pay Cogent/L3, et cetera for transit and then watch Comcast degrade those connections anyway.

    • Cable Apologist says:

      “NFLX enters into some super-secret transit arrangement with CMCSA whereby NFLX agrees to pay a premium for their time-sensitive packets.”

      Except the agreement:
      1) wasn’t super-secret
      2) wasn’t a transit agreement
      3) wasn’t a premium for time-sensitive packets

      • Cost Causation Lover says:

        Cable Apologist, can you provide a link to the arrangement between Comcast and Netflix b/c I can’t seem to find it. You obviously know the details. So I assume you’ve seen the document, the financial terms and the operational arrangements covered by this agreement.

        Thanks

        • Cable Apologist says:

          Being snarky and disingenuous undermines your argument.

          It wasn’t super-secret because it was announced in a press release, openly discussed in a corporate blog, and both companies have commented to the press about it since (worst secret deal ever?)

          It wasn’t a transit agreement because the whole point was for one company to reach the other’s customers. That’s not transit. It’s paid peering, and it’s not new.

          The financial terms are undisclosed, just like nearly every interconnection agreement, including those between Netflix and Cogent/Level3, or most private sector agreements in general.

          Finally, it wasn’t a premium for time-sensitive packets because a) as has been noted publicly, that would have violated neutrality provisions to which Comcast is still held (via NBCU consent decree), and b) buffered streaming video is non-real-time, bandwidth-intensive (but not particularly latency-sensitive) traffic.

  • Anon says:

    Let’s not forget that large IP transit ports are going for 30-40c per Mbit, depending on if you care about the quality (Level3, NTT, Telia…) or not (Cogent). So let’s say that Netflix had to buy full transit, say 1Tb of IP ports, and they negotiate a deal at 30c/Mbit. It’s still only $300K MRC in costs, or $3.6M a year – which is a drop in the ocean.

    Just pay the damn money already.

    • JPW? says:

      The problem is, Comcast has already demonstrated they’re willing to let their connections to transit carriers degrade as well, in order to squeeze the content providers. So you could pay the 3.6 million, and still have customers with bandwidth issues related to their ISP trying to ‘monetize’ them.

      • Anon says:

        Not really. You can just buy transit from Level3, AT&T, Verizon etc. Is Comcast going to allow all its upstream connections to become congested just to try to exhort a million dollars or so a year from Netflix?

        By the way, this is one of the problems people don’t think about when they start their business on AWS. Sure the infrastructure is cheap, but you have no control over who Amazon chooses to buy transit from and a big technical problem when the time comes to start trying to get your traffic through to end users.

        • JPW? says:

          If Netflix tried to ‘sneak’ the IP traffic in by going with a bigger meaner transit provider, Comcast would just squeeze by some other means like traffic shaping at the edge. Comcast has demonstrated that the quality of their product comes second to ‘monetizing’ their customer base. The technical means they use becomes less relevant, they’ll still accomplish their goal if permitted by consumers and the FCC.

          • Nope says:

            Consumers don’t have a choice, and will permit it. Regulators appear to be paid off, and will permit it. It’s an ugly spiral.

    • Nope says:

      Netflix was paying way more than $3.6M/year to both Cogent and Level 3. Anon is absolutely correct: Comcast was squeezing the pipes, wherever the traffic came from. They’re shameless, and that’s why the “sunlight model” advocated by Rob would accomplish nothing.

  • Cost Causation Lover says:

    Well, tie me up an call me a pretzel b/c Web 3.0 has arrived early. I guess we’re not far at all from a Switched Packet Access Regime (SPAR). This blind squirrel seems to have finally found a nut.

    Congratulations to all the Eyeball Owning Network Operators (EONOs), you have successfully taken us Back to the Future.

    There are champagne bottles popping in Philadelphia (CMCSA), NYC (VZ), Dallas (T), Stamford, CT (CHTR), Monroe, LA (CTL), Atlanta (Cox), and lets not forget the wireless guys too b/c they’re surely going to get in on this SPAR gravy train. So add Overland Park, KS (S) and Seattle (TMUS) to the bubbly brigade.

    I can’t wait to find out how Comcast is going to IMPUTE Switched Packet Access Charges on NBCU to ensure they’re paying their fair share. I have no doubt that CMCSA will happily volunteer to self-report their actions on this matter to regulators.

    Of course, I must also pass on my condolences to the content community, the largest of which sat on their ass for the last 10 years watching this slow train wreck developing and did nothing. Add to the victim list the ap developers who will now need to bake into their revenue models EONO Switched Packet Access Charges just to launch their new ventures.

    To repeat what I said above:

    I’ve said it for a few years now and I know I sound like a broken record, but we’re not far away from an FCC Notice of Inquiry (NOI) followed by a Notice of Proposed Rulemaking (NPRM) on the creation of a Switch Packet Access Regime (SPAR) modeled off of the decades old voice switched access structure.

    So get those slide rules out, break out the spread sheets, crank out the cost models, familiarize yourself with Judge Greene’s Modified Final Judgement (MFJ), and bring in the economists, engineers, accountants and lawyers b/c we’re in for nothing short of a few long years of hard fighting before Web 3.0 takes the shape of telecom industry circa 1985.

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