Wednesday, February 19, 2014

Post Network Neutrality Feud Number 1: The Netflix (Traffic) Jam

            As you know, the D.C. Circuit Court of Appeals has invalidated network neutrality requirements that impose common carrier requirements.  In this blog and elsewhere I predicted an uptick in disputes between content providers and distributors in the absence of unquestionable authority for the FCC to intervene if necessary. 

To be clear I favor commercial negotiations that typically resolve interconnection compensation disputes.  However, I also suggest that the FCC have authority to resolve intractable disputes as a referee and mediator.

So along comes another dispute between Netflix and retail ISPs such as Verizon and Comcast.  See Drew FitzGerald & tzGerald   BiograShalini Ramachandran, Netflix-Traffic Feud Leads to Video Slowdown, The Wall Street Journal (Feb. 19, 2014); available at: http://online.wsj.com/news/articles/SB10001424052702304899704579391223249896550?mod=WSJ_hp_LEFTTopStories.

This really should not come as a surprise, even as retail ISPs already receive compensation on both sides of their two-sided market: 1) 3 digit margin monthly broadband retail subscriptions; and 2) transit payments from ISPs, particularly Content Distribution Networks for Netflix such as Level 3.

Retail ISPs want a third revenue stream on some notion that content sources, such as Netflix, are “bandwidth hogs” who should be throttled, or alternatively hit up for direct payments.  In particular it must tick off senior management at ISPs, owned by cable television companies, to see Netflix offer a $7.99 value proposition when cable content bundles are 10-15 times as expensive.

I agree that a direct payment should flow from Netflix if and only if it directly interconnects with a retail ISP.  If Netflix were to stop using CDNs and seek to interconnect directly with ISPs providing the last mile delivery Netflix surely should pay including the significant electricity used to power onsite proxy servers. 

But are retail ISPs right to demand payment from both the directly interconnecting upstream ISP/CDN and even farther upstream from the content source?

I don’t think so, but there’s nothing stopping retail ISPs from trying.  Apparently Verizon and others can degrade Netflix traffic delivery—intentionally or not—without much consumer pushback.  When consumers don’t get high resolution Netflix content, they do not even know whom to blame.  Has Netflix done something wrong, or has the last mile carrier?  Who operates the weakest and inferior link when multiple ISPs participate in the complete end-to-end routing of traffic?

Until retail ISPs lose customers or the debate in the court of public opinion expect more interconnection compensation disputes to arise and possibly mess with your Internet access experience.

1 comment:

Kelly Cameron said...

Not much chance of them losing subscribers. Who are they going to lose them to? Comcast? Or, let's see - Nobody? This is a good illustration of market power and market failure.