Who Pays What to Whom in the Internet Ecosystem?

Internet interconnections and compensation arrangements have been based on voluntary terms and conditions after government underwriting stopped. In a commercial context, funds flow on the basis of traffic volume, but also bargaining power (individually, or collectively held).

Last mile ISPs have significant bargaining power in light of their control of access to end users ("eyeballs" to advertisers and content providers alike).  While we could debate about the robustness of competition and last mile broadband options (functional equivalency), few would disagree that most consumers select one and only one last mile wireline provider (where available) for traffic requirements exceeding 10 Gigabytes.  The FCC termed last mile ISPs as "terminating monopolists," appropriate insofar as most consumers are willing to pay for and rely on a single wireline last mile ISP.  Consumers might also subscriber to a wireless broadband carrier, but data caps force conservation and create incentive to retain a wireline option offering unlimited data, or very high caps like Comcast's 1 terabyte monthly cap, plus Wi-Fi tethering.

In the context of platform/double-sided markets model, last mile ISPs have 2 compensation/revenue streams available: 1) last mile broadband subscriptions and 2) payments from upstream CDN and content providers.  While I can see how a credit card company might need to offer free cards, or even pay car users with airline miles and rebates, last mile ISPs have not given up imposing tiered service rates, primarily based on transmission speed (and not data volume like wireless carriers).  Last mile ISPs now want to increase the compensation received from upstream players.

Netflix, Google and other large volume generators of content have been free riders only if one considers content providers/distributors as solely responsible for compensating downstream carriers handling more traffic than generating upstream.  But Netflix is not the sole revenue source: last mile ISPs used to rely primarily (if not exclusively) on their retail subscribers' monthly payments.  The last mile ISPs want to maximize revenues on BOTH sides of their platform and I don't see the same financial constraints like that incurred by credit card companies.

Netflix blinked first, had payer's remorse, but the commercial negotiation process generates winners and losers.  For my part, I don't see how commercially negotiated compensation arrangements trigger network neutrality concerns, unless and until the FCC has jurisdiction to apply Title II, which it now has, plus evidence that the arrangement is discriminatory and/or unreasonable as defined by the FCC.  Bear in mind that the FCC has eschewed requiring tariffs and doesn't apply the prohibition of paid prioritization upstream from the last mile ISP.

So in large part, it seems to me that a maturing Internet ecosystem has diversified from the traditional peering/transiting dichotomy into a variety of hybrid arrangements.  Has such diversification harmed competition and/or consumers?  I'm not sure that it has, even when zero rating has the potential to influence consumers' content choices by injecting a possible cost avoidance factor.

Netflix Has Buyer’s Remorse Over Its Paid Peering Deal with Comcast

         Soon after capitulating to Comcast’s surcharge demand for improved treatment of its traffic, Netflix got better downstream delivery speeds.  Apparently Comcast did not have to undertake a major bandwidth expansion program.  Much to the immediate relief of Netflix, Comcast merely needed to allocate more ports for Netflix traffic.  So with a reallocation of available bandwidth, Comcast solved Netflix’s quality of service dilemma apparently without degrading service to anyone else, upstream or downstream.

 

          Rather than make Netflix satisfied with its surcharge payment, Comcast has triggered buyer’ remorse.  Netflix CEO Reed Hastings now rails against the deal he cut as payment of a unfair toll; see http://nflx.it/1pgX4cd.  

 

         
          Haven’t we heard this scrip before?  Yes.  Level 3 used words like toll bridge and surcharge when Comcast hit that company up for more compensation.  See http://telefrieden.blogspot.com/2010/11/comcasts-demand-for-video-surcharge.html.

         
          Comcast surely can exploit a bottleneck in the sense that it exclusively controls the “last mile” link to its sizeable share of broadband subscribers.  Acquiring Time Warner Cable would increase Comcast’s market share, and most consumers don’t have a faster, cheaper, or better alternative. 

         
          Comcast has won the game of chicken, because Netflix and content providers have to fix the problem of subpar download delivery speeds as soon as they occur, or risk inconveniencing their subscribers.  Comcast and retail ISPs have greater leverage, because Netflix has to ensure high quality of service across the entire link to its subscribers.  Comcast can deliberately degrade service by refusing to allocate sufficient ports, but Netflix subscribers don't care who has caused the deterioration.  Netflix has to "fix the problem" immediately even if Comcast has leveraged inferior delivery to force a return to the status quo in terms of downstream service quality.

         
          Upstream content providers and carriers appear to have declining leverage in forcing retail ISPs to accommodate any and all increases in downstream demand.  Arguably Comcast could have hit its subscribers with higher rates, but the company has embarked on a strategy designed to maximize payments from upstream content providers and carriers, but also from downstream retail subscribers.  Netflix, Level 3 and Content Delivery Networks get hit with surcharge demands, but at the same time Comcast and other retail ISPs can raise retail rates across the broad, or create more tiers of service resulting in higher rates for large volume subscribers.

         
           Going forward I believe it will be quite a stretch for content providers to wrap themselves around a network neutrality banner when a downstream carrier manipulates the allocation of ports and bandwidth for maximum leverage.  This “network management” function does not constitute deliberate blocking of packets.  Similarly Comcast will reframe the issue as one of commercial negotiations about access to property rather than discrimination and an unfair trade practice.