Better Than Best Efforts Routing of Mission Critical Traffic and the FCC

           It appears that the FCC will permit exceptions to the standard, plain vanilla best efforts routing standard for Internet traffic, such as the paid peering arrangement recently negotiated between Comcast and Netflix.  In both academic and applied papers I have supported this option, with several major conditions.  See, e.g., Net Bias and the Treatment of 'Mission-Critical' Bitshttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422842.

            With no opposition that I have seen, companies like Akamai offer better than best efforts routing of “mission critical” traffic from content source to last mile, “retail” Internet Service Providers. This service improves the odds for congestion-free delivery of “mission critical” traffic, e.g., live video streaming.  It appears that the FCC intends to permit better than best efforts routing options for retail ISPs.

            I have no problem with ISPs throughout the Internet ecosystem providing different tiers of service, provided the most costly differentiation offers a true enhancement.  Put more simply better than best efforts should not foreclose the best efforts option, particularly for ventures and individuals whose traffic volumes have no possibility of causing congestion.  Comcast and other retail ISPs should have the option of providing companies like Netflix with an insurance policy of sorts so long as all ventures and individuals do not have to follow suit.  Without transparency and reporting requirements companies like Comcast can punish anyone refusing to upgrade from the old standard best efforts option by all but guaranteeing congestion and degraded service. 

            ISPs should have the opportunity to offer an enhanced deliver option with less latency, faster delivery speeds and improved odds for high quality of service.  But the enhancement should not become necessary for any and all users. 

 

           

           

Aereo Lessons

            The Aereo technology and litigation offer several insights on how we will access video entertainment going forward and who has superior bargaining leverage.  Once upon a time—back in the age of “appointment television,” broadcasters controlled access to “must see” television.  We dutifully selected the network television channel at the appointed time and watched knowing any repeat access option was also subject to great specificity several weeks later.

            The onset of the analog video cassette recorder “empowered” viewers by facilitating time shifting and multiple viewing options.  With digitization consumers have greater options for shifting content between and among different recording and playback devices.  So one trend favors consumers with greater flexibility and the prospect of access to content anytime, anywhere, via any device and in any format.  Technology agnostic consumers have little interest in the medium of delivery, but surely expect on demand access to any and all screen: television sets, pc, smartphones and tablets.

            So far so good, but no one should be surprised when content creators and distributors responded in ways that lock down access and attempt to reestablish control.  While they failed to secure FCC regulations mandating television set processing of broadcast flags limiting content access flexibility, (American Library Assn. v. FCC  347 F.3d 291, 293 (D.C. Cir. 2003)) content creators and distributors achieved success in restricting copying and device shifting when the an HDMI cord handles the carriage, e.g., from a Blueray DVD player to a television set or PC.  Score one for the incumbents who now can use Digital Right Management technologies to prevent what might otherwise qualify as fair use, the right of consumers to make copies and switch access between devices for private, non-commercial use.

            Broadcasters in particular score additional points when they successfully accrued billions in retransmission consent fees for content they have to offer “free to air” for the 9 percent of the viewers still using the broadcast spectrum option. Copyright fees appear to matter more to broadcasters than advertising revenues which arguably Aereo technologies would increase in light of possibly higher ratings.

            So along comes a “disruptive” Aereo technology that mimics old school broadcast television reception.  The crux of the copyright litigation lies in whether the reception design of Aereo sufficiently mimics the private reception of public media via each dime sized antennas routing content via the Internet.  If the Supreme Court views this reception as a private performance, then Aereo would not incur copyright liability.  There is case law that suggests broadcasters have little control over content they “freely broadcast.” Bear I mind that this stakeholder group has benefitted for so many years with such benefits as free spectrum in light of their service in the public interest.  Converting free content into content available only subject to a retransmission consent fee dilutes any claim credible claim for such preferred status.

            If Aereo loses, perhaps broadcasters should lose the benefits of a status deeming them “trustees” of scarce and valuable spectrum, including the billions that otherwise might accrue by relinquishing control of some spectrum in an incentive auction.

 

 

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.

Scale and the Comcast-TWC Acquisition

           Former FCC Chairman Reed Hundt hosts The Digital Show on Business Radio 24/7-- Business Talk from Wharton, channel 111 on Sirius/XM satellite radio.  He invites major thinkers on telecom and Internet issues to chat Mondays from 5-7 p.m. in the Eastern time zone.

            On March 10^th, the program featured prominent buy side analyst Craig Moffett, Comcast E.V.P. David Cohen, Free Press Policy Director Matt Wood and yours truly.  I wish Sirius/XM archived the program, because you would hear the points for and against the Comcast-TWC acquisition in an understandable and comprehensible forum.

 

            Each presenter made his arguments effectively. Mr. Cohen offered the view that the acquisition is not such a big deal, particularly in light of the fact that Comcast and TWC “don’t compete,” while Comcast operates in a fiercely competitive marketplace for both video content and Internet access.

            Clearly Comcast does not operate as a charity, but Mr. Cohen recognized the duty to make the case for the deal based on some articulation of how the public benefits, or at least is “not threatened.” He emphasized that Comcast needs to acquire even greater scale to operate effectively and to provide consumers with the best quality of service, a robust research and development budget and a wealth of next generation services, including a new state of the art set top box.  He did not mention the prospect for lower prices even though larger scale may support the company’s ability to extract lower content prices and better Internet peering terms, in the same manner as Walmart. 

            Chairman Hundt used the phrase “balloon squeezing” to provide a visual reference for the enhanced ability of the company to reduce its costs even as smaller ventures incur higher prices for access to the same content and Internet network links.

            Mr. Cohen provided clarity on why the company wants to acquire greater market share in the video and broadband marketplace.  The merged company would serve about 30 million cable television and broadband households. In broadband, the company’s market share will likely grow significantly in light of the fact that Digital Subscriber Line service cannot increase bit transmission speeds to satisfy growing demand for video downloading.  Additionally, AT&T and Verizon have largely refrained from investing more funds to expand their high speed, digital fiber or hybrid copper/fiber networks.  So Comcast can only improve its ability to extract even higher payments from retail subscribers, particularly broadband users likely to face lower downloading allowances and more expensive tiers of service.  The company also can extract additional peering and transiting payments from upstream ISPs and content providers as evidenced by the recent paid peering deal with Netflix.  Also the company has greater “balloon squeezing” leverage with content providers, far greater than even Google.  That megafirm won’t have anything near the scale of Comcast even with an expanded footprint of 37 or so metropolitan areas.

            Case closed?  Matt Wood offered a fine rebuttal and the case for the FCC and Department of Justice to reject the deal.  The scale argument and the lack of competition among Comcast and TWC stand as two major elements why the issue of bigness is threatening to consumers and to a robustly competitive marketplace.  Standing as a toll bridge or bottleneck  operator between consumers and content sources, Comcast would have even greater leverage to extract higher charges without having to enhance the value proposition on either side.

            My concern focused on what happens when Comcast can buy out a significant player in the cable and broadband marketplace.  The fact that operators like Comcast and TWC have implicitly agreed not to compete (a mutual non-aggression pact) does not mean that their combination will lack impact.  Without TWC, cable and broadband companies have even less incentives to innovate and to sharpen their pricing pencils.

            Consider the wireless marketplace with a company like T-Mobile and one where AT&T acquired the company.  In the former, consumers benefit by having the fourth among equals forced—perhaps kicking and screaming— to compete aggressively.  In just a few weeks T-Mobile departed from conscious parallelism—simply duplicating the price points and service terms of AT&T and Verizon—to becoming an innovator.  The company has made a huge impact with lower rates for consumers who bring their own devices, roam internationally and want to change carriers in fewer than every two years.

            With its acquisition of TWC, the odds decline even further for a maverick innovator to offer a better value proposition for consumers, e.g., the opportunity to pick and choose networks on an a la carte basis instead of a large “enhanced basic” tier of channels.  Who would evidence “best practices” when doing so results in sleepless afternoons competing and the potential for being targeted by Comcast for balloon squeezing?

            Matt Wood made a series of convincing arguments that most consumers will suffer from the deal, but I would not bet against conditional approval in this politicized, pay to play environment.

Does Sec. 706 Authority Ride Solely on the FCC Continuing to Find Indequate Broadband Competition?

            In the Verizon v. FCC, the D.C. Circuit Court of Appeals briefly addressed the issue of the Commission's assessment of broadband competition.  With some incredulity, the court nevertheless expressed its unwillingness to second guess the FCC on its decision to back off from previously finding adequate market access.  With a new and reversed finding of inadequate access—especially in rural areas—the FCC has a stronger argument for using Sec. 706 of the Communications Act to achieve promotional goals through non common carrier rules and regulations.

            The D.C. Circuit Court of Appeals frequently is not so deferential.  For example, even when the FCC had explicit authority under the Telecommunications Act of 1996 to require local loop unbundling, the D.C. Circuit (in the U.S. Telecom Assn. cases) chided the Commission for lack of granularity and market specific requirements.  Bear in mind the court second-guessed--if not micromanaged--a process involving telecommunications service providers and Title II requirements.  The court appeared quite uncomfortable with the FCC forcing competitors to cooperate on matters where interconnection terms and conditions would not match what arm's length, market driven negotiations would generate.

            The possibility exists that a change in administration, or judicial impatience with regulatory meddling will prompt an appellate court to second guess a finding of insufficient competition.  If that were to occur I suspect the FCC would claim that its Sec. 706 authority does not ride solely on the basis of its annual assessment of the broadband marketplace.  However the Commission would have yet another hard case to make that accessibility in the context of Sec. 706 is measured by factors other than marketplace competitiveness.

Paid Peering a Contradiction in Terms?

            On a listserv in which I participate, another participant suggested that there is no paid peering.  I agree that paid peering has oxymoron characteristics, but these two words have become an accepted term for a peering arrangement that involves payment rather than barter.

            An expert on the subject defines paid peering as: “the business relationship whereby companies (Internet Service Providers (ISPs), Content Distribution Networks (CDNs), Large Scale Network Savvy Content Providers) reciprocally provide access to each others’ customers, but with some form of compensation or settlement fee.” William B. Norton, http://drpeering.net/white-papers/Ecosystems/Internet-Paid-Peering.html.

See also: Confirmed: Comcast and Netflix have signed a paid peering agreement, GigaOm; http://gigaom.com/2014/02/23/confirmed-comcast-and-netflix-have-signed-a-peering-agreement/; Netflix is paying Comcast for direct connection to network; Paid peering agreement will improve Netflix quality for Comcast subscribers; arstechnica; http://arstechnica.com/business/2014/02/netflix-is-paying-comcast-for-direct-connection-to-network-wsj-reports/.

Netflix “Most Favored Nation,” Paid Peering Agreement With Comcast: The Good, Bad and Ugly

            Notwithstanding Comcast’s open Internet access commitment made to close the NBC-Universal acquisition, the company has executed a preferential access deal with Netflix.  For me the primary question is what kind of discrimination does “better than best efforts” routing constitute?

            At the risk of giving an inch so Comcast can take a mile, I consider paid peering a reasonable quality of service discrimination with several caveats.  First the possibility exists that payments flowing directly from Netflix to Comcast are largely offset by reductions in the direct payments the company makes to Content Distribution Networks like Level 3 and Cogent.  Netflix and its customers benefit from higher quality of service with fewer intermediary carriers and routers. 

Of course no one knows, because the parties execute nondisclosure agreements and the FCC has not thought to require disclosure.  Perhaps with its new found emphasis on transparency the FCC will demand disclosure of all “special routing arrangements” complete with redacted public release of the agreements.

More direct traffic routing probably accords Comcast greater leverage upstream with Netflix and similarly situated content providers.  Without adequate oversight nothing prevents Comcast from making paid peering—and the surcharge it incorporates—standard operating procedure.  In other word little remains of plain vanilla “best efforts” routing: Comcast can demand similar payments from other content providers and distributors backed up by a not so veiled threat that it simply will not have adequate downstream delivery capacity to accommodate even what it previously was able to handle. 

Such contrived congestion forces almost every upstream venture, with the financial resources available, onto some type of premium service provisioning.  In other words there probably will be a rush to “Most Favored Nation” quality of service making it the default standard, even though ISPs previously accommodated increasing network demand without upstream carrier surcharges.  Retail ISPs either absorbed the cost of upgrades as a cost of doing business, or they raised retail rates.  Now they can do both.  Just last week AT&T announced significant increases in retail broadband access rates.

Perhaps other content providers, generating less traffic, can continue to squeeze by with standard best efforts routing.  But why would a competitor of Netflix risk the consequences knowing that ISPs like Comcast can throttle, degrade and create artificial congestion without FCC sanction.  Bear in mind that retail ISPs can create bitstream delivery problems without their broadband subscribers knowing the cause and the responsible party. 

Consumers can complain all they want about a reduced value proposition from their $30-75 monthly subscription payments, but competitive carriers are scarce and unlikely to refrain from such higher rent extraction options themselves.  

Netflix must have decided that the sooner it can lay to rest the risk of artificial or real downstream congestion the better.  It also must have considered a near term solution as according it the cheapest option, knowing that going forward Netflix competitors also will have to pay perhaps on less generous terms.  So Netflix secures a competitive advantage even as retail ISPs extract more revenues.

Expect Netflix to respond with new service tiers and higher rates.

Consumer Impacts of a Net Biased Ecosystem

            Consumers ought to understand what opportunities and threats arise from an even more non-neutral Internet.  Expect existing trends to become entrenched with new impacts.

Extended Trends

            Better Than Best Efforts Routing Options

            The “good old days” of absolute best efforts neutrality in the Internet cloud have long since passed for better and for worse.  I haven’t heard any opposition to the use of proxy servers and “better than best efforts” service options provided by companies such as Akamai.  When consumers want access to “mission critical” bits, e.g., a weekend mainlining on the entire second season of House of Cards, they might even pay for higher quality of service when the possibility of congestion and degraded service exists.

            Expect retail Internet Service Providers, operating the first and last mile broadband link, to offer enhanced quality of service options for a price.

            Squeezing Even Higher Broadband Profit Margins

            ISPs, affiliated with incumbent ventures such as cable television companies, have come to recognize that they are “first among equals” in the bundling of telephone, home security, video and broadband.  Cable operators may want to offer lower margin video services to forestall cord cutting, but the triple digit margins accrue from broadband.

            Expect ISPs to press for even higher broadband service rates through general rate increases and additional tiering on the basis of transmission bit rate and download allotments.  Also expect a substantial narrowing in the gap of download caps between wireline and wireless broadband options.  Currently wireline options have soft caps in the 200-300 Gigabyte range while wireless carriers have hard caps from 250 megabytes to 10 Gigabytes.  Wireline ISPs can squeeze out higher margins simply by forcing “bandwidth hogs” onto more expensive tiers.

            Options for Avoiding Download Debits

            Less generous download allotments reduce the broadband subscription value proposition, but I don’t see consumers pushing back.  What competitive alternative do they have?  Yes 4G makes it possible for wireless to compete, but their per-megabyte download cost well exceeds the wireline rate even if the latter rates rise significantly. Satellite options offer slower speeds at higher download costs, coupled with some latency (signal delay) issues.

            Expect ISPs to “soften the blow” of stingy download caps with expanded opportunities for content and service providers to pay in lieu of metering the download.  This might come across as “pay to play,” but heightened consumers sensitivity to a download cap means they are even less likely to respond to additional commercial pitches that debit their download allotment.

Developing Trends

            New trends will develop slowly, largely because of Comcast’s ambiguous concession commitment to neutrality as a sweetener for securing approval of its NBC-Universal acquisition.

I don’t see extortion plays and deliberate dropping of packets as a ploy to force migration by upstream content providers and downstream end users to higher quality of service tiers.  However there will be instances where an ISP simply can’t contain its instinct to push the envelope and squeeze that last dollar.

ISPs Demand More Incentives to Upgrade

            Expect ISPs to leverage network upgrades in exchange for better interconnection terms with content providers and their downstream Content Distribution Networks.  Netflix might even secure the opportunity to install servers on ISP premises, but at a price. 

I expect Netflix and consumers to lose the argument that ISPs are entitled only to retail broadband subscriber monthly subscriptions and surcharge payments from upstream CDNs.  If Netflix wants to reduce its CDN payments, then it will have to pay ISPs directly.

More Interconnection Compensation Disputes

One might consider increases in peering/transit disputes as an extension of an existing trend.  However, the frequency of disputes and the complexity make this a developing trend.  A recent and probably temporary surge in broadband demand points to the potential for consumers to experience degraded service.  Depending on who frames the issue, congestion recently occurred thanks to Netflix, the weather and a holiday: the House of Cards second season in its entirety, home cocooning due to extraordinary cold and snowy weather and Valentine’s Day.  So much for network robustness capable of handling peak demand.  But of course consumers don’t know whom to blame.  Expect lots of finger pointing.

I hope carriers and content suppliers won’t make excuses for reducing the value proposition of Internet access, but it would not surprise me.

FCC Chairman Wheeler’s Open Internet Strategy Post Verizon v. FCC

            FCC Chairman Wheeler has released a statement outlining his thoughts on how the FCC lawfully can press on for open and neutral Internet access; see http://fcc.us/1c2RBzv.

             I appreciate what Chairman Wheeler has attempted to do: avoid any unlawful mission creep in light of the strong language in the Verizon decision, but also run as far as possible with Sec. 706 authority.  I do think the Commission can move forward with muscular transparency/disclosure requirements.  Just now Netflix subscribers don't know the cause of any service degradation so perhaps ISP disclosure requirements might provide some light on how frozen images came about even for subscribers to FIOS service operating at multi-megabit per second speeds.

    I do think the Chairman and the Commission will find a less than receptive D.C. Circuit should any order ignore the clear prohibition on the imposition of Title II common carrier requirements on ISPs.  I don't see much wiggle room in the no blocking, no discrimination area, nor am I as sanguine as the Chairman in terms of what deference the data roaming decision affords the FCC.  That decision emphasized the use of commercial negotiations and the limited role of the FCC and its ability to intervene. 

    One could draw a parallel between the duty to negotiate, commercially driven data roaming terms and conditions and the similar duty to negotiate retransmission consent between cable operators and local television broadcasters.  In both instances the FCC cannot act proactively and has limited powers even to resolve a protracted dispute. Unfortunately for broadband subscribers there won't be a specific "must see" television program that forces one side to capitulate, so degraded service and not so subtle abuses of last mile access may occur.

 

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.

A Free Pass for Comcast to Acquire Time Warner, Because They Don't Compete With Each Other?

            Two rationales supporting the Comcast acquisition of Time Warner don’t make sense to me. 

First Comcast touts the existence of Netflix, Hulu and Google as ample evidence that content competition exists.  Of course the two sources of content mentioned reach end users primarily via last mile broadband providers like Comcast.  Goggle Fiber serves three metropolitan areas and is nothing more than a test and demonstration project that Gigabit fiber is commercially and technically viable. 

Would Comcast meddle with Netflix traffic, say to tilt the competitive playing field in favor of Comcast’s pay per view options?   Why would it, particularly if in a two-sided market total revenues might decline if Comcast were to retard broadband demand?  So Comcast would have no incentive to throttle traffic and otherwise mess with the traffic of content competitors who need its network to reach end users.

Does this rationale pass the smell test?  Was Comcast merely “experimenting” with network management techniques when it previously meddled with peer-to-peer traffic?  Why are retail broadband carriers demanding surcharge payments from Netflix on top of the transit payments they receive from Content Distribution Networks like Level 3, plus the end user subscriptions that have three digit margins? 

Absent a four year network neutrality commitment as part of its acquisition of NBC, profit maximizing Comcast surely would try to squeeze every last dollar, particularly from competitors who need its downstream delivery.  Remember what Ann and Gordon told us: “Greed is good.”

Second, Comcast asserts that because it does not compete with Time Warner, no one should worry about lost competition and consumer welfare.  Would not a more concentrated cable television market have even less likelihood that some operator somewhere would experiment with new pricing models, e.g., offering ala carte channel access in lieu of bloated channel bundles? Isn’t it easier for Comcast to reduce the broadband value proposition by capping download allotments and upselling higher amounts, or agreeing not to debit the now single digit Gigabyte allotment in exchange for a surcharge paid by content sources?  Note that AT&T Wireless announced such a "toll free data” option just a few weeks ago.

Bottom line: Comcast may not compete with Time Warner, but a bigger Comcast makes it more likely that the company can claw back consumer welfare gains and reduce the value proposition of both cable television and broadband subscriptions without significant customer churn.

Comcast-TWC: Why Compete and Innovate When You Can Buy Market Share?

            Expect a charm offensive as Comcast and scores of sponsored researchers explain how acquiring Time Warner Cable will promote competition and enhance consumer welfare.  You might not hear too much about two traditional concerns remedied by actual facilities-based competition: incentives to innovate and reduce prices.

            Comcast will frame its acquisition as necessary to achieve even greater scale to compete with other sources of video content and maybe to compete with the limited other sources of broadband access.  Granted cable television operators have to provide consumers with a compelling value proposition particularly given the pricing model they use that runs up the bill—often to three digits—with a large bundle of channels for which few consumers have any significant preference.

            But Comcast is not acquiring TWC as a defense strategy to shore up the viability of cable television.  Comcast is exploiting the apparent inability of government—even one with a Democratic President and Senate majority—to enforce viable competition policy.  A concentrated market used to trigger concern about whether one or more survivors would continue to compete, or simply agree not to devote sleepless hours innovating.

            Just what happens when markets concentrate?  How can one doubt that the incentive to innovate and compete recedes?  Consider commercial aviation: when a single airline controls an airport, rates to and from that market skyrocket.  Consider wireless service: when AT&T could not acquire TMobile, TMobile got serious about innovating and competing.  Reluctantly Verizon and AT&T have had to respond to TMobile’s initiatives like lower rates for subscribers using their own handsets, lower roaming charges abroad and refunds of early termination penalties.  Would AT&T, Verizon and even Sprint have introduced these enhancements if TMobile did not exist?

            The balance of power has shifted from consumers to providers in the telecommunications marketplace.  Companies like Comcast can invoke scale and efficiency arguments that obscure the fact that consumers will have to pay more for less. So-called competitors can “close ranks” and implicitly agree not to compete.   

            Consider access to Olympics content.  Comcast-NBC wants to make it certain that consumers access this content only via prescribed means, firewalled so that they control access via new technological options like the Internet.  If Comcast did not have the goal of maintaining the status quo, why would it care whether viewers watched commercials on a computer monitor, smartphone screen, or tablet in lieu of the television set?

            Reduced to its simplest terms Comcast’s acquisition of TWC enhances shareholder value at consumers’ expense.   The only silver lining might be FCC-imposed conditions that impose otherwise unlawful requirements,  Of course the Commission would have to enforce them in the face of relentless claims that the requirements are “job killing,” unnecessary and unconstitutional.  What politically savvy civil servant would want to take on a “too big to fail” venture like Comcast?

The Network Neutrality Debate in “Extra Innings”

     Since release of the D.C. Circuit Court decision on the FCC’s Open Internet Order, I have read and reread the decision along with many interpretations.  I have seen some opponents to network neutrality try to convince themselves and others that the two courts decisions have little impact or finality, so the campaign (and the need for financial support) must continue. 

     On the other hand, some advocates for network neutrality appear intent on finding a glimmer of hope that the decisions do not prevent the FCC from yet again trying to carve out a regulatory regime for Internet access.  Even as the court devoted much space in explaining what the FCC cannot do, many advocates on both sides invoke the validation of FCC statutory authority (under Section 706 of the Telecommunications Act, 47 U.S.C. §1302) as evidence that the FCC can still do harm, or remedy likely problems.

     Both sides appear to overstate what the court considers lawful going forward.  Bear in mind that Section 706 only authorizes the FCC to promote access to, and investment in the Internet.  The legislative history appears to emphasize deregulatory initiatives, rather than new regulatory ones to achieve the specified twin goals.  Both court decisions devote many pages on what the FCC has done unlawfully with fairly clear admonitions on what the Commission cannot do going forward.  Put simply, the FCC has a limited wingspan for invoking Sec. 706 to create regulations directly impacting how Internet Service Providers (“ISP”) deal with upstream sources of content and downstream subscribers.

     The Commission can impose transparency requirements such as the duty to disclose when network management factors warrant throttling (slowing down) certain traffic streams, or when an ISP offers premium, “better than best efforts” quality of service and traffic routing options.  Likewise the Commission should retain authority to respond to complaints from subscribers, upstream ISPs and content sources.

     However, the language in Sec. 706 and the clear prohibition on imposing common carriage responsibilities significantly constrain the FCC.  Perhaps more importantly and ignored from the analyses I’ve read is the insight provided by cable television case precedent and the court’s reading of these cases.  These cases did not endorse the FCC’s imposition of anything coming close to common carriage responsibilities on cable operators. 

     The high water market of a duty to deal occurred when the FCC created a dichotomy of carriage options pertaining only to significantly viewed broadcast television stations.  When unable to extract payment from cable operators for their “retransmission consent” broadcasters can demand carriage, a process known as “must carry.”  Note that the FCC limited this carriage obligation to a select beneficiary, broadcast television stations, not to any and all sources of content.

     The D.C. Circuit court in Verizon v. FCC, http://www.cadc.uscourts.gov/internet/opinions.nsf/3AF8B4D938CDEEA685257C6000532062/$file/11-1355-1474943.pdf, emphasized that the FCC could apply its expertise to determine that the public would benefit from a limited cable television carriage regime.  The FCC rules provided for a marketplace-driven, commercial negotiation process by the stakeholders, with the prospect of mandatory carriage coupled with denial of monetary compensation flowing to the source of content electing compulsory carriage. Note that currently most broadcaster-cable operator negotiations opt for retransmission consent and not must carry.  Additionally the FCC limited the carriage requirement to a percentage of overall channel capacity.  Also the Commission never put itself in the position of ordering cable operators to carry a specific station, or content.

     The court in Verizon v. FCC devoted several pages to explaining that when the FCC decided to mandate the reservation of channels by cable operators for access by a larger group of qualifying candidates, (public, educational, local governmental, and leased-access users), the Commission exceeded its statutory authority by imposing the functional equivalent of common carriage.  See FCC v. Midwest Video Corp. - 440 U.S. 689 (1979)(Midwest Video II).

     It appears to me that the D.C. Circuit has provided the FCC and others rather clear guidance on the way forward.  The Commission cannot impose common carriage requirements and not even quasi-common carrier duties to deal that extend to a large subset of the public.  The court used a little snarkiness to admonish the FCC not to push the envelope as it had done with previous interpretations of its ancillary jurisdiction.  Noting that even regulatory agencies take pride in authorship, the court recited the history of network neutrality litigation where the Commission’s work product failed to pass muster, but it soldiered on only to receive the same rejection.

     Perhaps history will not repeat itself.  However the FCC has a long history of false pride, or at least the inability to take no for an answer. Some of the judges in the D.C. Circuit court appear to know this and to infer from this the need to provide clear instructions. 

    Is anyone listening?

Short Netflix, Go Long Verizon?

            Reduced to its least common denominator, the network neutrality/open Internet debate involves money: who pays and who receives in the delivery of traffic.  After the Internet’s government incubation phase, where taxpayers underwrote traffic delivery, the payment issue has focused on the balance of traffic streams between two directly interconnecting Internet Service Providers.  If traffic balances roughly match, the ISPs barter equivalent access to their networks without a cash settlement.  For unequal traffic flows, the ISP generating more traffic than it receives has to pay transit fees to compensate the ISP handling more traffic.

            When we focus on the first and last mile link to and from the Internet cloud, the “retail ISP” currently has two sources of revenue: 1) Internet access subscriptions from end users and 2) transit payments from ISPs with more traffic for retail ISP delivery than for the upstream ISP to deliver farther into the Internet cloud.

            Not satisfied with this doubled-sided market and two sources of revenues, some retail ISPs want a third source: content creators and distributors farther upstream with which the retail ISP does not directly interconnect.  Ventures like Netflix and Youtube have pushed back, because they already pay to have their considerable traffic enter into the Internet cloud.   Arguably a portion of the payments made by companies like Netflix already reach retail ISPs when upstream ISPs, such as Level 3,  have to pay “surcharges” in light of the disproportionately higher downstream traffic volumes.

            So are retail ISPs such as Verizon greedy?  The marketplace will decide, but it would help consumers to know a few inconvenient truths.  First, the Internet access business already has extraordinary margins often exceeding 100%.  Two, at least some consumers consider their $30-75 monthly Internet access payments ample compensation for the retail ISP to deliver traffic without whining.  Three, ISPs will further slice and dice the broadband access market with an eye toward extracting high average revenue per subscriber.  With significant upward pressure on  retail Internet access rates,  “toll-free” data plans paid by content providers and distributors look increasingly attractive, if not essential.

The D.C. Circuit Court Decision on the FCC’s Open Access Order

            The D.C. Circuit Court of Appeals has affirmed the FCC’s reading of Section 706 in the Communications Act, but also determined that the FCC could not extrapolate from that Section statutory authority to prohibit Internet Service Providers from engaging in discriminatory practices, including blocking access to specific content. See http://www.cadc.uscourts.gov/internet/opinions.nsf/3AF8B4D938CDEEA685257C6000532062/$file/11-1355-1474943.pdf.

            This is “damning with faint praise” at its finest, so much so that the author of the decision condescendingly notes that “even a federal agency is entitled to a little pride” (p. 20) when after losing the first case on network neutrality (Comcast v. FCC, 600 F.3d 642 (D.C. Cir. 2010) the Commission struggled onward to find lawful authority.  This decision offers the FCC a generally worthless victory that the Commission can lawfully find some statutory basis for jurisdiction over Internet Service Providers so long as the responsibilities imposed do not constitute common carriage. 

            The court again reminded the FCC that having classified Internet access as an information service, the Commission has no foundation whatsoever to impose common carrier duties:

even though the Commission has general authority to regulate in this arena, it may not impose requirements that contravene express statutory mandates. Given that the Commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the Commission from nonetheless regulating them as such. Because the Commission has failed to establish that the anti-discrimination and anti-blocking rules do not impose per se common carrier obligations, we vacate those portions of the Open Internet Order. (p.4)

            Some network neutrality advocates had expressed hope that the court would have considered nondiscrimination and anti-blocking rules as permissible in light of a recent case that approved as non-common carriage specific interconnection requirements on wireless carriers. In Cellco Partnership v. FCC, 700 F.3d 534, 541 (D.C. Cir. 2012) the court approved the FCC requirement that wireless carriers negotiate commercial terms and conditions for data roaming, Internet access via smartphones located outside the customer’s home service territory.  The FCC treats all forms of Internet access as non-common carriage by classifying the offering as an information service.  The court affirmed the FCC, because the imposition of some duties to deal, e.g., providing data roaming, does not rise to the level of compulsory carriage, particularly because the FCC only required commercial negotiations and recognized that the duty is not mandatory if technologically infeasible, or that the terms and conditions be uniform across all instances of interconnection.

            Even with a quasi-common carrier option, the FCC cannot expressly impose non-discrimination and anti-blocking duties.  Section 706(a) of the Communications Act requires  the FCC to “encourage the deployment on a reasonable and timely basis of advanced

telecommunications capability to all Americans . . ..” Section 706(b) requires the Commission to conduct a regular inquiry “concerning the availability of advanced telecommunications capability” and if it determines that access is not available on “a reasonable and timely fashion” “to take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.”

            The court determined that the FCC could reasonably interpret Sec. 706 as providing statutory authority for some degree of private carrier oversight, despite the FCC having previously determined that this Section provided no such foundation when the Commission previously sought to classify ISPs as information service providers entitled to a largely deregulated status.  The court defers to the FCC and its later in time decision to consider Sec. 706(a) as providing a statutory basis for regulatory oversight: “Does the Commission’s current understanding of section 706(a) as a grant of regulatory authority represent a reasonable interpretation of an ambiguous statute? We believe it does.” (p.22)

            The court accepts the ability of the FCC to change course and even change factual determinations, as when the Commission determined that the Internet access market lacked sufficient competition having previously determined that it did. The court also does not dispute the FCC’s finding that ISPs have the ability to engage in discriminatory practices: “there appears little dispute that broadband providers have the technological ability to distinguish between and discriminate against certain types of Internet traffic,” p. 38 nor does the court dispute that the Internet access subscribers cannot or will not quickly change providers if potentially harmful discrimination actually occurs:  
For example, a broadband provider like Comcast would be unable to threaten Netflix that it would slow Netflix traffic if all Comcast subscribers would then immediately switch to a competing broadband provider. But we see no basis for questioning the Commission’s conclusion that end user are unlikely to react in this fashion. (p.39)

            However, the ability to discriminate does not automatically translate into illegal discrimination particularly when the FCC has determined that discrimination is something only common carriers cannot pursue.

            The FCC may seize upon the approval of its reliance on Sec. 706 to assert statutory authority to regulate ISPs.  However, the Commission will have little latitude and even less deference to craft quasi-common carrier duties on ISPs.  One permissible duty would require transparency and full disclosure of non-neutral service arrangements.  The Commission lawfully can require "truth in billing" by private carriers.  Perhaps the potential for consumer pushback in response to disclosed sweetheart deals with corporate affiliates and favored ventures might create a disincentive for ISPs not to go overboard. 

Thoughts on AT&T's "Toll Free" Data Delivery Service

            AT&T wireless has announced a campaign offering content providers the opportunity to pay for access to end users so that the downloading does not debit customers’ data plans.  Some think this constitutes double or triple dipping, because AT&T already receives compensation from end user broadband subscriptions and ISPs with which the last mile provider has a peering or transit agreement.

            What’s “fair” and “unfair” in this discussion highlights the complexity when a transaction combines content and conduit.  Efforts to separate the two and price them out can raise fairness concerns.

            Consider a transaction where the separation occurs more readily: paying for an item, e.g., book content from Amazon, and paying for shipping, e.g., postal delivery of a hard copy book, or download from Amazon to an e-reader.  Vendors often bundle “free shipping.”  For its part Amazon wants customers to use “free” wi-fi for the download, but the company does pay for wireless carrier delivery when necessary to cellular equipped e-readers.

            A content distributor, like Netflix, wants to avoid having to pay the U.S. Postal Service for physical delivery of DVDs and similarly the company wants to avoid having to pay last mile retail ISPs. For Netflix Internet delivery can save the company money, because end user retail Internet access subscriptions can include the book delivery within the “free delivery” monthly data allotment.  Bear in mind that until now Netflix consumers didn’t have to think about downloading costs thanks to unmetered data delivery.

            With monthly data caps, the delivery aspect becomes more visible and potentially costly to both the content provider and the consumer.  Cost recover gets murky, because even before companies like AT&T want to hit up Netflix for “toll free” downloading there already are two sources for offsetting carrier download costs.

            Offering Netflix the opportunity for not causing a downloading debit adds a potential third revenue stream. Is this an extension of the double-market economic construct like that envisioned by Chairman Wheeler?  Bear in mind that even now Internet compensation arrangements are negotiated between directly interconnecting parties that barter access or secure payment.

Comcast Logic: A New Broadcast TV Fee

       Comcast’s most recent rate increase adds a new line item to the bill: a Broadcast TV Fee.  In the company’s typical doublespeak, this charge works to “identify some of the rising costs of retransmitting broadcast television signals.” 

        Some, but apparently not much.  Comcast magnanimously pulls out the initial $1.50 Broadcast TV Fee from its Limited Basic service fee, reducing the figure to $15.75.  The majority of the channels on Limited Basic represent broadcast channels, so the Broadcast TV Fee is not really reflecting much of the total costs.

        Could it be Comcast thinks consumers are so stupid that they cannot add the new Broadcast TV Fee with increases in other service tiers to calculate actual cost increases?  Given the lack of interest and aptitude in math maybe the company can fool consumers into thinking the company hasn’t just raised rates by about 10% what with 4% or so allocable to those greedy broadcasters like Comcast's NBC.

Rent Seeking Across Party Lines

            Over many years, telecommunications and Internet policymaking have become politicized often with clear cut Democratic and Republican viewpoints.  Votes by the FCC Commissioners increasingly split 3-2 along party lines.   How can this be?

             Perhaps the politicization stems from higher stakes in FCC votes which in turn have stimulated greater interest in the outcome.  But politicization stands as a cause if and only if a specific political party clearly holds one perspective largely opposite that of the other party.  Don’t both parties support competition? They do, but a dichotomy might arise if the Democrats readily welcome government initiatives to promote competition and the Republicans consider competition most potent when government opts out.

           
            At first blush the role of government can support a Democratic/Republican dichotomy, but it does not always play out.  Teddy Roosevelt made it his mission to bust up monopolies and this Republican “tradition” extended into the early 1970s when the Nixon Administration filed suit against the AT&T monopoly.  Democratic FCC Commissioners regularly vote in favor of market concentrating, competition reducing horizontal mergers

 

             So maybe the blame lies with unprincipled and apolitical rent-seeking.  Stakeholders keen on working less hard and earning greater returns will resort to any political, legal and economic ideology and philosophy to support the desired outcome.  It is quite fine when the FCC granted incumbent wireline telephone free spectrum for mobile services, but now denying these carriers the opportunity to bid for any and all spectrum is an abomination.
 

             Let’s not underestimate the power of sponsored research where esteemed scholars grab lots of dollars for embracing a specific ideology and explaining how it serves the public interest.  In a matter of days the very same economist might rail against the Herfindahl Hirschman Index (“HHI”) of market concentration as flawed and not predictive of anything.  But when presented with an assignment and a generous retainer to show how robustly competitive a market is, that economist might quickly invoke the HHI to “prove” how competition can exist in a concentrated marketplace.
 

            Rents seeking crosses all party lines.

Tracking New Models and Conflicts in Web Interconnection and Delivery

            You might have an interest in my work to understand the diversification of web interconnection and content delivery models, largely driven by the substantial increase in streaming video and the proliferation of Content Delivery Networks.  ISPs have devised many new deviations from the traditional peering/transiting dichotomy including: use of Internet Exchange Points by Tier-2 ISPs, paid peering, CDN surcharges, equipment co-location, e.g., Netflix Open Connect Network; “specialized networks” and Intranets/ Multiprotocol Label Switching and non-carriers like Google securing Autonomous System identifiers.

            Some retail ISPs also want to increase to three the number of payers for last mile content delivery.  Currently end users pay monthly Internet access subscriptions and directly interconnecting, upstream carriers pay when traffic for delivery well exceeds what the retail ISP can or will hand off for upstream carriage.  The targeted third revenue source does not directly interconnect, but constitutes a major source of content, e.g., Netflix.

            I’m working on a paper that examine existing and likely future interconnection disputes with an eye toward identifying where conflicts will arise and whether commercial negotiations can reach closure on a timely basis.  Here’s a link to slide pack summarizing the paper:
http://www.personal.psu.edu/rmf5/New%20Models%20and%20Conflicts%20in%20the%20Interconnection%20and%20Delivery%20of%20Internet-mediated%20Content.ppt.

Mission Critical Bits and Pay to Play Net Bias

             The proliferation of video content options via the Internet raises questions about what ISPs can and should do to offer “better than best efforts” to enhance quality of service.  Is this an opportunity for “pay to play” extortion, or welcomed quality of service discrimination?  One might assert the lack of a need for service prioritization in light of the absence of network congestion, but as bandwidth intensive, video demand increases does this conclusion make sense?

            Video content often qualifies as “mission critical bits” whose delivery must arrive on time, or the streaming content freezes and evaporates.  For example, Netflix and its subscribers expect each and every link to work with sufficient switching, routing and transmission capacity to deliver packets on a timely basis.  Few Netflix subscribers would stick with the company if suddenly full motion video streams became slide shows of random frames. 

            Increasingly ISPs want to secure surcharge payments from companies like Netflix to guarantee timely packet delivery.  So on top of the double-sided market where ISPs already receive payments from end users and upstream carriers, such as Content Distribution Networks, a third revenue stream should flow further upstream from content providers like Netflix.  Is this being greedy, particularly in light of what ISPs markets to subscribers?  Bear in mind that traditionally both peering and transit agreements involved directly interconnecting carriers, not ones further upstream or downstream.

            Broadband end users expect their $50-75 monthly subscriptions to cover the cost of access without a surcharge to them and others for the privilege of accessing full motion video sites.  ISPs already have the option of charging more for high volume users.  ISPs: send “broadband hogs” fruit packets and a higher bill, not throttled service.  ISPs also tier service based on bit transmission speed.  Are they entitled to more compensation from the sources of content that motivate broadband subscriptions in the first place?

News Flash: Airlines Discover Wireless Profit Center; Forget About Harm to Cockpit Communications

After years of claims that in-cabin wireless use would risk calamity, the airlines now want the public to believe any wireless access regulation--and the failure to make timely deregulation-- results from government inflexibility and inertia.  Why the change of strategy? 

The airlines want to "monetize" wireless access making it another profit center along with checked baggage and snacks.  But to fully do so they need to undo several decades of claims that wireless handset use would cause--or at least risk--harmful interference with air traffic control communications and other essential avionics.

    The restrictive FAA/FCC regulations resulted from active airline participation with a different rent seeking strategy.  The airlines' motivation did not solely stem from concern about consumer welfare.  Instead they wanted to protect their Airfone monopoly deal with GTE and later BellAtlantic/Verizon.
 

    Over time wireless has migrated from voice/text only to a vast array of data and applications.  The airlines now need to refute the avionics harm rationale they vigorously advocated in the first place.  True to form, sponsored engineers and now economists are retained to claim the need for immediate deregulation of "job killing" regulations.  These researchers join with more clearly defined stakeholders to vilify regulatory inertia, etc. 
 

    So now the avionics harm risk does not exist, if it ever did.  Smartphones always have had the ability to reduce transmission power to the lowest wattage needed making it highly unlikely that in cabin interference could result.  Also the airlines now have a transmission routing scheme, albeit overly costly, that eliminates the avionics risk by locating the necessary higher wattage link to an outside the cabin antenna for ground tower, or satellite access.

    My takeaway from this case study: it's easy to blame government regulators as inflexible.  But the political process forces these regulators to accommodate well-financed stakeholders like the airlines.  Belatedly the airlines have come to understand that wireless can become a lucrative, new revenue center.  So they launch a "public interest" campaign to persuade the FAA/FCC to remove now unnecessary, inefficient and costly regulations they helped create.  Sadly the true public interest has suffered for the decades of unnecessary handset restrictions.
 

    Also consider this irony: back on earth the wireless carriers have spent billions convincing Congress and the FCC that subscribers should not have certain access freedoms, including the "right" to unblock a fully paid for handset.  The wireless carriers claim that subscribers have no legal right to use a handset to access a competitor even if the subscriber no longer is bound  by a service agreement and even after the carrier has recouped any handset subsidy it offered the subscriber.  Some subscribers have resorted to "illegal" self-help strategies instead of asserting their right of ownership.

    I marvel at how wireless carriers can regulate and constrict individual economic freedoms, including the right to control fully owned property like handsets, including ones bought on an installment basis during a two year subscription term.  The FCC has a longstanding Carterfone policy that would prohibit such consumer restraints on corded handsets.  Sadly the FCC has bought bogus concerns about radio spectrum harm raised by the wireless carriers who benefit from the restrictions they impose in subscription agreements.

Some Brief Comments on Terminating the PSTN

NPR's All Things Considered covered the PSTN termination story including some words from me: http://www.npr.org/blogs/alltechconsidered/2013/11/18/246001725/have-we-reached-the-end-of-the-landline.

Netflix and the Future of NGN Interconnection

            Recent press accounts report that Netflix and cable television companies have collaborated on carriage agreements.  What results from these negotiations may provide a model on next generation network (“NGN”) interconnection and compensation arrangements.

            Currently telecommunications, cable television and Internet arrangements have problems for video-heavy traffic flows.  Traditional telephone carrier settlements have too much granularity when the meter counts minutes of use.  Cable television retransmission consent agreements primarily cover copyright licensing, because the content typically arrives at the cable head end via satellite (paid by the content provider) leaving the cable operator with the last mile distribution it already performs for all other channels.  Current Internet arrangements focus on directly interconnecting carriers and customers making it difficult to extend a compensation demand farther upstream to sources or distributors of content.

            Retail ISPs in particular have objected to providing last mile carriage of Netflix traffic “without compensation,” a false allegation, but one gaining some traction.  ISPs want Netflix to pay them directly, in addition to the significant retail subscriptions paid by their end users and the transit, paid peering and other compensation arrangements paid to them by Content Delivery Networks and even other ISPs with comparatively more traffic needing downstream delivery.

            Netflix and cable operators appear to work on a mutually beneficial interconnection and compensation regime where compensation flows directly to the cable operator, but the length of carriage—and presumably the cost—drops with the installation of a proxy server directly at the headend.  Netflix benefits by securing higher quality of service and some future assurance that the cable broadband plant can and will handle even more traffic as Netflix’s subscribership grows and when content formats increase in bandwidth requirements, e.g., 3D and ultra high definition. 

            Cable operators benefit, by securing financial compensation for their retransmission consent.  While the interconnection arrangement may differ from other satellite-delivered cable networks, or the retransmission of broadcast channels, cable operators will receive direct compensation for providing a subscriber-friendly platform using the existing set top box.

            Consumers may end up having to pay more for their Netflix subscription to cover higher delivery costs as well as higher copyright licenses, but the convenience in access enhances the value proposition.  Rather than trying to engineer and “sling” Netflix content from the computer to the television set wirelessly, the content arrives directly to the television set, a winning proposition.