Toll-gate: Level 3-Comcast traffic dispute explodes into Net Neutrality controversy

In what could become known as the carrier peering dispute that quickly spawned the industry’s biggest Net Neutrality controversy, wholesale carrier and content delivery network operator Level 3 Communications yesterday accused cable TV and broadband giant Comcast of opening an Internet “toll booth” by imposing recurring charges on Level 3 for the transport of over-the-top video to Comcast subscribers.

The two companies have a peering agreement in place that seemingly would govern such traffic scenarios, but Comcast responded to Level 3’s accusations by saying that Level 3, which recently began carrying the Internet traffic of online video juggernaut Netflix, is essentially blowing past the boundaries of that agreement by attempting to transport over Comcast’s network much more traffic than Comcast pushes over Level 3’s network.

Unbalances in carrier peering arrangements are not uncommon and are usually resolved behind closed doors by the carriers negotiating a fee for the additional traffic. But, in this case, Level 3 may have smelled blood in the water because Comcast already has a delicate relationship with regulators. There is also a fundamental disagreement between the two companies about what role Level 3 is playing in their arrangement—wholesale Internet backbone operator whose traffic is subject to traditional peering contracts, or CDN operator whose traffic fees need to be settled separately.

Here’s why this issue boiled over into controversy in a matter of hours yesterday, and what’s at stake:

--Comcast is already on federal regulators’ Net Neutrality hit-list, having been charged with violations of the Federal Communications Commission Net Neutrality rules for throttling peer-to-peer file-sharing traffic. Level 3’s charge may be enough alone to get the FCC and others back on Comcast’s case.
What’s at stake: More possible Net Neutrality violations for Comcast and a revival of the Net Neutrality policy debate.

--Comcast is in the latest stages of trying to get regulatory approval for its controversial NBC Universal deal, and Level 3’s allegations directly reflect the concerns that many of the deal’s critics have about Comcast’s potential domination of TV programming and distribution.
What’s at stake: The outcome of a proposed merger that Comcast still expects to close before 2010 ends.

--The type of over-the-top traffic being transported by Level 3 potentially involves a lot of traffic from companies such as Netflix (whose traffic Level 3 penned a deal to carry earlier this month) that Comcast won’t get compensated for, but increasingly are competing with aspects of Comcast’s business, playing a role in the emerging pay TV cord-cutting trend and accounting for a progressively larger portion of Internet traffic at peak hours.
What’s at stake: Video services competition, broadband competition, the future of pay TV cord-cutting, the future potential of carrier compensation for OTT traffic.

--Level 3 may have decided to go public because it was essentially forced to accept new peering payments to Comcast or risk quality of service being affected for its traffic partners and the end users they are trying to reach.
What’s at stake: Video service quality for Netflix online streaming video and other services.

--Level 3 and Comcast have radically different views of what is causing their dispute. To Level 3, it’s a violation of Open Internet practices and Net Neutrality. To Comcast, Level 3 is a wolf in sheep’s wool, a CDN player trying to portray its traffic as wholesale peering traffic so that it doesn’t have to pay additional fees.
What’s at stake: The future of carrier peering arrangements, CDN contracts and operations, as well as future business practices of companies that possess both wholesale and CDN operations—not only Level 3, but AT&T, Verizon and many others.