Netflix, Comcast agreement exposes a house of cards flaw in net neutrality

Posted February 24th, 2014 in Comcast, FCC, Government, Government Regulation, net neutrality and tagged , , by Alton Drew

On 23 February 2014, Netflix (Nasdaq: NFLX) announced that the over-the-top video distributor has entered an interconnection agreement with Comcast (Nasdaq: CMCSA).  According to Netflix:

“Working collaboratively over many months, the companies have established a more direct connection between Netflix and Comcast, similar to other networks, that’s already delivering an even better user experience to consumers, while also allowing for future growth in Netflix traffic. Netflix receives no preferential network treatment under the multi-year agreement, terms of which are not being disclosed.”

The Federal Communications Commission has not, at the time of this writing, issued a statement yet on the interconnection agreement.  Interconnection agreements between backbone providers and internet access providers are unregulated, although the FCC has authority to regulate the internet eco-system as affirmed by a recent appellate court ruling last month.

How does this agreement impact net neutrality in general?  First, it exposes a flaw in the approach that net neutrality advocates pursued on the issue of non-discrimination among various providers of traffic.  As The Washington Post‘s Timothy Lee pointed out in an article this morning, advocates have looked at traffic flow from websites, big and small, as coming through one pipe with the fear that an internet access provider could determine which content provider’s packetized data could flow through at one level of speed versus other providers.

Yesterday’s announcement presents what could be a trend where larger providers of content, such as Netflix, a company that accounts for 30% of video traffic over the internet, could go the backbone provider arbitrage route, choosing to go directly deliver traffic to residential ISPs versus going through a backbone provider.

Mr. Lee raises concern that there may be some negative impact on competition in the backbone provider sector especially where content providers can connect directly to ISPs and ISPs themselves are backbone providers.  The way I see it, backbone providers would have to reduce their interconnection rates to stay competitive with ISPs like Verizon or Comcast who have the resources to provide their own backbone services.  As content providers pay lower charges to interconnect and as more over-the-top providers enter the market, consumer welfare may increase because the rates they pay for over-the-top services may remain flat or even decrease.

Going back to the appellate court’s ruling in January, the agreement forces the FCC to apply extra caution in interpreting and using section 706 of the Communications Act to reboot net neutrality rules.  Here it is that a content provider has entered into an agreement to increase the quality of services to its clients without any prodding from regulators.  Should regulators now subject content providers and ISPs to case-by-case reviews of interconnection agreements?  That policy approach would run counter to enhancing consumer welfare in that subscribers to video services such as Netflix would have to see delays in the implementation of increased quality of customer service.

If the FCC wants to promote the deployment of a high-speed universal broadband network, allowing content providers and ISPs the autonomy to enter and enforce their interconnection agreements is the best approach.

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