Net gain or loss?

Open Internet advocates fear Netflix/Comcast deal and court ruling will create a pay-to-play landscape

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Tom Hazlett Image courtesy

What if they held a war and no one showed up?

For months the media has portrayed the recent net neutrality debate as a cold war, pitting streaming entertainment giant Netflix against mega-Internet service providers such as Verizon and Comcast. Then abruptly in February, a peace treaty of sorts was signed when Netflix and Comcast announced a partnership to increase the performance of Netflix content over Comcast’s Internet network.

Proponents of open Internet fear that this move, combined with a recent federal court ruling against the Federal Communications Commission’s net- neutrality rules, could result in a pay-to-play landscape. Under that scenario residential broadband customers would have to pay higher fees to access multimedia content, and content providers such as Netflix and Google would have to pay broadband providers for preferred access to customers.

Nonetheless, economics and law professor Tom Hazlett, who teaches at George Mason and Clemson universities, says there’s no such thing as an open Internet.

“Every network is operated in such a way that it discriminates against certain types of traffic. It has to be. Customers would be damaged greatly were they not,” says Hazlett, former chief economist with the FCC.

For example, he says, network engineers working for Internet providers give greater priority to voice-over-Internet traffic than email. It doesn’t matter if email is delayed by a half-second, but that sort of delay could kill a conversation over Skype. Similarly, network engineers also try to filter out malware and viruses, and some universities block peer-to-peer file sharing, which can overwhelm small networks. “That’s not an open Internet,” Hazlett says. “That’s a managed Internet.”

In January, the U.S. District Court of Appeals for the District of Columbia struck down the FCC’s 2010 net-neutrality rules. They were partly aimed at preventing broadband providers from blocking or slowing down access to bandwidth-hogging streaming media services such as Netflix, Amazon or Google’s YouTube.

The FCC has vowed to draw up new net-neutrality rules that it hopes will meet court approval. The Obama White House released a statement in support of that effort: “Absent net neutrality, the Internet could turn into a high-priced private toll road that would be inaccessible to the next generation of visionaries. The resulting decline in the development of advanced online apps and services would dampen demand for broadband and ultimately discourage investment in broadband infrastructure. An open Internet removes barriers to investment worldwide.”

Hazlett, however, says that position is based on faulty logic. “The FCC … says the Internet has developed as an open ecosystem, and now we have to impose rules to keep it an open ecosystem. … The argument for net neutrality is that somehow you have to change the rules to keep things the same.” Companies such as Google and Netflix grew and thrived in a market environment without increased government regulation such as the FCC’s net neutrality rules, he points out.

And it’s not a bad thing that Netflix is paying Comcast for better delivery to its customers, Hazlett says. “Comcast is going to reposition some of its infrastructure, and Netflix is going to reposition some of its infrastructure. That’s good for the customer, that’s good for Comcast, and that’s good for Netflix. … It shows [the] … dangerously anticompetitive, anticonsumer regulation we get when we go down the road to net neutrality.”

Besides, “some of us don’t use Net­flix,” Hazlett says. “And if [Internet service providers] are going to charge all of us end users to support higher bandwidth … why not charge Netflix?”

There’s precedent for buying preferred status, Hazlett says, noting that Google made a deal in 2002 to become the default search engine for America Online, which at that time was still one of the nation’s largest Internet service providers.

When the Internet started booming in the 1990s and early 2000s, it was largely accessed through dial-up modems on existing telephone lines. Since then, telecommunications companies such as Verizon, Comcast and Time Warner have spent more than $1 trillion in building and upgrading a high-speed, fiber-optic and coaxial broadband network across the nation.

Broadband speeds are growing ever faster, but multimedia content on the Web keeps pushing bandwidth limits. Netflix already offers streaming movies in 3-D and 1080p high definition (the term refers to 1,080 horizontal lines of vertical resolution and progressive scan).  And it has plans to stream 4k Ultra HD videos, which will offer four times the resolution of current HD video and will require much more bandwidth and fast connections.

Scott Cleland, chairman of broadband industry-backed group Net Competition, says it’s past time that Netflix paid its share of broadband infrastructure costs.

“Kudos to Netflix for recognizing that when one is the single biggest generator of Internet traffic and consequently one of the biggest cost causers for the Internet infrastructure upgrades, one has to contribute their fair share of the cost. The Netflix-Comcast [deal] … shows commercial negotiations work, and there is no need for government intervention in the Internet peering market that has operated well for 20 years without government regulation.”

Comcast and Netflix released a joint statement announcing “a mutually beneficial interconnection agreement that will provide Comcast’s U.S. broadband customers with a high-quality Netflix video experience for years to come” but declined to reveal terms of the deal.

Netflix spokesman Joris Evers says that his company is committed to advocating for open Internet policies and notes that his company is a big driver for customers to purchase broadband.
“The primary reason people buy high-speed Internet access is to stream video. That’s evidenced by the popularity of video on the Internet and by our growing membership. Video is the killer application for broadband and helps ISPs [Internet service providers] sell higher tiers with faster speeds,” Evers says. “Our goal is to work with the ISPs to deliver the best possible experience to our joined customers, but we also feel that ISPs should deliver the Internet access their customers pay for, and many of their customers subscribe to broadband to watch video.”

Netflix has 33.4 million U.S. subscribers, about 5 million more than HBO. Some studies estimate that the service accounts for nearly 30 percent of the nation’s Internet traffic during peak usage hours. YouTube is ranked next in bandwidth usage, with about 17 percent.

There have been plenty of claims online and in the news that Verizon, which runs a competing streaming media business, is “throttling” Netflix, or intentionally decreasing Netflix’s traffic speed, which would result in a lower quality video experience for the end user.

Verizon has vehemently denied the allegations. Cleland also denies it, but he points out that even if a provider did throttle traffic, there would be nothing illegal about that since the court ruling struck down the FCC’s net neutrality rules.

Comcast, Verizon, AT&T and Cox all say they are committed to an open Internet. Their statements leave the door open for the possibility of charging higher fees to customers who use multimedia services or charging the multimedia providers for preferred access. None of the companies would address those issues directly.

Comcast is legally obligated to operate under the old FCC net-neutrality rules until 2018 as part of the FCC’s approval of its 2011 acquisition of NBC Universal. It said in a joint statement it is not giving preferential treatment to Netflix.

As for Verizon, it says the court decision “will not change consumers’ ability to access and use the Internet as they do now. The court’s decision will allow more room for innovation, and consumers will have more choices to determine for themselves how they access and experience the Internet. Verizon has been and remains committed to the open Internet that provides consumers with competitive choices and unblocked access to lawful websites and content when, where and how they want. This will not change in light of the court’s ruling. We look forward to working with the FCC and Congress to keep the Internet a hub of innovation without the need for unnecessary new regulations that seek to manage the explosive dynamism of the Internet.”

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