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Posted at 8:20 PM ET, 11/29/2010

Level 3 accuses Comcast of unfairly using its clout as the dominant U.S. cable provider

By Cecilia Kang

update at 10:45 p.m.: with comments from Susan Crawford, professor of communications law at Cardozo University's law school; quote from Level 3 assistant legal counsel

An online networking company that carries video feeds for Netflix has accused cable giant Comcast of demanding unfair fees to provide that video to home subscribers, raising questions about Comcast’s power to control consumers’ access to the Internet.

Level 3, a Colorado-based Internet company whose main client is the video giant Netflix, on Monday said Comcast’s action amounts to setting up a “toll booth” on the Internet.

The issue arises as federal regulators consider Comcast’s proposed purchase of a controlling interest in NBC-Universal, which rivals have said will give the cable company too much power over both programming and the means to distribute it.

This action by Comcast threatens the open Internet and is a clear abuse of the dominant control that Comcast exerts in broadband access markets as the nation’s largest cable provider,” Level 3’s chief legal officer, Thomas Stortz, said in a news release.

Comcast disputed Level 3’s claims, saying its demand for fees is unrelated to the content that Level 3 wants delivered to consumers.

“Comcast offered Level 3 the same terms it offers to Level 3’s content delivery network competitors for the same traffic,” Joe Waz, Comcast’s senior vice president for external affairs, said in a statement. “But Level 3 is trying to undercut its . . . competitors by claiming it’s entitled to be treated differently and trying to force Comcast to give Level 3 unlimited and highly imbalanced traffic and shift all the cost onto Comcast and its customers.”

The allegations come as the Philadelphia-based cable titan seeks to wrap up federal reviews of its merger with NBC Universal. Sources with knowledge of the reviews say regulators are expected to demand as a condition of approval that the company adhere to guidelines that discourage it from showing preference for some Web sites over others.

Regulators are also expected to demand that Comcast agree not to withhold NBC shows and movies from new Internet competitors such as Google TV and Apple TV, said the sources, who spoke on condition of anonymity because they were not authorized to publicly discuss the matter.

Level 3’s complaint also comes as the Federal Communications Commission prepares to issue more formal rules, conceived by Chairman Julius Genachowski, that would force broadband provider to treat all content equally. The agency’s authority over network operators was cast in doubt by a federal appeals court ruling in April. Genachowski is expected on Tuesday to announce the agency will vote on new net neutrality rules in December.

The FCC declined to comment Monday. A spokeswoman for the Justice Department wasn’t immediately available to comment.

Level 3’s backbone Internet networks deliver content such as videos, retailing Web sites and games to networks operated by cable and phone companies, which then transmit the data over the “last mile” of Internet pipes into American homes.

On November 19, Comcast demanded extra fees from Level 3 for delivering Web content to Comcast customers, according to Stortz. Level 3 agreed to Comcast’s demands a few days later after the cable company posed a “take it or leave it” threat, he said.

Level 3 is the exclusive backbone Internet service provider for Netflix, the mail-order DVD company that has morphed into an Internet streaming giant. It accounts for 20 percent of all broadband traffic during peak hours, according to analytics firm Sandvine. And analysts say it’s propelled a recent wave of cable subscription losses.

Netflix’s market value has more than tripled this year. On Monday, Netflix stock rose to a record $198.92 a share, making the company worth nearly $10.4 billion.

Public interest groups held up Level 3’s claims as evidence that Comcast’s proposed merger with NBC Universal could hurt competition and consumers.

“This case clearly establishes that Comcast is engaging in grossly anti-competitive conduct and is a serial violator of the FCC’s Net Neutrality policies,” said Derek Turner, a research director at public interest group Free Press. “Despite its calls for self-regulation, Comcast has demonstrated time and again that it will push the boundaries of the law without any concern for how its actions harm consumers.”

Analysts and telecom law experts say it's unclear if Comcast's alleged actions violate federal policies because there isn't a regulatory body that oversees network transit deals between backbone networking companies and last mile firms like Comcast. Susan Crawford, a professor at Cardozo University school of law wrote that competition among network companies would ensure fair arrangements for "peering," the practice of exchanging traffic for free.

"There are sharp limits to this competition that can no longer be ignored. Level 3 just ran into a wall with Comcast and felt it had no choice but to cave," Crawford wrote in a blog. She noted that Comcast's demands for fees from Level 3 came days after the backbone Internet firm announced a new partnership with Netflix. Netflix then announced a new $7.99 Internet streaming membership plan -- a direct competitor to cable service providers.

Level 3 assistant chief legal officer Steve Ryan said in an interview Monday evening that the company will file fuller comments on the situation in the FCC's proceeding on net neutrality.

"The ability to tax or charge a toll is the ability to control what its subscribers see on the Internet and that is what we don't like," Ryan said.

Separately, Zoom, the nation’s second-largest maker of retail modems, filed a complaint to the FCC saying that Comcast has unfairly imposed requirements that make it harder to compete with Comcast, which rents modems to its 17 million high-speed Internet customers.

Zoom said that Comcast demanded costly and time-consuming tests even though its modems had already met industry-wide standards. In its 117-page FCC complaint, Boston-based Zoom said it was needed Comcast’s approval because the cable giant controls 40 percent of the cable market.

By Cecilia Kang  | November 29, 2010; 8:20 PM ET
Categories:  Comcast, DOJ, FCC, Media, Net Neutrality  
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Comments

Leave it up to Comcast to ruin something good. If they block access to Netflix movies, I can still watch TV shows and some movies with TVDevo.com. Although, I will miss my Netflix movies. On second thought, if Comcast blocks, I will cancel everything and find an alternate internet connection.
Comcast's competition must be licking their chops.

Posted by: meganbrod | November 29, 2010 8:10 PM | Report abuse

As usual, Cecilia Kang - Google's Reporter at the Post - attempts to slant and mischaracterize the news so as to favor the corporate agenda of advertiser and patron Google.

The truth is that ISPs routinely charge fees to content delivery networks to peer with them and accept the expensive traffic that they push onto ISPs' networks. Level3 wants a special deal from Comcast, and is trying to take advantage of the fact that Comcast is seeing merger approval - and that the FCC is considering issuing "network neutrality" regulations. (In fact, this situation has nothing to do with "network neutrality," but Google lobbyists are glad to chime in and claim that it does - while at the same time bashing their old punching bag, Comcast.)

Ms. Kang also states, falsely, that Level3 is the exclusive backbone provider for Netflix. This is incorrect; Netflix uses several major backbones. But to make the situation sound more dire, she's lying about this.

The thing to do here is to let the two companies sort things out. Regulation of the Internet wouldn't help this situation; in fact, it would make matters worse.

The same is true of the issue with Zoom cable modems: this is not a "network neutrality" issue. The onerous rules which the FCC is now proposing to impose upon the Internet do not cover cable modems, because they are upstream of the Ethernet interface that delivers data to the customer. And all cable companies must ensure that devices connected to their networks are safe; after all, they take the heat when something goes wrong! (Also, one rogue device can take down part or all of an entire city's cable network.) Again, this is not a situation that requires intervention. But of course, Google - which has set itself up as a mortal enemy of all ISPs, and most of all Comcast - wants to regulate the Internet and kick Comcast when it's down. And Ms. Kang, of course, goes along. When will the Post fire her for her violations of journalistic ethics and blatant conflicts of interest?

Posted by: LBrettGlass | November 29, 2010 10:01 PM | Report abuse

LBrettGlass, as usual attempts to slant and mischaracterize the news as reported by Cecialia Kang.
Perhaps you'd like to disclose your employer and how much you are being paid to inluence the upcoming net neutrality regulations, LBrettGlass.

Posted by: veritasinmedium | November 29, 2010 10:36 PM | Report abuse

veritasinmedium,

LBrettGlass is right. Level3 is becoming a CDN like akami and is expecting MSO's (like Comcast) to treat them differently. This is not a story about Comcast. Level3 is doing with this other corps. I don't agree with slamming the reporter, but his argument is correct.

JR

Posted by: JR14dddddd | November 29, 2010 10:40 PM | Report abuse

Comcast is taxing the Internet. We scream anytime the government wants to do the anything, but permit companies to tax whatever they want.

Posted by: DGSPAMMAIL | November 30, 2010 12:39 AM | Report abuse

Now, the last time I checked, Level 3 Communications was also a telecommunications company. Level 3 enters into interconnection agreements with other communications companies for the delivery of traffic. Given the other portion of its business model, ie., delivering media traffic, audio/video feeds, dedicated Internet access, Level 3 has to interconnect with other networks to bring its clients like Netflix any value. Level 3 also provides long distance and local service and as such it also receives interconnection fees from the termination of traffic on its network.

The other irony is that Public Knowledge has jumped into the fray, describing this incident as another example for why we need net neutrality. Public Knowledge can’t have it both ways. If the network neutrality posse wants the broadband Internet access ecosystem regulated under Title II, it means that there will be recurring fees for inter carrier compensation. As demand for video streaming increases, the cost for congestion caused by these services will be recovered in these fees and these fees will increase.

Level 3 knows this. Netflix knows this. So why is Level 3 whining? Well, have you seen their stock prices lately? They are practically a penny stock and definitely not the darling of the street. Level 3’s return on equity is -257%. Its return on assets is -0.90. Earnings per share is also negative, at -$0.46. In Street parlance, the company is a dog. The last thing they need are increased costs that may lead to further questioning of their company’s value.

So, rather than hide behind the bogus net neutrality argument, maybe Level 3 needs to focus more on operating efficiently and getting that bogus stock price up. Time to find a new Trojan horse because this dog don’t hunt.

Posted by: altondrew | November 30, 2010 6:13 AM | Report abuse

Now, the last time I checked, Level 3 Communications was also a telecommunications company. Level 3 enters into interconnection agreements with other communications companies for the delivery of traffic. Given the other portion of its business model, ie., delivering media traffic, audio/video feeds, dedicated Internet access, Level 3 has to interconnect with other networks to bring its clients like Netflix any value. Level 3 also provides long distance and local service and as such it also receives interconnection fees from the termination of traffic on its network.

The other irony is that Public Knowledge has jumped into the fray, describing this incident as another example for why we need net neutrality. Public Knowledge can’t have it both ways. If the network neutrality posse wants the broadband Internet access ecosystem regulated under Title II, it means that there will be recurring fees for inter carrier compensation. As demand for video streaming increases, the cost for congestion caused by these services will be recovered in these fees and these fees will increase.

Level 3 knows this. Netflix knows this. So why is Level 3 whining? Well, have you seen their stock prices lately? They are practically a penny stock and definitely not the darling of the street. Level 3’s return on equity is -257%. Its return on assets is -0.90. Earnings per share is also negative, at -$0.46. In Street parlance, the company is a dog. The last thing they need are increased costs that may lead to further questioning of their company’s value.

So, rather than hide behind the bogus net neutrality argument, maybe Level 3 needs to focus more on operating efficiently and getting that bogus stock price up. Time to find a new Trojan horse because this dog don’t hunt.

Posted by: altondrew | November 30, 2010 6:15 AM | Report abuse

Why does Ms. Kang not mention this 2005 press release from Level 3 in which the company says any "peering relationship" must be "mutually beneficial?"

http://bit.ly/hDfdgm

Posted by: TheChileanPresidentIsMuchBetterRespondingToDisastersThanObama | November 30, 2010 6:34 AM | Report abuse

I have refused to be a Comcast customer for years. Comcast has nothing but contempt for its customers. They have no idea what customer service is and they simply want to screw over anybody they can. I hope the merger fails and that tough net neutrality laws are passed.

Posted by: rcc_2000 | November 30, 2010 8:56 AM | Report abuse

You just know this is not going to be in favor for the consumer.

COMCAST AND NBC?

If the Gov. had regulated the telcos and ISP/CABLE from the beginning we would not be having this problem.

Comcast has to be the new Microsoft.
Greedy and trying to cut the small guy out!

Posted by: shamken | November 30, 2010 9:16 AM | Report abuse

I have refused to be a Comcast customer for years. Comcast has nothing but contempt for its customers. They have no idea what customer service is and they simply want to screw over anybody they can. I hope the merger fails and that tough net neutrality laws are passed.

Posted by: rcc_2000 | November 30, 2010 9:41 AM | Report abuse

comcast and the roberts family are the koch bros. of media corporations.

their greed and extremism is well known in the industry.

more layoffs and anti unionism is what they bring to the table.

stop the comcast takeover of nbc.

Posted by: xxxxxx1 | November 30, 2010 11:07 AM | Report abuse

I would like to see a television station which dedicates a large part of it's programming to documenting the destruction of the earth's land, waters and forests by various multi-national corporate giants around the world, especially if these earth destroying multi-national companies are owned by media giants.

Chinese state owned multi-nationals are now doing apocalyptic levels of environmetal destruction around the world.

Media cross ownership in different industries like mining, logging and defense etc. conflicts with providing unbiased news coverage of warfare and environmental destruction. (if your media company owns part of a company that mines aluminum or steel and pollutes rivers with mining waste they will be less inclined to report on the pollution and damage that mining does to the earth and it's natural systems etc.).

Posted by: FlowchartdocumentB | November 30, 2010 12:20 PM | Report abuse

I am paying my ISP for access to the Internet: the whole Internet. If they are demanding fees from backbones, why am I paying my ISP?

It's past time to treat Comcast as a common carrier and open their network!

Posted by: caribis | November 30, 2010 1:10 PM | Report abuse

The answer is simple, although Congress doesn't have the guts.

Comcast (or Verizon, or Time Warner) can either own the pipes, or it can own the content, but not both.

Posted by: tws1372 | November 30, 2010 1:28 PM | Report abuse

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