IP Convergence: Beyond VoIP, Beyond Cost Savings

Following recent reports that Comcast “actively interferes with attempts by some of its high-speed Internet subscribers to share files on line,” a coalition of consumer groups filed a complaint with the Federal Communications Commission (“FCC”) seeking an injunction against the practice. The coalition also is asking the FCC to declare that degradation of service in the manner that Comcast is alleged to have engaged violates FCC policies and principles, particularly the FCC’s Internet Policy Statement . Even before this action, the reports about Comcast’s actions sparked members of the Senate to request hearings on the matter.

I have to admit that I was surprised at the sophistication of the practice as it is alleged, and perhaps more so that it was Comcast and not Verizon or AT&T. I don’t mean that in a pejorative sense, it’s just that AT&T and Verizon are generally more experienced in this field, particularly with their Internet backbone networks. In any event, this has all led parties to once again whip up the net neutrality frenzy, even infecting the Presidential campaign.

The Progress and Freedom Foundation (“PFF”) tried to put the issue in perspective with a release pointing out that this wasn’t so much a net neutrality problem as it is a pricing problem that Comcast (and other ISPs) have. The primary reason net neutrality is even an issue is not because ISPs have nothing better to do than sit around and figure out how to mess with particular services and applications (at least not yet). It is because certain services and applications place a disproportionate burden on the Internet infrastructure. Due to the nature of Internet connectivity and routing, often times the compensation for service is not direct or entirely clear. But as the following example illustrates, all parties are being compensated.

Assume Content Provider A purchases its Internet connectivity from Carrier X. Carrier X is directly compensated by Content Provider A for the capacity it requires. If, however, Carrier X peers with Carrier Y on a settlement free basis and passes Content Provider A’s traffic through the peering point, Carrier Y may complain that it is not being compensated for the capacity required to carry Content Provider A’s traffic. And while it is true that Carrier Y is not receiving direct payment within the framework of a settlement free peering arrangement, Carrier Y does have the right to pass its own traffic to Carrier X on a settlement free basis and therefore is “compensated” in that fashion. The settlement free peering is maintained so long as Carrier X and Carrier Y continue to believe they are receiving roughly equal value from the relationship. Moreover, if Carrier Y is still not satisfied that it is being fairly compensated, Carrier Y can compete for Content Provider A’s business and obtain the direct compensation it seeks.

Now assume Carrier Y has a transit arrangement with ISP 1 whereby ISP 1 pays Carrier Y for Internet transit services. When Carrier Y passes Content Provider A’s traffic to ISP 1 for delivery to ISP 1’s end user customer, ISP 1 is actually paying Carrier Y for that traffic. Of course, ISP 1 is also compensated by its end user for Internet access. So, the traffic flow and money flow for the above example looks as follows –

If Carrier X is setting the right price to Content Provider A and Carrier Y is setting the right price to ISP 1 and ISP 1 is setting the right price to its end user, then everyone should be happy. The fact that some parties are not happy is a result of either (1) their own pricing, (2) their inability to compete effectively for certain market segments, or (3) they are greedy. In either event, it is the party’s problem and not a defect in the Internet.

Some carriers want to charge premium prices for “premium” delivery of content in the belief that this will improve their lot. Others suggest carriers simply need to add more capacity as that is a less expensive alternative to the sophisticated traffic management tools that Comcast and others are beginning to employ and would be required to support premium delivery.

At this point, I don’t think anyone knows what the right answer is. This is one reason why it would be foolish to impose a net neutrality mandate at this time. As the above example and diagram illustrates, there are a host of market factors that need to come into equilibrium in order for the market to function smoothly. Considering how early we are in the growth curve of the Internet, those who advocate legislating an equilibrium now run a very high risk of getting it wrong. It is also presumptuous to think that a “problem” even exists just because of a vocal minority. AT&T and Verizon are but two of many Internet backbone operators. Just because they are complaining doesn’t mean there is a problem. Similarly, just because some heavy users complain that their Internet experience is being disrupted doesn’t mean that the rest of us aren’t happy.

So before everyone gets their knickers in a bunch over Comcast’s alleged actions, maybe they should give some serious consideration as to what the problem really is, who is affected by the problem, and what the consequences of action at this time are.