Net Neutrality

Net Neutrality

The Delta Perspective

Was the ‘Netflix-Comcast’ deal really threatening net neutrality or was it only business as usual?

The essence of net neutrality is that the Internet is an open network and any person can and should have access to any content available; this implies that Internet Service Providers (ISP) should not discriminate or degrade any access QoS based on the content that is being accessed.

Was this the beginning of ISPs pushing customers to select and favour content providers, such as Netflix, over other smaller players with limited resources?  Is it a way of guaranteeing consistent service quality and speed? Or, was this just business as usual and a way for Netflix to improve its customers’ experience (naturally at a cost that may or may not be passed on to the end user)?

Point of view # 1 – Direct impact on net neutrality
The Federal Communications Commission (FCC), with the network neutrality rules, wants to prevent ISPs from blocking any legal site or content from customers and aims to avoid discrimination. At the same time, it seems that the FCC wants to avoid deals where a content provider, such as Netflix, could offer and give faster access to their customers by paying a fee to ISPs, such as Comcast; the rationale for this being that such commercial relationships would lead to an unfair advantage to certain companies and may end up increasing the price for the end users for certain services.

Furthermore, some argue that this deal dramatically changes the dynamics of the Internet as we know it, shifting the balance of power in favour of infrastructure owners that can now ask content providers for a fee to deliver their content with minimum quality standards.

On February 22 2014 however, Netflix, the most popular movie streaming service in the USA, generating around 30% of all internet traffic in peak hours, closed an agreement with Comcast, USA’s largest service provider, for an undisclosed amount. Netflix is basically paying an interconnection fee to have a more direct connection, guaranteeing faster and more reliable access to their customers accessing the service through Comcast.

Defendants of the net neutrality rules advocate for an internet where all end users receive the same QoS for any service they receive, regardless of preference (e.g. HD streaming movies vs LD YouTube videos), the contents nature (payment transactions vs video streaming) or their willingness to pay. This is the only way for the competitive playing field to be levelled for all players, where small start-ups can compete with the big corporations.

Point of view # 2 – Business as usual
‘Differentiating services should be a priority. Price is determined by the willingness to pay of buyers’ is one basic maxim of liberal and free economy. Netflix is only paying an interconnection fee to guarantee a better experience to its customer but is not paying to have a preferential route over peers.

There are two points to mention that could support the idea that the deal has nothing to do with net neutrality but only with business:

1. Interconnection fees (peering) are already the industry standard: many arrangements (paid or not) exist to interconnect a content provider to a network operator or third party
2. No preferential agreement: as stated in their press release, ‘Netflix receives no preferential network treatment under the multi-year agreement’. No blocking or discriminating policy is applied to any content providers.
Finally, a fundamental question: why should a company not have the opportunity to provide a better customer experience compared to their competitors, especially in such a competitive environment? Competitors may choose to do the same and buyers make the ultimate decision on whether the customer experience is worth the price or not.
 

Conclusion

The FCC has no choice: there is a need to review the regulation.
 
A segmented approach to customer experience and QoS results, arguably, is a better experience for those who value it and generate higher revenues for ISPs and (most likely) content providers. A blanket approach on quality across services is more egalitarian and arguably protects corporations that cannot afford the higher QoS from those who can.
 
A definite truth regardless of the argumentative position is that someone has to pay for the cost of the network. Whatever solution is reached, it needs to cater for this and allow infrastructure owners to sustain decent ROIC.  Otherwise the US may face in the mid-term a possible repeat of the California electricity crisis of the 2000s (due to lack of investment in its electricity distribution system). That experience resulted in the declaration of state of emergency by Governor Gray Davies in 2001.
 
Better not to think about the consequences of a non-functional internet in today’s economy and society.

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Delta Partners - TMD Advisory and Investment