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Interconnection Confusion | Commentary

Arguments over net neutrality and how companies connect on the Internet’s back end are usually the province of academics and engineers — but in recent weeks, these complex issues have exploded into the public sphere. Congress is preparing numerous hearing that will touch on these subjects, from Thursday’s House Judiciary hearing on the proposed Comcast-Time Warner Cable merger to the May 20 House Energy and Commerce oversight hearing on the Federal Communications Commission. The FCC itself will also soon consider new net neutrality regulations.

These obscure tech policy debates are confusing enough when everyone is trying their best to be clear. Unfortunately, some of the recent discussions are proceeding from an intentionally muddled premise — that the recent deal between Netflix and Comcast for Internet interconnection is the same as the consumer protection issue of net neutrality. It isn’t.

This confusion stems from a blog post by Netflix CEO Reed Hastings arguing for what he calls “Strong Net Neutrality.” Hastings claims the costs Netflix has agreed to pay Comcast for delivering its traffic constitutes an “arbitrary tax” (though there is no payment to government here, just an ordinary business transaction). Netflix reiterated the argument in a letter to its shareholders, supposedly as a basis for opposing the proposed Comcast–Time Warner Cable merger.

Industry experts are puzzled by Hastings’ claims, not just because of the about-face on a deal Netflix reportedly sought in the first place, but also because what Hastings is discussing is very different from net neutrality. Net neutrality is principally concerned with the level of priority traffic gets, whether certain data gets to move to the front of the line when routed to users over Internet service providers’ “last mile” connections to subscriber homes. Interconnection, on the other hand, is a catch-all term for the variety of ways the networks that make up the Internet connect to one another.

There are many different types of interconnection arrangements to choose from, with pricing depending on the amount of traffic a website uses. Small businesses can get by with a simple Web hosting service. Those services aggregate all their client’s traffic then pay for access to the rest of the Internet. Once you get to be the size of Netflix, however, cutting out the middleman and connecting to last-mile networks yourself can save a lot of money.

Net neutrality has always been kept separate from interconnection, and for good reason — interconnection is a classic case of a complex, but well-functioning market. Contrary to some reporting, the deal Netflix and Comcast recently struck to cut out the middleman Netflix previously paid is really nothing new. For years, big content distributors have been paying to connect directly to networks. These types of flexible arrangements have become popular as consumers increasingly demand data-intensive, high-quality online video and allow networks to expand capacity to meet demand.

Hastings’ gambit is particularly frustrating in that it deliberately conflates these two issues, importing the charged politics of net neutrality into the business relationships of interconnection. His reason for doing so is obvious: moving large amounts of data from high-quality videos across the Internet is expensive. If Netflix can hoodwink regulators into putting this burden solely on last-mile broadband providers, it can avoid these costs entirely.

While Hastings’ blog is an interesting piece of business strategy, ultimately even the most ardent cord-cutter should not be concerned that paid-peering deals will threaten the open Internet we know and love. The flexibility in the interconnection market has actually been a key tool in the successful growth of the Internet and will remain so.

Companies have to pay for their own Internet access, and companies that use more capacity should pay more. Netflix has been tremendously successful, so successful that it accounts for about 30 percent of downstream traffic at peak Internet use hours. Netflix’s recent arrangement with Comcast is simply its latest attempt to keep costs down as it continues to scale up its operations dramatically. Moving this traffic around the nation to local broadband networks is not cheap, and those costs should be borne by the traffic creators, in this case, Netflix. Having these sorts of deals hashed out in the marketplace shows the Internet ecosystem is flexible and healthy.

We should also not be concerned that such a deal will prevent Internet video start-ups. Entrepreneurs will continue to have the same opportunity to grow and prosper using the same old transit options to connect to the wider Internet — it’s only when they grow to the size of Netflix that paying for direct interconnection with residential ISPs starts to make sense. Big companies as well as start-ups in the “garage next door” continue to have countless ways to access customers and connect with broadband providers.

If Netflix has a real claim that the interconnection market is anti-competitive (color me skeptical), it should make a real complaint with anti-trust authorities instead of muddying an already complex area of policy.

Doug Brake is a telecom policy analyst with the Information Technology and Innovation Foundation.

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