Why Net Neutrality Means Consumers Should Pay More -- but Won't

Last Updated Dec 1, 2010 3:32 PM EST

The FCC plans to take up net neutrality again in its Dec. 21 meeting. The current fight between Comcast (CMCSA) and Level 3 Communications (LVLT) over streaming Netflix (NFLX) shows how urgent the issue is.

The verbal public slugfest also illustrates a basic problem on the Internet: a decade plus-old practice of handling traffic based on sharing cost burdens. When you walk through how things actually work and consider how uni-directional traffic has become, you might conclude that the only fair system would be some version of tiered Internet access pricing for both businesses and consumers. And yet the FCC appears loath to agree, which means true net neutrality will remain elusive.

Netflix chose Level 3 -- a big broadband backbone provider -â€" to deliver its video streaming. On Monday, Level 3 issued a statement that Comcast would charge "a recurring fee" from Level 3 for any streaming video or other content requested by consumers who use Comcast as their ISP. The claim was that Comcast was trying to eliminate competition on the video front:

With this action, Comcast is preventing competing content from ever being delivered to Comcast's subscribers at all, unless Comcast's unilaterally-determined toll is paid -â€" even though Comcast's subscribers requested the content.
Shortly after, Comcast slammed back, claiming that Level 3 had "inaccurately portrayed the commercial negotiations between it and Comcast":
To quantify this, what Level 3 wants is to pressure Comcast into accepting more than a twofold increase in the amount of traffic Level 3 delivers onto Comcast's network -- for free. In other words, Level 3 wants to compete with other CDNs, but pass all the costs of that business onto Comcast and Comcast's customers, instead of Level 3 and its customers.
In fact, Comcast went so far as to create a video that discusses the concept of so-called peering -- the balance of traffic among different sections of the Internet. It's worth a watch, because it helps put things into perspective.

Comcast argues there must be relative traffic parity among the companies that cooperate to enable the Internet. If not, one side is burdened with excessive costs to enable the traffic of the other. There's just one problem: every carrier already gets paid by its customers to carry traffic, whether sent or received. If Comcast customers were sending roughly as much traffic back to Level 3 customers as they were receiving, the company's arguments would fall apart because now it would be left liable for its own traffic.

Here's where things get complex. I don't for a moment believe that Comcast's disagreement with Level 3 has nothing to do with the nature of the traffic. Please. Comcast made its fortune on delivering video programming to consumers at an effective rate a good deal higher than what it gets for Internet connectivity. That position is threatened, especially by such developments as the announcement that Netflix will carry first-run movies that previously would have been reserved for pay TV on cable.

The company's obvious worry is that people might cut the cable -- drop subscription television for what they can get over the Internet. However, as I've pointed out in the past, cutting the cable doesn't really happen, because consumers still need a way to get on the Internet and the wireless carriers charge too much.

So Comcast's real worry is that it will lose the TV business and be left as a glorified ISP that ultimately still carries the same amount of traffic, only with lower profits. The obvious answer would be to charge consumers more when they rapidly increase their consumption of Internet traffic. However, that's tiered pricing, closely related to the bandwidth cap that Comcast previously tried to adopt. And, if you remember, Comcast's slowing customer access to BitTorrent over the claimed traffic burden is what brought the FCC into the thick of the net neutrality debate in the first place.

On one hand, many people object to Comcast wanting to either limit consumer traffic use or, presumably, charging more for increased use. On the other hand, charging Level 3 is a version of double-dipping that is not only bad policy for Comcast, but for any other carrier, including Level 3. It sets toll booths up on both ends of a connection, even though senders and receivers already pay for their traffic use.

Such companies as Google (GOOG), Facebook, and Netflix will complain that the alternative, charging customers more for the traffic they consume, will hinder innovation and new Internet services. It probably will. Nevertheless, there is something equally unacceptable about creating the false impression among consumers that the services they want are literally free with no cost to anyone. In other words, the Internet companies want to do business with a significant cost burden shifted to the carriers just so they can pretend that consumers don't have to pay for what they want because that's convenient for their marketing.

It's ultimately an untenable situation, and the only solution seems to be the end of all-you-can-eat charges to consumers. But good luck to the FCC trying to make an argument for that -- especially given the current U.S. political situation, which makes any action on net neutrality problematic at best.


Image: RGBStock.com user hisks, site standard license.
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.