Perhaps I shouldn’t have been surprised at how seriously some people are taking Netflix’s attempts to couch Internet traffic exchange negotiations as a Net Neutrality issue. If you wave the Open Internet flag someone invariably salutes it – even when an issue is 'dumbed down' to the point where that someone doesn’t understand what it is he or she is advocating.

A recent corporate blog post from Netflix CEO Reed Hastings offers an excellent example of both Open Internet flag waving and dumbing down of the issue.

“Strong Net Neutrality . . . prevents ISPs from charging a toll for interconnection to services like Netflix, YouTube or Skype, or intermediaries such as Cogent, Akamai or Level 3 to deliver the services and data requested by ISP residential subscribers,” writes Hastings.

According to Hastings, Netflix recently agreed to pay Comcast for traffic exchange only because it felt it had no other choice if it wanted to provide a good end user experience. Comcast reportedly had delayed upgrading connection speeds to Netflix until the agreement was made. With the precedent set, Netflix now faces a similar face-off with other large network operators including AT&T.

AT&T argues that Netflix should pay for interconnection because it sends more traffic to AT&T than it receives from the carrier. Paid interconnection is a practice that is common in the Internet business as a means of distributing the costs of operating the public Internet. In his own corporate blog post, AT&T senior executive vice president Jim Cicconi notes that if AT&T were to comply with Netflix's request it would have to raise prices and that would be unfair to AT&T customers who do not use Netflix because those customers would be bearing some of the cost of the ongoing network upgrades required to support burgeoning Netflix traffic. “Mr. Hastings’ arrogant proposition is that everyone else should pay but Netflix,” Cicconi argues.

An unusual deal

There is one thing a bit unusual about the deal that Comcast struck recently with Netflix, however -- and that's the fact that Comcast’s agreement was with Netflix at all. Normally, negotiations are not with content providers but rather are with the network operators who connect the content providers to the Internet.

Normally those network operators carry a mix of traffic to and from a mix of customers, and negotiations between network operators are based on the overall traffic mix and destinations involved. Accordingly, fears that companies like AT&T and Comcast might start exacting some kind of toll from small content providers for carrying their traffic across the Internet core are largely unfounded. The network operators normally would have no reason to negotiate directly with the content providers. Network costs are built into what network operators charge for connectivity – and content providers typically have multiple connectivity providers from which to choose.

The agreement that Netflix and Comcast reached inherently involves a traffic imbalance because the content provider is negotiating directly with the operator of the network to which traffic is being sent. As a source familiar with the negotiations told me at the time the agreement was made “Netflix has to pay someone because they don’t own a network.”

The source told me that Netflix and Comcast were interconnecting in about a dozen third-party data centers. Netflix also plans to put storage servers in those data centers, the source said.

It’s likely that these storage servers are the same devices Netflix has been touting as a means of improving the end user experience by serving up popular content from a location relatively close to end users. This approach also minimizes the distances over which Netflix has to send this content, which ultimately should help minimize the company’s connectivity costs.

Merger conditions?

It’s important to note that the exact rate that Netflix has agreed to pay Comcast for traffic exchange was not revealed. Accordingly, although I agree that the concept of charging for a traffic imbalance is a fair one, it’s impossible for outsiders to make a judgment about the fairness or unfairness of this specific deal.

Image via Shutterstock

And that raises an interesting question.

After all the fuss that Netflix has made, some stakeholders are expecting to see regulators ask Comcast for some sort of concession on Internet traffic exchange as a condition of approval of the company’s proposed merger with Time Warner Cable. But what those concessions might be is unclear.

And the debate about Internet traffic exchange is only going to get more intense as companies like AT&T undertake a full transition from TDM to IP, requiring stakeholders to determine how they’re going to exchange VoIP traffic and under what terms.

Competitive carriers advocate greater transparency in interconnection agreements, arguing that the way to ensure fairness is to ensure that everyone knows what everyone else is paying and under what terms. It’s an idea that seems worth further exploration – although Verizon already has expressed opposition to that idea, and as the nation’s other dominant carrier, I would expect AT&T to take the same position.

Clearly this won’t be an easy issue to solve.

Traditional TDM voice interconnection was heavily regulated. But regulators to date have favored a more hands-off approach to the Internet because that’s the way virtually all stakeholders have wanted it.

And with that in mind, anyone waving the Open Internet flag in support of Netflix ought to be careful what they wish for.