Broadband Cable Association of Pennsylvania


May 9, 2014

If you happen to own a computer, television or other streaming device, you've probably heard that Netflix recently reached an agreement with Comcast to streamline the delivery of Netflix's videos to Comcast customers. You've probably also heard that the chairman of the Federal Communications Commission has circulated new "net neutrality" rules to govern how traffic moves across the so-called "last mile" connection between an internet service provider and your home.

What do these have to do with each other? The short answer is "nothing," but you wouldn't know that from listening to Netflix's CEO.

In short, the Netflix-Comcast agreement deals with something known as interconnection - how big content providers transmit their huge files over the internet's backbone in order to get to Comcast (and other ISP) last mile facilities in the first place. Net neutrality deals with how traffic is handled once it arrives at the last-mile, and whether it makes sense for certain traffic to receive priority treatment once it gets there.

Let's take the issue of interconnection first. Big content providers have always had to pay someone to manage delivery of their shows, movies and services. Typically these companies use specialized services called "content delivery networks" (CDNs) to manage this traffic as it travels from the provider to the ISP, which then moves it over its "last miles" to individual customers and screens. CDNs often build significant infrastructure of their own to improve speeds, and content providers (including Netflix) have always paid for this. A company like Netflix can also connect to ISPs directly to cut out the middleman. Companies like Google, Microsoft, Amazon and others do just this, paying for network "ports" that enable them to manage their own traffic and offload their massive data streams directly, instead of paying a third party to handle it.

Netflix's much-loved videos take up as much as 30 percent of all internet bandwidth in the U.S, creating longstanding traffic management problems for the company that have been costly to address. Netflix had used a number of CDN middlemen to deliver its traffic, but ran into problems when it overloaded one CDN, Cogent, which didn't want to pay for the extra infrastructure needed to offload the additional content. So Netflix chose to interconnect directly with Comcast, which had already invested heavily in the infrastructure to handle large volumes of content. Although Netflix pays Comcast for interconnection, it has reportedly saved a ton of cash in cutting out the middleman- and increased its speeds by 65 percent.

Net neutrality, on the other hand, addresses the issue of discrimination on the last-mile networks owned by Comcast and other ISPs. In essence, it seeks to prohibit unfair treatment of unaffiliated content traveling within an ISP's network. Under the new proposed rules, according to reports, if an ISP decides to provide premium speeds to Netflix over its last mile facility, it can't deny that same quality of service to Netflix's competitors. So if the issues of interconnection and net neutrality are entirely different, why did Netflix CEO Reed Hastings take to the airwaves to complain that the interconnection deal with Comcast - one that he initiated and over which he stands to save money - amounts to an unfair "toll" on Netflix that threatens net neutrality?

Apparently, Mr. Hastings figured he could confuse longstanding, widely accepted interconnection practices with the debate over net neutrality, hoping politicians and regulators who favor net neutrality might help him get a free pass on interconnection costs. But free to whom? Someone has to pay for the infrastructure needed to handle Netflix's traffic. If Netflix (or Cogent) doesn't pay, everyone using the network would have to, whether they were Netflix customers or not.

In reality, Hastings was looking for a government handout - either in the new net neutrality rules or via "conditions" attached to approval of the Comcast/Time Warner Cable deal. Given that Sen. Al Franken recently asked Netflix to help him kill the transaction using similar "gatekeeper" metaphors, Hastings' ploy may well be effective. But that doesn't make it logical or fair.

There is simply no justification for offering Netflix any special treatment in its interconnection arrangements. Online content providers have countless ways to connect with broadband networks. Competition has forced prices for these interconnection services down by a remarkable 99 percent in recent years. ISPs can do nothing to thwart interconnection, and, in fact, Comcast has every incentive to keep the online video spigot wide open. There is a reason every iteration of the FCC's net neutrality rules, including the latest, have explicitly not applied to backbone interconnection agreements: Interconnection over the backbone has always been open and competitive, and it simply doesn't give rise to the kind of discrimination concerns net neutrality is meant to address.

That Netflix would prefer not to pay for delivery of its content isn't surprising. But net neutrality regulations don't - and shouldn't - have anything to do with it. (Op-ed by Geoffrey Manne, executive director of the International Center for Law and Economics in Portland, Oregon)

Liberty Media Corp is spinning off its cable assets, including a stake in Charter Communications Inc, into a new publicly traded company called Liberty Broadband, the media holding company said on Thursday. "We believe a separate Liberty Broadband will offer investors greater choice and transparency, and is well-timed with Charter's agreements with Comcast, which will result in Charter owning or serving over eight million video customers," Liberty Media Chief Executive Officer Greg Maffei said. Maffei's boss, Liberty Media Chairman John Malone, is famous for complicated stock structures designed to be tax-efficient. The announcement came amid more clarity on Charter's expansion plans.

In a call with analysts to discuss Liberty Media's first-quarter results, Maffei said Charter is a "natural acquirer of pretty much any cable asset that gets sold." A separate Liberty Broadband could help raise capital for Charter, he added.On April 28, Charter said it would pay Comcast $7.3 billion for 1.4 million cable subscribers and trade about 1.6 million subscribers in different parts of the country in a deal that depends on regulatory approval of Comcast's takeover of Time Warner Cable. Charter will also own one-third of a new cable company to be spun off from Comcast.

Maffei said the spin-off would be completed by the end of the year. It replaces a previous plan announced in March to split up the cable media assets into new companies, Liberty Broadband Group and Liberty Media Group. The plan announced on Thursday will be a hard spin-off of Liberty Broadband, similar to how Liberty spun off television and movie channel Starz last year. Liberty Broadband will house Liberty's stake in Charter Communications, which was worth $3.31 billion as of March 31, as well as investments in Time Warner Cable and the small location technology company True Position Technologies Inc.

Liberty Media will continue to hold stakes in Sirius XM and Live National Entertainment and remain the owner of the Atlanta Braves baseball team. Liberty Media announced on Thursday that its first-quarter operating income before depreciation and amortization rose 12 percent to $294 million, compared to $262 million a year ago. Its shares were up almost 1 percent at $131.40 in early afternoon trade. Reuters

Dish Network Corp. Chairman Charlie Ergen said he sees a lot of sense in merging with satellite-television rival DirecTV, but doesn't think he could outbid AT&T Inc. His comments came Thursday in a freewheeling earnings conference call with reporters and Wall Street analysts. Dish's first-quarter profit fell 18% as higher expenses offset a rise in revenue. But the results were overshadowed by Dish's place near the center of merger speculation sweeping the telecom industry.

Dish's 14 million pay-TV subscribers and big holdings of wireless spectrum amassed in recent years make it a logical partner for several companies. They include rival DirecTV and big telecom companies like AT&T and Verizon Communications Inc., or smaller wireless companies like T-Mobile US Inc. On the call, Mr. Ergen made clear he would be a willing participant in nearly all those scenarios, but said he didn't want to overpay. "We don't have the kind of money to go outbid, you know, Sprint for T-Mobile or outbid AT&T for DirecTV," he said. Dish's first-quarter profit fell to $176 million, as expenses rose 6.5% to $3.59 billion. The company added 40,000 pay-TV subscribers and 53,000 broadband customers in the quarter.

AT&T has approached DirecTV about a takeover and the two companies are in talks, people familiar with the matter have said. In addition, Sprint Corp. is pursuing a merger with T-Mobile, though opposition from regulators poses a hurdle. The deal making comes against the backdrop of Comcast Corp.'s $45 billion agreement to buy Time Warner Cable Inc., which will create a giant in the pay-TV and broadband markets, as well as a potential new entrant into wireless. Dish would consider deals with either target, but only if their suitors drop out, he said. "We don't mind getting in a battle we've got a shot to win, but we have no shot," he added.

DirecTV has long been regarded as a natural merger partner for Dish. The two firms tried to do a deal more than a decade ago, but were shot down by regulators. Mr. Ergen said Thursday he thinks such a deal could win approval now, especially as the Comcast deal changes the competitive landscape. If would make strategic sense to try such a merger now, while regulators are considering the cable deal, he said. Dish would evaluate a deal, but DirecTV's current "frothy" valuation—its shares are up more than 20% so far this year—would be a "non-starter," he said.

AT&T could pay more than $100 a share for DirecTV and still find it financially attractive, Mr. Ergen said. The Dish chairman also said buying his company would "make a lot of sense" to companies like AT&T or Verizon. Dish has spent years building up a cache of wireless spectrum that is worth billions of dollars. Now, Mr. Ergen said, we're "ready to harvest." Dish posted earnings of $175.9 million, or 38 cents a share, down from $215.6 million, or 47 cents a share, a year earlier. Analysts polled by Thomson Reuters had projected earnings of 44 cents a share and revenue of $3.58 billion.

Dish, which has struggled to boost its subscriber numbers, added 40,000 net pay-TV subscribers, versus a net gain of 36,000 during the same period a year earlier. The company ended the period with about 14.1 million pay-TV subscribers, nearly flat from a year earlier. The company also added about 53,000 net broadband subscribers in the quarter, versus additions of 66,000 in the previous year's quarter. Wall Street Journal

Colorado Gov. John Hickenlooper is signing legislation that reroutes part of a $54 million annual ratepayer subsidy to telecom companies into a broadband fund to provide service in rural areas. The subsidy goes back to the days when most people had landlines and few provider options. The money was used to provide service in hard-to-reach areas. The plan is to phase out the ratepayer subsidy in 10 years. The governor is signing the bill Friday, along with three others dealing with updating the state’s decades-old telecommunication laws. Associated Press