[Update: I gave a brief interview to Marketplace Tech Report]

The last 48 hours has given rise to a fascinating dispute between Level 3 (a major internet backbone provider) and Comcast (a major internet service retailer). The dispute involves both technical principles and fuzzy facts, so I am writing this post more as an attempt to sort out the details in collaboration with commenters than as a definitive guide. Before we get to the facts, let’s define some terms:

Internet Backbone Provider: These are companies, like Level 3, that transport the majority of the traffic at the core of the Internet. I say the “core” because they don’t typically provide connections to the general public, and they do the majority of their routing using the Border Gateway Protocol (BGP) and deliver traffic from one Autonomous System (AS) to another. Each backbone provider is its own AS, but so are Internet Service Retailers. Backbone providers will often agree to “settlement free peering“ with each other in which they deliver each others’ traffic for no fee.

Internet Service Retailers: These are companies that build the “last mile” of internet infrastructure to the general public and sell service. I’ve called them “Retailers” even though most people have traditionally called them Internet Service Providers (the ISP term can get confusing). Retailers sign up customers with the promise of connecting them to the backbone, and then sign “transit” agreements to pay the backbone providers for delivering the traffic that their customers request.

Content Delivery Networks: These are companies like Akamai that provide an enhanced service compared to backbone providers because they specialize in physically locating content closer to the edges (such that many copies of the content are stored in a part of the network that is closer to end-users). The benefit of this is that the content is theoretically faster and more reliable for end-users to access because it has to traverse less “hops.” CDNs will often sign agreements with Retailers to interconnect at many locations that are close to the end-users, and even to rent space to put their servers in the Retailer’s facilities (a practice called co-location).

Akamai and LimeLight Networks have traditionally provided delivery of Netflix content to Comcast customers as CDNs, and paid Comcast for local interconnection and colocation. Level 3, on the other hand, has a longstanding transit agreement with Comcast in which Comcast pays Level 3 to provide its customers with access to the internet backbone. Level 3 signed a deal with Netflix to become the primary provider of their content instead of the existing CDNs. Rather than change its business relationship with Comcast to something more akin to a CDN, in which it pays to locally interconnect and colocate, Level 3 hoped to continue to be paid by Comcast for providing backbone connectivity for its customers. Evidently, it thought that the current terms of its transit agreement with Comcast provided sufficient speed and reliability to satisfy Netflix. Comcast realized that they would simultaneously be losing the revenue from the existing CDNs that paid them for local services, and it would have to pay Level 3 more for backbone connectivity because more traffic would be traversing those links (apparently a whole lot). Comcast decided to try to instead charge Level 3, which didn’t sound like a good deal to Level 3. Level 3 published a press release saying Comcast was trying to unfairly leverage their exclusive control of end-users. Comcast sent a letter to the FCC saying that nothing unfair was going on and this was just a run-of-the-mill peering dispute. Level 3 replied that it was no such thing. [Updates: Comcast told the FCC that they they really do originate a lot of traffic and should be considered a backbone provider. Level 3 released their own FAQ, discussing the peering issue as well as the competitive issues. AT&T blogged in support of Comcast, Level 3 said that AT&T “missed the point completely.”]

Comcast’s attempt to describe the dispute as something akin to a peering dispute between backbone providers strikes me as misleading. Comcast is not a backbone provider that can deliver packets to an arbitrary location on the internet (a location that many other backbone providers might also be able to deliver to). Instead, Comcast is representing only its end-users, and it is doing so exclusively. What’s more, it has never had a settlement-free peering agreement with Level 3 (always transit, with Comcast paying). [Edit: see my clarification below in which I raise the possibility that it may have had both agreements at the same time, but relating to different traffic.] Indeed, the very nature of retail broadband service is that download quantity (or the traffic going into the Comcast AS) far exceeds upload quantity. In Comcast’s view of the world, therefore, all of their transit agreements should be reversed such that the backbone providers pay them for the privilege of reaching their users.

Why is this a problem? Won’t the market sort it out? First, the backbone market is still relatively competitive, and within that market I think that economic forces stand a reasonable chance of finding the optimal efficiency and leave relatively less room for anti-competitive shenanigans. However, these market dynamics can fall apart when you add to the mix last-mile providers. Last mile providers by their nature have at least a temporary monopoly on serving a given customer and often (in the case of a provider like Comcast) a local near-monopoly on high-performance broadband service altogether. Historically, the segmentation between the backbone market and the last-mile market has prevented shenanigans in the latter from seeping into the former. Two significant changes have occurred that alter this balance: 1) Comcast has grown to the size that it exerts tremendous power over a large portion of the broadband retail customers, with far less competition than in the past (for example the era of dial-up) and 2) Level 3 has sought to become the exclusive provider of certain desirable online content, but without the same network and business structure as traditional CDNs.

The market analysis becomes even more complicated in a scenario in which the last-mile provider has a vertically integrated service that competes with services being provided over the backbone provider with which it interconnects. Comcast’s basic video service clearly competes with Netflix and other internet video. In addition, Comcast’s TV Everywhere service (in partnership with HBO) competes with other computer-screen on-demand video services. Finally, the pending Comcst/NBCU merger (under review by the FCC and DoJ) implicates Hulu and a far greater degree of vertical integration with content providers. This means that in addition to its general incentives to price-squeeze backbone providers, Comcast clearly has incentive to discriminate against other online video providers (either by altering speed or by charging more than what a competitive market would yield).

But what do you all think? You may also find it worthwhile to slog through some of the traffic on the NANOG email list, starting roughly here.

[Edit: I ran across this fascinating blog post on the issue by Global Crossing, a backbone provider similar to Level 3.]

[Edit: Take a look at this fantastic overview of the situation in a blog post from Adam Rothschild.]