Netflix, the company that mails out DVDs and streams movies to millions of home theater potatoes, made the rounds to the Federal Communications Commission on Friday. The company's general counsel told staffers and Commissioners that the movie rental distributor supports the agency's proposed Internet nondiscrimination rules. But they also include a potentially nasty loophole, Netflix warned—the "managed services" category that the Commission created in its Notice of Proposed Rulemaking back in October.

"Netflix is concerned that network operators will use so-called managed services in a way that harms unaffiliated content or service providers that compete directly with services provided by the network operator," the company told the FCC earlier this month. "In short, if left unchecked, the 'managed services' category could engulf the Commission’s open Internet policies altogether" and let ISPs end run any regulations.

Paid provisions

What are "managed services"? That remains to be worked out. It's a vague concept that appears to include IP voice and video. The FCC's NPRM suggests they could be good or bad for competition, depending on how they're deployed.

But first some background is in order. The FCC's proposals call for two additions to the agency's four-part Internet Policy Statement, which commits the Commission to making sure consumers can access the legal content of their choice on the 'Net. Rule Five will add an enforcement provision to the FCC's regulations, requiring networks to treat content, applications, and services in nondiscriminatory ways—that is, to avoid "from favoring or disfavoring lawful content, applications, or services accessed by their subscribers." Rule Six will require ISPs to be transparent about their network management practices, disclosing their methods to the public.

One of the biggest questions is whether Rule Five would apply not just to crude attempts to block content, but to priority access arrangements, which the big cable companies and the telcos very much want. AT&T defines these arrangements as "voluntary commercial agreements for the paid provision of certain value-added broadband services"—presumably faster and smoother access for certain sites.

In its NPRM, the FCC wonders where the freedom to cut these kind of deals could go.

"A broadband Internet access service provider that is also a pay television provider could charge providers or end users more to transmit or receive video programming over the Internet in order to protect the broadband Internet access service provider’s own pay television service," the document speculates. "Alternatively, such a broadband Internet access service provider could seek to protect its pay television service by degrading the performance of video programming delivered over the Internet by third parties."

Gatekeeper

Amen to that, declares Netflix, which definitely has a dog in this fight. In addition to 11 million DVD rental subscribers, the company streams tons of video. In fact, half of its customers have watched at least 15 minutes of movie content on its main site, the service estimates. Netflix predicts that by the end of this year, its streaming capacity will be available on over 100 different devices, including TiVO, BluRay, X-Box, and PlayStation 3, plus SONY and VIZIO IP-TV sets.

"The fact that network operators control the delivery pipes and generate significant revenue from content that travels over those pipes provides both the means and motive for discriminating against new ventures that might threaten revenue sources of the network operators," Netflix warns. The filing worriedly mentions Comcast and Time Warner Cable's TV Everywhere ventures, in which cable subscribers will have access to content over the web, and the proposed merger of Comcast and NBC Universal.

These developments "exacerbate the growing concern that will use their control over programming networks to stifle competition, including the growing competition from online video providers like Netflix," Netflix adds. "The concern that network operators will use their gatekeeper control over broadband access services to discriminate against unaffiliated content in a variety of ways is central to the Commission’s proposed open Internet policies, and a wide variety of discriminatory conduct that stems from such gatekeeper control should be cognizable under the net neutrality rules."

Managing managed services

But in order for this potential problem to be "cognizable" [our translation: "covered"] under the agency's Open Internet rules, Netflix urges the Commission to clarify what are or are not "managed services"—at present a rather vague category that the FCC added to its NPRM. The document defines them as IP offerings such as voice and video, "often provided over the same networks used for broadband Internet access service, that have not been classified by the Commission."

The agency mentions AT&T's U-VERSE IP-Video package as an example of a managed service. "Should the Commission classify these services for policymaking purposes, and if so, how?" the Commission asks. "If rules are appropriate in this area, what should those rules state?"

Ask us something hard, Netflix responds. "The potential category of 'managed services' discussed in the NPRM is of concern, particularly if this category of services is exempt from the openness or nondiscrimination provisions of the rules," the company writes. The FCC must ensure that ISPs "not simply use the 'managed services' category to "end-run the openness and nondiscrimination rules."

What kind of call will the FCC make on this? Good question. Wish we had the answer, for Netflix's sake. At present all we have are the agency's open-ended questions.

"We recognize that these managed or specialized services may differ from broadband Internet access services in ways that recommend a different policy approach, and it may be inappropriate to apply the rules proposed here to managed or specialized services," the Commission's proposals note. "However, we are sensitive to any risk that the growth of managed or specialized services might supplant or otherwise negatively affect the open Internet."