Network operators Level 3 and Cogent Communications today urged the Federal Communications Commission to prevent Internet service providers from charging what they deem to be excessive fees for interconnection.

The Federal Communications Commission's first attempt to create net neutrality rules, which were struck down in court after a challenge by Verizon, prevented discrimination, blocking, and pay-for-play charges on the so-called last mile of broadband networks. This required ISPs like Comcast, Verizon, and AT&T to treat Web services equally once traffic entered their networks and started making its way to residential and business customers.

But the FCC implemented no rules for the interconnections between consumer ISPs and Internet transit providers like Level 3 and Cogent. Notably, Netflix pays Level 3 and Cogent to distribute its traffic across the Internet, and ISPs are demanding payment from all three of these companies in exchange for accepting traffic. Level 3 and Netflix both pay Comcast while Cogent has held out . Verizon and AT&T are also both seeking payment from Netflix.

While ISPs say the traffic loads are too heavy, Level 3, Cogent, and Netflix argue that ISPs are abusing their market power, since customers often have little to no choice of Internet provider. That means there's only one path for Netflix traffic to reach consumers, at least over the last mile.

FCC Chairman Tom Wheeler has said he intends to issue new net neutrality rules. Netflix argued for rules that cover interconnection agreements last night, and both Level 3 and Cogent filed comments with the FCC today to outline proposals.

"Level 3 urges the Commission to protect the Internet from this abuse, by ensuring that bottleneck ISPs, which control the only means of Internet access to millions of consumers, are not permitted to impose these arbitrary access charges," Level 3's filing said. "That does not mean that ISPs should not be able to offer—and charge for—CDN, transit, or other services to edge providers and others. Rather, the Commission should declare that large bottleneck ISPs, in addition to offering any commercial services they chose to make available, must also exchange Internet traffic on commercially reasonable terms without imposing access charges. That is, ISPs should be permitted to charge other providers for services they provide, but they may not charge fees simply for the privilege of accessing that ISP’s customers."

Level 3 acknowledged that its proposal lacks some important specifics. "Level 3 does not here propose to define (and the Commission need not define at the outset) every potentially commercially reasonable approach to interconnection," the company said. "But the Commission should set out some principles for, and examples of, commercial reasonableness."

Cogent's filing is similar, with one difference being that Cogent asked the FCC to reclassify broadband providers as common carriers, which would allow implementation of stricter rules. Recognizing that a common carriage classification isn't likely, Cogent spent most of its filing describing steps the commission could take, short of reclassification.

Cogent argued for stricter transparency rules forcing ISPs to disclose network management practices. It also asked for required testing that would show performance data of "the actual speeds at which popular edge-provider content [like Netflix and YouTube] is being downloaded during peak usage periods (7:00-11:00p.m., adjusted for local time zones) on a system-specific level."

When interconnection points become congested, the FCC should have authority to intervene, Cogent said. This would force the broadband provider "to show cause why it should not be required to implement prompt remedial measures to relieve the sustained state of congestion," Cogent said.

Cogent claims its proposal wouldn't prevent ISPs from seeking paid peering agreements, but in practice, the FCC under Cogent's proposal could force ISPs to relieve congestion without payment. "[T]he proposal would allow a broadband ISP the flexibility to attempt to reach a paid peering agreement with peering partners in order to relieve a sustained state of congestion," Cogent wrote. "However, if such agreement cannot be reached, then the broadband ISP must upgrade its interconnection with its peering partner(s) as is necessary to relieve the sustained state of congestion."

The interconnection points carry all sorts of Web traffic, so congestion can slow down e-mail or general Web browsing, but streaming video suffers more because of how much bandwidth it requires.

Netflix's payment to Comcast for a direct connection to its network wouldn't necessarily be outlawed under this proposal, Cogent said. "As long as a broadband ISP's network is not congested at interconnection points to the degree that its customers are not able to reasonably access the open Internet, then the fact that one or more edge providers are paying for a 'dedicated lane' is not inconsistent with the reasonable and timely deployment of broadband service to all Americans," Cogent said.

However, if the payments for "dedicated lanes" are "the product of anticompetitive conduct, then such conduct can and should be addressed by the antitrust enforcement authorities."

Changing their tune

While Level 3 and Cogent are in lock step today, they weren't always so friendly. In 2005, Level 3 cut off its peering connection with Cogent, making the same arguments Comcast, Verizon, and others make today.

"In order for free peering to be fair to both parties, the cost and benefit that parties contribute and receive should be roughly the same," Level 3 said at the time, the same argument ISPs have recently made about Level 3 and Cogent. "We determined that the agreement that we had with Cogent was not equitable to Level 3. There are a number of factors that determine whether a peering relationship is mutually beneficial. For example, Cogent was sending far more traffic to the Level 3 network than Level 3 was sending to Cogent's network."

Level 3 and Cogent eventually settled and began exchanging traffic again. Analyst Dan Rayburn pointed out this past dispute today in a blog post accusing Netflix and Level 3 of ignoring inconvenient facts while making arguments that could benefit them financially.

Rayburn argued that Netflix failed its own customers by sending traffic through congested links at Level 3 and Cogent when it "could use multiple providers to connect to ISPs and could also use third-party CDNs like Akamai, EdgeCast, and Limelight, who are already connected to ISPs, to deliver their traffic. In fact, this is how Netflix delivered 100 percent of its traffic for many, many years, using third-party CDNs. Netflix likes to make it sound like there is only one way to deliver videos on the Internet when in fact, there are multiple ways."

In another filing with the FCC today, the Telecommunications Industry Association argued against "prescriptive network management rules," saying they deter network investment. The lobby group also said regulation and enforcement should come only after the identification of "actual harm" and be narrowly tailored.

Level 3 today argued that the un-competitive nature of the consumer ISP market means that ISPs can charge whatever they want and actually charge more for peering than Level 3 does for transit:

Both tolls on edge providers and tolls on transit providers pose the same risks to the free and open Internet. That is, just as an ISP has the incentive and ability to charge tolls to edge providers in order to generate revenues (and which generate significant negative externalities), it has the same incentive and ability to charge tolls to transit providers to generate revenue. If an ISP’s tolls were charged and paid, transit providers, which operate in a highly competitive market which has seen tremendous price compression over the years, would have no choice but to pass these significant, additional costs on to those who purchase transit from them—the very edge providers that the Commission was attempting to protect from such tolls. While the precise size of the tolls demanded vary from ISP to ISP, in Level 3’s experience they frequently equal or even exceed the price that Level 3 charges its customers for transit to those ISPs’ networks (and the rest of the Internet as a whole). Said another way, some ISPs want to charge an access fee for access to their little corner of the Internet (i.e. their customers) that frequently equals or exceeds the fees Level 3 charges its transit customers to reach every destination on the Internet.

In response to Level 3's latest statements, Rayburn wrote that the proposal itself is too vague to be properly evaluated, and that the failure of companies to release details of existing agreements makes it even harder to decide what a proper outcome should be.

"What I want are all the facts so I can make an informed decision of what should be done. But without details on the current business terms and how they work between all the parties involved and details, with numbers, on how they want it to change, it really keeps all of us in the dark," he wrote.

Comcast declined comment today, but in response to Netflix yesterday, Comcast noted that it supported the FCC's previous net neutrality rules "because they struck the appropriate balance between consumer protection and reasonable network management rights for ISPs."

"The Open Internet rules never were designed to deal with peering and Internet interconnection, which have been an essential part of the growth of the Internet for two decades," Comcast said. "Providers like Netflix have always paid for their interconnection to the Internet and have always had ample options to ensure that their customers receive an optimal performance through all ISPs at a fair price."

UPDATE: AT&T Senior VP James Cicconi gave his company's take in a blog post published late Friday. Cicconi disputed Netflix CEO Reed Hastings' arguments and accused Netflix of forcing AT&T to build new facilities and pass costs on to customers who may or may not subscribe to Netflix.

"[If] Netflix is delivering that increased volume of traffic to, say, AT&T, we should accept the fact that AT&T must be ready to build additional ports and transport capacity to accept the new volume of capacity as a consequence of Netflix’s good business fortune," Cicconi wrote. "And I think we can all accept the fact that business service costs are ultimately borne by consumers. Mr. Hastings blog post then really comes down to which consumers should pay for the additional bandwidth being delivered to Netflix’s customers. In the current structure, the increased cost of building that capacity is ultimately borne by Netflix subscribers. It is a cost of doing business that gets incorporated into Netflix’s subscription rate. In Netflix’s view, that’s unfair. In its view, those additional costs, caused by Netflix’s increasing subscriber counts and service usage, should be borne by all broadband subscribers—not just those who sign up for and use Netflix service."

Cicconi went on to compare Netflix's streaming service with the mail order service that got Netflix started. "When Netflix delivered its movies by mail, the cost of delivery was included in the price their customer paid," Cicconi wrote. "It would’ve been neither right nor legal for Netflix to demand a customer’s neighbors pay the cost of delivering his movie. Yet that’s effectively what Mr. Hastings is demanding here, and in rather self-righteous fashion... It’s simply not fair for Mr. Hastings to demand that ISPs provide him with zero delivery costs—at the high quality he demands—for free. Nor is it fair that other Internet users, who couldn’t care less about Netflix, be forced to subsidize the high costs and stresses its service places on all broadband networks."

UPDATE 2: Level 3 VP Mark Taylor offered an explanation as to why the Level 3/Cogent dispute in 2005 is different from the disputes Level 3 has with ISPs today. The dispute came at a time when "our business models diverged and the peering agreement hadn't contemplated that," he said. "Level 3 very significantly extended the geographic coverage of its network, particularly in Europe. At the same time Cogent focused more heavily on one part of the Internet market; Content companies. That meant we ended up carrying bits that moved through our interconnection points for a far greater distance than those bits travelled over the Cogent network. We no longer shared costs equally."

Level 3 still believes that "business benefit and costs should be equally shared," and that cost should be measured in terms of "bit miles," the distance traffic is carried rather than the direction it flows in. Taylor continued:

[T]here are three fundamental differences with that when a global backbone network like Level 3’s connects to a broadband provider like AT&T. First, if an AT&T subscriber asks to see Internet content, whatever provider is delivering that content has no option but to use AT&T to deliver it to the AT&T customer that asked for it. In other words, unlike the Internet backbone, there is no competitive choice in the last mile of the Internet. Secondly, our business models are completely different. The backbone operator’s commercial model is to sell services based on the amount of traffic a customer uses at the busiest time. So Level 3’s revenues go up and down as traffic goes up and down. In contrast the broadband operators sell services on a fixed monthly fee irrespective of the amount of traffic consumed. Thirdly, our network is fully synchronous [and] theirs is asynchronous. Broadband operators sell a service that is built to deliver more bits in one direction than the other. Consumption patterns magnify that effect. It simply isn't even possible to be in balance—not even close. And so it becomes pretty obvious pretty quickly that a simple ratio of send to receive traffic in no way acts as a proxy for equal business benefit or equal cost.

The market at the Internet's "backbone" where companies like Level 3 operate is a lot more competitive, Taylor said. "Carriers in the backbone of the Internet have similar business models," he said. "They sell services to content companies, businesses and to other network providers like the broadband networks. The backbone of the Internet is highly competitive, and the networks operated there are fully synchronous; that is the pipes that comprise those networks are capable of sending and receiving the same amount of traffic. If a network company is in the same, competitive business, has a similar geographic network and a similar network design then three things are likely true; both networks will benefit equally from interconnection; both networks will incur equal cost for carrying a packet from a to b across their interconnection points; and if either network operator does not want to do business with the other, competitive alternatives are available."