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Comcast (NASDAQ:CMCSA) versus Level 3 (NYSE:LVLT) has been widely covered, with great articles on Ars Technica, GigaOm and others. Fundamental questions include:

  • Is it about peering? And then, is traffic direction relevant at all?
  • Is it about competition, or lack thereof? And then, does an ISP hold a monopoly on 'termination'?
  • Is it about net neutrality? And then, is it about Netflix (NASDAQ:NFLX), which has a new deal with Level 3? Andis it about Comcast's NBC takeover?
  • Who should pay: Netflix, Level 3, Comcast, or the consumer? And then, should anyone of these be paid twice?
  • Is it all about opinions, or is there some way to look at it in an neutral and objective manner?

If it is left to the market entirely, then there shouldn't be any one player with siginificant market power. And if so, regulation must be put in place. Hence, there is a reason for regulators to look at the Internet on a global level.

Some people say that ultimately Netflix needs to pay. The trouble, however, is that they are paying already (to Level 3). For argument's sake, let's just suppose that Netflix was originally in the DVD rental business, making use of UPS. Unfortunately, Reed Hastings, a former door-to-door salesman, mistook UPS (United Pigeon Service) for USPS. Now, Reed has the brilliant idea of switching to the genuine USPS, which will make his service a lot cheaper, faster and more secure. What do you suppose will happen? Will USPS be thrilled to get this wonderful big new customer? Get all the extra revenue from increased traffic, i.e. return envelopes? Or will they complain, saying: "You can't use my boxes without paying." Not likely, as long as Netflix pays postage itself and/or delivers its DVDs to the post office.

In the internet world, ISPs charge consumers; if they feel it isn't enough, they can raise prices, or try out new pricing models - assuming that there is sufficient competition (which is doubtful in the US). But they shouldn't use their termination monopoly to also charge upstream parties. In fact, without these upstream providers, not a single consumer would be interested in any of these fancy broadband packages in the first place. ISPs should be thrilled to be able to deliver streaming movies to their customers.

And yes, replacing networks is expensive. Migration to FTTH (not to be confused with evolutionary upgrades using xDSL or Docsis X) is a once-in-a-century drama. It requires a capex boost, which creates a singularity in the otherwise predictable free cash flows and dividend payments. So for once, telcos are required to take a long-term view, instead of the short-term focus on progressively growing dividends (and share buy-backs). But that doesn't mean that they should turn to upstream parties for increased payments.

That leaves telcos with the difficult task of explaining to shareholders that free cash flow is going to suffer for a while. But the good news is that the NGA network is a lot more efficient and green than the old one.

Source: What if Netflix Switched From Pigeons to Postage?