Netflix deals with Verizon, Comcast aren't helping net neutrality, but does that matter?

It's easy to feel somewhat torn by Netflix's (NASDAQ: NFLX) recent moves to pay Comcast (NASDAQ: CMCSA) and now Verizon (NYSE: VZ) for better access to their broadband subscribers. On one hand, as a FiOS subscriber, I should see better quality video and fewer buffering messages when binging on MST3K and catching up on Walking Dead. On the other hand, as a concerned citizen, I should be really, really worried about the precedent Netflix is setting just as the FCC completes its third revision of net neutrality rules.

Right now, the demand for online video is pushing the ideal of true net neutrality into the toilet.

It's understandable. Net neutrality is just not an attractive concept, nor is it easy for the layperson to get. Trying to explain net neutrality to, well, just about anyone is a lot like a scene that was part of Sunday night's episode of HBO's Silicon Valley. As hapless entrepreneur Richard Hendriks attempts to explain what his exciting new software application does, the jet-setting accountant he's explaining it to almost instantly loses interest, turns his back and starts strumming his prized guitar.

Explaining net neutrality isn't simple because the Internet isn't simple. There's the public Internet, the distributed network that forms the nucleus of the Web. And then there are a variety of networks that interconnect using Internet protocol (IP)--owned networks, like AT&T's (NYSE: T) U-verse fiber network; private networks, like the ultra-low-latency routes leased to financial organizations; and government networks, from publicly available municipal networks to encrypted Defense Department networks. These terminate or interconnect, depending on what various companies plan to do with their particular data, at various points, such as the Amsterdam-IX or in one of the massive data center and interconnection points around Washington, D.C., and so on … and, I've lost you, haven't I. You're across the room strumming your guitar (or your virtual Smule guitar, or whatever).

Let me try and simplify it. Net neutrality is really important, more important even than getting Game of Thrones to stream to your iPad without buffering. That's because a lot of other data, not just video streams (although they make up nearly half of Internet traffic now, at peak viewing times) cross the network.

Netflix has enough money to pay off major ISPs like Verizon so that it can get more bandwidth and avoid congestion problems. But other organizations don't. Let's take, for example, a nonprofit medical group trying to send patient data from one side of the country to the other, or perhaps live-stream a critical medical procedure from a surgical center to a team of advisors. If the medical group didn't pay a fee to Verizon, what happens when the data encounters congestion at, say, the network edge where it needs to move onto a Verizon network to reach the final destination?

And the other question is, where does it stop? Netflix now pays two of the biggest ISPs to improve its connection. It's almost doubtless that it will work out deals with most if not all of the other large ISPs that it lists in its monthly speed index. And then, perhaps, other providers will show up with palm outstretched. After all, if the big players can build pay-for-play traffic lanes, why can't the little guys?

But here's the third question: Does any of that really matter? Is Netflix's strategy really going to damage net neutrality in the long run?

Underneath all the hullaballoo about the FCC's rewrite of net neutrality rules and the way these will allow similar "pay-for-play" agreements, is the hard fact that to remain a dominant online video player, Netflix has to do business this way.

Further, the Internet hasn't been truly neutral for some time.

Kevin Werbach and Phil Weiser, in a Huffington Post op-ed, wrote that we have to acknowledge that Internet traffic cannot be strictly neutral, and in fact is not treated in a neutral way now.

"In implementing network neutrality, some differentiation of traffic must be allowed on the Internet, even encouraged. Network operators should be able to block malware and denial of service attacks, for example. And companies like Akamai and Limelight should be able to offer content distribution network (CDN) functionality to improve delivery of certain content. There are many thousands of interconnection agreements among network operators, backed by massive amounts of traffic engineering, caching overlays, and other mechanisms to meet business and technical parameters. If the Internet story is one of a neutral network, it's also one of private firms negotiating arrangements and managing their networks as they see fit."

In other words, many companies are already paying to get their traffic through ahead of others. Including, hopefully, that hypothetical nonprofit medical group--which hopefully has a crack team of IT engineers and access to a CDN to prevent streaming issues end-to-end. And financial industry players, which have long paid to transmit trades and other data between major hubs via private, ultra-low-latency networks.

That's a big consideration, and one that I believe FCC Chairman Tom Wheeler and his team looked at closely when re-drafting the latest version of net neutrality.

The risk here, of course, is continued innovation. Will allowing ISPs to give preferential treatment to those who pay for it cause a chill in the IP video delivery market? There are no certainties. The FCC can enact its latest rules, and the market may see little to no change in the growth that's occurring now. Or it can hold off on putting those rules into effect--and risk letting the big fish in the Internet pond control traffic with no clear oversight, something that could also kill innovation and entrepreneurship.

When looked at from that angle, it's much more clear that Netflix has no choice but pay for direct access to its subscribers, and the FCC has no choice other than the lesser of two evils: some oversight of the Internet, versus no oversight at all, and no redress for smaller companies trying to make a dent in the IP industry.--Sam

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