Mega companies Netflix, Level 3 don’t need subsidies

Netflix now has more subscribers than Comcast thanks to a blistering growth rate, while Level 3 Communications will soon become the biggest backbone on the Internet due to its announced merger with Global Crossing.  Level 3 is one of the primary video distributors for Netflix.  Despite their success on the free market Internet, Level 3 and Netflix CEO Reed Hastings recently lobbied for government assistance in their business negotiations with Comcast so that they can be subsidized by all broadband users.

Netflix and its distribution partner have negotiated peering agreements with broadband providers like Comcast.  The purpose of these Internet peering agreements is to provide mutual benefit to all willing participants and to fairly divvy up profits and responsibilities.  If both networks divided work equally in terms of infrastructure investments, then they provide equal value to each other and no money is exchanged.  If company A used company B’s network more and derived a bigger benefit while putting a greater infrastructure burden on company B, then company A is expected to compensate company B.  This is spelled out in the peering contract in the form of traffic ratios, which are generally expected to be “roughly equal”.  The industry consensus on “roughly equal” means no more than a 2 to 1 ratio, and excess traffic above 2:1 are billable.

The ratio of private peering traffic from Level 3 (the bulk from Netflix) was approaching 5 to 1 and growing (see video) and Comcast exercised their contractual rights to bill Level 3 for traffic levels above the 2 to 1 ratio.  Level 3 agreed to the terms with Comcast privately, but Level 3 and Netflix openly complained to the media and the FCC under the banner of “Net Neutrality” that they deserve free peering even though their agreement was consistent with business on the Internet and that such agreements were always privately settled.  Level 3 attempted to distort the facts by claiming that they were doing most of the work delivering video to the consumer when in reality the broadband providers were doing most of the work.  Had Comcast’s Internet streaming been more successful (it is currently dwarfed by Netflix) and Comcast was using Level 3’s network more than Level 3 was using Comcast’s network, it is doubtful Level 3 would be so generous to overlook the traffic imbalance.

Internet freedom means freedom from interference by bad government or bad private actors.  But the word freedom has been distorted by the extreme Net Neutrality movement to mean free as in “free beer.”  The way the Internet has always worked is that customers of the Internet pay for the right to connect to any other customers of the Internet.  That concept has been distorted to mean the right to connect to any person or company regardless of whether they are paying customers of the Internet, but that places the financial burden on the remaining customers who pay.  Companies like Netflix and Level 3/Global Crossing are big enough and successful enough that they have more than enough leverage in the free market place.  They don’t need government assistance to unfairly burden their network suppliers and offset their costs to broadband customers.

  • nucrash

    Companies in general don’t need subsidies. Subsidies are corporate socialism which pretty much go against everything the free market stands for.

    And I don’t think I would consider Netflix or Level3 as Mega Corporations. I don’t know if Level 3 is on the fortune 500 and I know that Netflix isn’t.

  • George Ou

    The point is that in their respective markets, they are very dominant and have a lot of negotiation power. They don’t need special government rules that stack the card in their favor.

  • H. Luria

    Level 3 has never made a penny – they need some kind of help!

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