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In Net Neutrality Debate, You Are Not a Peer

Stocks in this article: NFLX CMCSA VZ GOOG CCOI EQIX WMT T

NEW YORK (TheStreet) -- The economics of the Internet are based on a concept called peering and you are not a peer.

Peering means your Internet Service Provider (ISP) takes a bit, mine takes a bit, and it balances out. A peering agreement defines how big the lines are between us and who pays for the difference in traffic between peers.

For services like email your ISP sends as many emails from you as it takes from me. You buy a connection from your local ISP, I buy one from mine, and it all works.

For video, by contrast, the traffic is all one-way, and it has to be much faster. Peering agreements weren't designed around the Internet as cable TV. They were designed for engineers who were using two-way services like email.

Net neutrality is based on the idea that all bits are created equal and should be treated equally. A bit that's part of your email is just like a bit that's part of that Breaking Bad binge you had last weekend.

Technically, that's true, but economically that's not true. That video bit has to come at you fast, a few megabits per second, to become Bryan Cranston. An email bit sent to Cranston can take its time. Also, that video bit is one-way traffic. Cranston might want to write you back.

So ISPs serving homes that get lots of video bits, controlling the "last mile," want to change their peering deals with the companies sending most of those bits, like Netflix (NFLX). The last-mile ISPs are mostly cable companies like Comcast (CMCSA) and phone companies like Verizon (VZ), and most now have their own video services.

We're being overloaded, they say. In Internet terms we're getting a firehose of bits and we're not able to send any back. Combined, Netflix and Google's (GOOG) YouTube represent half the traffic flowing through the Internet's back roads and cul de sacs, and it's nearly all one-way.

Netflix knows this. It has something it calls the Open Connect Network, which brings its bits closer to customers. Netflix has also been paying core ISPs like Cogent (CCOI) for lines needed to get these bits closer to you.

But these deals let Netflix get bits just from the Interstate to the federal highway. Getting them to your house still takes a last-mile ISP, just as you get home on city streets or country lanes.

The last-mile ISPs want to be paid for this. They first protested weakly, then loudly. Verizon took the FCC to court saying that net neutrality violated peering principles. In January, they won their case. 

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