Level 3 Communications, Inc. (NASDAQ: LVLT) today released the following statement: On Dec. 17, 2010, Comcast issued a letter to the Federal Communications Commission (FCC) concerning Level 3’s request to the FCC and the Department of Justice to impose conditions on Comcast’s acquisition of NBC Universal. The letter contains misleading allegations, and many of the assertions are based on factually incorrect statements. Level 3 is releasing this Q&A in order to address the allegations and to correct the factual record. Q1: Comcast has repeatedly said that “In Comcast’s experience, Level 3’s new peering proposal is unprecedented.” Is this correct?A1: No, it is incorrect and misleading. The “unprecedented” action in this case has been taken by Comcast, not Level 3. To Level 3’s and third parties’ knowledge, for the first time, Comcast is demanding a payment from Level 3 for access to Comcast’s customers. 1 The Level 3 “proposal” referred to by Comcast is an offer to interconnect in several cities where Comcast owns large cable systems in addition to the 10 large cities where the two companies already interconnect. Level 3 offered to carry content to these additional cities at no cost to Comcast, a solution that Level 3 believed would lower Comcast’s costs. Level 3 believes this solution is simply an extension of the existing interconnection architecture already in place between the two companies and is thus technically and economically straightforward. Comcast is mischaracterizing the offer made by Level 3 to distract attention from other, more fundamental issues. Q2: Comcast says that Level 3 is insisting that “Comcast and its customers bear 100 percent of the costs of this new design, regardless of traffic flows between the parties.” Is this correct?A2: No. Clearly, Level 3 would not offer to settle a dispute with Comcast by making an offer that is less desirable to Comcast than the interconnections already in place. As outlined in a letter to Comcast, 2 Level 3’s proposal was meant to settle the disagreement with Comcast by interconnecting with Comcast in more locations that are closer to Comcast’s local cable networks. Level 3 made this offer solely in an attempt to address Comcast’s complaint that it would experience cost increases caused by its customers requesting more content with higher bandwidth requirements. Comcast is distorting Level 3’s offer – if Comcast had accepted our offer, the result would have been to increase Level 3’s costs and lower Comcast’s costs. Q3: Comcast says, “The proposal raises significant and complex technical and economic questions that could impact both parties’ customers in uncertain ways, and represents a major and untested shift in interconnect architecture that presents feasibility, scalability, and other considerations.” Is this correct?A3. Level 3 believes interconnection architectures and costs are well understood in the industry and by both Level 3 and Comcast. Level 3 and Comcast already interconnect and exchange content in Atlanta, Chicago, Dallas, Los Angeles, Miami, New York, Seattle, Sunnyvale and McLean. Level 3 offered to carry content, using its own network and at no cost to Comcast, to several additional cities where Comcast’s residential customers are concentrated. We believe that this is simply an extension of the existing interconnection arrangement, and is economically and technically straightforward. Q4: Comcast says that it offered to run a 45 day trial of Level 3’s offer and that “Level 3’s response to this offer was to terminate the meeting and file its December 16 letter with the FCC and to the Department of Justice – with no reference to Comcast’s good-faith offer,” and that “Level 3’s actions in this regard are in bad faith.” Is this true?A4: No. This statement is false and completely misleading. Comcast neglects to mention the fact that this offer, and other matters discussed in the meeting Comcast mentions, were subject to a nondisclosure agreement (“NDA”) binding on both parties. 3 Comcast violated the NDA; used confidential information to mislead the FCC, the Department of Justice and the public; and acted in bad faith. Level 3 has requested that Comcast correct the public record on this and other misstatements, 4 but, to date, Comcast has not done so. Q5: Comcast says that Level 3 wants the FCC to impose restrictions on Comcast but insists “that government oversight would be appropriate only for those parts of the Internet that Level 3 wants to define as being ’off the backbone’ – a definition designed solely to advantage Level 3 given its unique dual role as a Tier 1 provider and a CDN.” Is this correct?A5: No. In addition to Level 3; ATT, 5 Verizon, 6 Global Crossing, 7 Qwest 8 and Sprint 9 all offer commercially available CDN services. Each of these companies is considered a “Tier 1” U.S. Internet backbone operator. 10 There are other companies that offer combinations of IP backbone and CDN services. The market is clearly competitive. Comcast is seeking to confuse and mislead by drawing inappropriate comparisons between competitive markets and high-speed Internet access markets where Comcast has a dominant position. Q6: Comcast states, “What Level 3’s new position is all about is its view that broadband Internet customers – on Comcast’s network but eventually on all ISP networks – should subsidize Level 3’s business by shouldering massive new costs imposed by Level 3.” Is this what Level 3 wants?A6: Of course not. Once again, Comcast is trying to mislead and confuse. As a letter from James Crowe, CEO of Level 3, to Neil Smit, president of Comcast Cable, makes clear, 11 Comcast is well aware of the facts of the situation. However, to correct the record, Level 3 must point out the “massive new costs” that Comcast references are not new at all, and are the direct result of Comcast offering high-speed Internet services to its residential subscribers. Those subscribers expect that the service provided by Comcast will permit access to and delivery of all of the content lawfully available on the Internet. As use of the Internet continues to increase, and as more and richer video and other content continues to be available to consumers, all of the networks carrying Internet traffic (including Level 3’s and Comcast’s) will have to add more capacity in order to deliver service to their customers. We don’t want a subsidy from Comcast, but we also don’t want to pay a subsidy to Comcast. What we do want is for the future of the Internet to be filled with competitive content, with innovation, and with choice for consumers to see and hear what they want. Q7: What about Comcast’s assertion that because Level 3 hands Comcast more content than Comcast hands to Level 3, Comcast must unfairly incur additional costs. Is this true?A7: Comcast makes one factually correct observation, but then reaches an illogical and unsupportable conclusion. First, it is true that Level 3 expects to hand Comcast more content than Comcast hands to Level 3. This is because Level 3 has a substantial number of online content companies as customers and Comcast has millions of consumer Internet access customers that can only be reached through Comcast. Both Comcast and Level 3 must incur costs to carry all of the content, including movies and TV shows that require large amounts of bandwidth, which goes both to and from Comcast’s customers. Comcast is well aware of these facts. 12 However; the conclusion Comcast draws is that it is unfair for Comcast to have to incur the cost to carry growing amounts of content to and from its residential customers. This position entirely ignores the fact that Comcast’s customers already pay to receive online content. Comcast advertises that its customers are entitled to receive 250 gigabytes (GB) of content per month. 13 And now Comcast, with a clearly dominant position in the relevant markets, wants to charge Level 3 for what its customers already pay for. Comcast cannot, through repetition of a simplistic and misleading statement, make the conclusion true. Q8: If, as Level 3 says, Comcast is trying to distract the FCC, the Department of Justice and public attention from the essential issue, what is that issue?A8: The fundamental issue is this: Who gets billed as Level 3 and Comcast each seek to get a return on their increasing costs? If both Comcast and Level 3 operate in a competitive market, then the marketplace should decide. If, on the other hand, Comcast is found to have a dominant position in a market for consumer Internet access, then Comcast most certainly does not get to unilaterally decide.
1 “Comcast’s dispute with Level 3 arises from an abrupt change in a peering arrangement. According to accounts of the dispute appearing in the press and elsewhere, Comcast recently sought to renegotiate its contract with Level 3, demanding a recurring fee for carrying Level 3 traffic to and from Comcast broadband customers. According to many accounts, Comcast had never before requested such a fee.” (2010, December 8). Letter from the New America Foundation with the Media Access Project and Free Press. Retrieved from http://www.newamerica.net/publications/resources/2010/letter_regarding_comcast_corporation_and_level_3_communications_dispute2 “Specifically, Level 3 has offered to interconnect our networks without charge to Comcast in a way that would greatly reduce any additional Comcast expense for intercity backbone capacity. In contrast, Comcast, Level 3 and others typically charge customers, including MSOs, for this same kind of interconnection, so we believe this compromise is both technically feasible and financially beneficial to Comcast.” (2010, December 13). Letter from James Crowe, CEO of Level 3, to Neil Smit, president of Comcast Cable. 3 “Prior to engaging in efforts to resolve our differences, John Schanz and I had a discussion – at John’s request – to clarify that the discussions between us would be subject to our Nondisclosure Agreement, and that neither party would publicly disclose the offers, counteroffers and responses of the other party in these discussions.” (2010, December 17). Letter from Jeff Storey, president and COO of Level 3, to Neil Smit, president of Comcast Cable. Retrieved from http://fjallfoss.fcc.gov/ecfs/document/view?id=7020924519 4 “As a result, I expect that you will want to have Comcast representatives promptly correct your public and FCC statements in a manner that is at least as public as the manner in which they were initially made.” (2010, December 17). Letter from Jeff Storey, president and COO of Level 3, to Neil Smit, president of Comcast Cable. Retrieved from http://fjallfoss.fcc.gov/ecfs/document/view?id=7020924519 5 AT&T Corporate Website. (2010, December 20). Content Distribution. Retrieved from http://www.business.att.com/enterprise/Family/digital-media-solutions-enterprise/content-distribution-enterprise/ 6 Verizon Wireless Corporate Website. (2010, December 20). Content Delivery Network. Retrieved from http://www.verizonbusiness.com/us/govt/networx/enterprise/products/content_delivery.xml 7 Global Crossing Corporate Website. (2010, December 20). Enterprise CDN Solution. Retrieved from http://www.globalcrossing.com/enterprise/cdn/cdn_landing.aspx 8 Qwest Corporate Website. (2010, December 20). Content Delivery Network Service. Retrieved from http://www.qwest.com/networx/products/ipbased/cdns.html 9 Sprint Corporate Website. (2010, December 20). Content Delivery Network Services. Retrieved from https://networx.sprint.com/content/enterprise/cdn.html 10 Wikipedia (2010, December 20). Definition Tier 1 Network. Retrieved from http://en.wikipedia.org/wiki/Tier_1_network 11 “I will try one more time to clarify our position. I believe that there are at least some statements upon which we should be able to agree since I believe that the veracity of some are apparent to even the casual observer. Given your share of the residential Internet access market, the truth of these observations must be even more apparent to you.
- Your customers want to watch increasing amounts of online video on large screens at increasingly high quality on large screens
- This means increasing amounts of capacity must be installed in your network from your customer's home to the points where you interconnect with other IP networks that then interconnect with the content providers facilities
- This consumer demand for online video, games and other very high bandwidth content is already a big share of traffic and is expected to dominate Internet traffic in the fairly near term
- The Cisco Visual Networking Index website provides a respected third party view of this trend.
- Because online video demanded by your customers has far higher bandwidth requirements than the request sent by your customer, traffic will grow rapidly and the traffic ratios at interconnection points will be increasingly unequal
- Your access networks are designed with more capacity into the home versus out of the home to accommodate this reality
- Comcast and Level 3 will both need to incur increasing costs to add more capacity over the lengths of our networks (We think of this capacity-length metric as bit-miles) if we wish to meet this demand.”Letter from James Crowe, CEO of Level 3, to Neil Smit, president of Comcast Cable. (2010, December 13).
Forward-Looking StatementSome of the statements made in this press release are forward looking in nature. These statements are based on management’s current expectations or beliefs. These forward looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside Level 3’s control, which could cause actual events to differ materially from those expressed or implied by the statements. The most important factors that could prevent Level 3 from achieving its stated goals include, but are not limited to, the current uncertainty in the global financial markets and the global economy; disruptions in the financial markets that could affect Level 3’s ability to obtain additional financing; as well as the company’s ability to: increase and maintain the volume of traffic on the network; successfully integrate acquisitions; develop effective business support systems; defend intellectual property and proprietary rights; manage system and network failures or disruptions; develop new services that meet customer demands and generate acceptable margins; adapt to rapid technological changes that lead to further competition; attract and retain qualified management and other personnel; and meet all of the terms and conditions of debt obligations. Additional information concerning these and other important factors can be found within Level 3’s filings with the Securities and Exchange Commission. Statements in this press release should be evaluated in light of these important factors. Level 3 is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.