In Net Neutrality Debate, You Are Not a Peer

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. 

Then, when Netflix refused to sign a new peering deal, Verizon started slowing their traffic. Net neutrality advocates were horrified. They compared it with slowing traffic on a bridge. Verizon compared it with picking up cows that weren't paying for grazing rights. 

Netflix finally agreed to a new deal through Equinix (EQIX), which will measure the bits it is sending Comcast so Comcast can charge for them. But it still screamed bloody murder about all this and has yet to make deals with weaker ISPs serving the last mile.

The FCC's latest proposed rule on net neutrality tells Netflix to make the deals.

The agency will set a base-line speed for last-mile ISPs, accommodating video, but companies like Netflix that need a huge amount of downstream bandwidth will have to negotiate for a "fast lane" to handle their needs, and the FCC will monitor these deals to assure fairness.

Net neutrality advocates fear that Netflix and WalMart (WMT) may pay for fast service, but new start-ups won't be able to and thus competition will be restricted. Netflix worries that it will pay Comcast for fast service and Comcast will use that money to push Netflix out of the video market.

But new start-ups, by their nature, don't need this kind of bandwidth. They can get by on existing agreements. And the FCC says that if the last-mile guys try to press their advantage they could step in and call those ISPs "common carriers," imposing all sorts of expensive rules on them.

This is the last-mile's biggest fear.

When AT&T (T), or even Google, offer to provide super-fast gigabit speeds to homes (most cable modems send data at just a few megabits) they demand to be let out of the common carrier straitjacket. If they're going to spend the $100 billion needed to boost Internet speeds by 100 times in the last mile, they want to get their money out.

When Google came to my hometown of Atlanta with this offer recently, based on the possibility it might give us Gigabit Internet, the city was anxious to sign on. Now AT&T is offering Atlanta a similar deal, and the city will probably be just as anxious to sign, because we all want super-fast Internet.

But why, when video takes just a few megabits? Because there is more to the Internet than TV, and we want it. We want it now

At the time of publication the author owned shares in CMCSA and GOOG.

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