Making Sense of Recent Internet Controversies: Level 3, Zoom, OpenDNS

The last weeks revealed three open Internet controversies. In these controversies, phone or cable companies abused their power over users’ access to the Internet to harm innovators and limit how consumers could use their Internet connections. These revelations come as the FCC and DOJ are reviewing the competitive impacts of the Comcast-NBC merger and as the FCC is (reportedly) about to issue a network neutrality rule. That is, these revelations come as the phone and cable companies are supposedly on their “best behavior.”

There are the three controversies, whose facts and implications I try to unpack below.

  1. A company called OpenDNS revealed to the Washington Post that Sprint Wireless is (and Verizon Wireless had been) blocking its services. In addition, industry white papers suggest that carriers should block services like OpenDNS based on the pretense of “security.”
  2. A company called Zoom Telephonics filed a complaint with the FCC against Comcast because, in short, Comcast is blocking consumers‘ ability to use Zoom modems to access the Internet.
  3. A huge company called Level 3 issued a press release accusing Comcast of imposing enormous charges on Level 3 when Level 3 tries to deliver Netflix’s streaming movies and other content to Comcast subscribers.

Telecom law students would recognize the first issue, OpenDNS, as a pure “net neutrality” issue. They would recognize the second issue, Zoom, as a “device attachment,” or “Carterfone” issue (in honor of an FCC decision by that name). But they would scratch their head in confusion and concern at the third issue, Level 3. This looks either like a common interconnection negotiation or a new kind of threat to the open Internet by a powerful cable company.

I will give the implications upfront. On substance, they reveal why the FCC needs to ensure any of its rules are not riddled with loopholes permitting threats to an open Internet. On procedure, they reveal why the FCC needs to adopt simple, inexpensive, rapid procedures for companies and consumers to file complaints on such issues, and wield a stick to deter these and future abuses.

OpenDNS

OpenDNS is a direct competitor of all the phone and cable companies providing Internet service, as they provide DNS service as well. What is DNS service? It stands for Domain Name Service. Devices that are connected to the Internet have IP addresses, which are similar to phone numbers. So if you want to reach Facebook’s servers, they have an address. That address is a long numerical string. You will not be able to remember it.

To make addresses easy to remember, we have a way of translating those numbers into words, like “facebook.com” or “whitehouse.gov.” Some company, a “DNS service,” will translate the words you type into your browser into the right numerical address so you can reach Facebook.

Usually, your Internet Service Provider (say AT&T, Verizon, Comcast, or Sprint Wireless) will have a DNS service and it’ll be your default service. These companies sometimes make money when you mistype; you punch in facebk.com, which doesn’t match any number on the Internet, so your ISP sends you to a search page. On that search page are advertisements, for which the ISP gets paid. Voila, the DNS service makes money for the carriers.

You can choose an independent DNS service, like the one offered by OpenDNS or Google. Why would you do that?  Their DNS service might be faster. If you bounce around the web a lot, a faster addressing system would make pages load faster. Plus, these independent services may have innovative options for businesses and parents–for example, when your child punches in certain violent or indecent domains, the DNS could refuse to find such addresses.

I am not sure how long Sprint has been or is blocking OpenDNS and which other companies were doing so (Verizon is mentioned in the story). But Sprint’s incentive for doing so is obvious–Sprint could block a competitor that would take money out of its pocket. As Sprint Wireless was blocking a competing application, this would be a clear network neutrality issue.

Zoom Complaint

Zoom makes modems. What’s a modem? It’s that device at your home that connects your computer to the Internet. If you have Comcast as your Internet service provider, odds are that Comcast provided you a modem. But you could go to a store like Best Buy and buy your own. That modem could be made by Zoom or Motorola or others. While Zoom is one of the biggest sellers of modems this way, it is still just a small company trying to sell its products to willing customers.

Comcast has decided that it will block your ability to use a Zoom modem.

Why would it do that? If you’re using a Comcast modem, Comcast has more control over its features. Also, Comcast charges you a monthly rent for a modem, from which it makes a healthy profit.

The ability to attach any device to an Internet connection is the third principle of the FCC’s Internet Policy Statement. It’s also an old telecommunications principle beloved in FCC circles, usually referred to as “Carterfone.” The Carterfone case, decided in 1968, come from the era when AT&T was the national monopoly and your phone was hard-wired into the wall. You then rented your phone from AT&T for what amounted to thousands of dollars over the years. The FCC changed that in a series of decisions, and by the 1980s you could plug whatever you wanted into a standard phone jack, without AT&T’s permission, and without paying a rent. Since AT&T offered you a black phone … or another colored phone… the new options were extremely innovative. They included the answering machine, the fax machine, and the computer modem–and so making the Internet possible.

Comcast is violating the Carterfone principle, listed in the Internet Policy Statement. This reveals one threat to competition in devices, and therefore to innovation we’ve expected in the device market.

Level 3/Comcast

Level 3 just took on Netflix as a customer, and delivers Netflix’s movies and TV shows across its backbone to hand off to networks like AT&T and Comcast. As a result, subscribers of AT&T and Comcast Internet services would be able to watch the content they want to watch on Netflix. So Comcast made a “take it or leave it” threat to Level 3, forcing Level 3 to pay Comcast a lot more money to deliver what would be more traffic. These costs would likely be passed onto Netflix, which would weaken Netflix–a competitor to Comcast’s cable TV offerings.

This is the one confusing people right now. I have been on dozens of email strings, on several listservs, about the significance of this issue. I have seen investor reports, spoken to journalists, lawyers, researchers. It reminds me of when Apple’s iPhone refused to accept Skype into the App Store–people weren’t sure what to make of it initially. With Apple and Skype, that seemed like an anticompetitive action. But people didn’t traditionally worry much about choices made by device-makers like Apple, because the device market is generally competitive. Rather, people had worried about the phone or cable companies exercising their last-mile power over Internet users in a way to affect the potentially competitive markets of devices (see Zoom) and applications (see OpenDNS, among others). In the end, it turned out, that AT&T itself had been involved in the Apple decision to exclude Skype–so the AT&T threat was present.

The confusion with the Level 3 situation is that people usually think of the backbone market as competitive, or at least competitive enough not to warrant much regulation. What’s the backbone market? It’s kind of like the long distance lines for the Internet, connecting all the local networks. Because they connect whole cities, and don’t require building a line to every single home in a neighborhood, the cost structure of the backbone is such that you could conceivably have several competitors. (If you remember, we had companies like MCI and Sprint, in the 1980s, competing in long distance, though not in local calls, because of the costs of building the long networks versus the local networks.)

The FCC has not wanted to regulate the backbone market. It issued an excellent, kind of “telecom-famous”paper about this issue in 2000, called the Digital Handshake.  The main arguments against regulation were: (1) there was competition in the backbone market, so regulation was unneeded, and (2) it ain’t broke, don’t fix it. A lot has changed in the past 10 years. The backbone market has become more concentrated, as has the ISP market. And technologies have advanced, permitting certain discriminations in the backbone transmissions that were not possible 10 years ago. An independent problem is: we know very little about the market, as the FCC gathers little information and the agreements are generally confidential.

Level 3 is a backbone. It engages in commercial deals with other backbones and end-user ISPs to exchange and deliver traffic. In Comcast’s version of the story, Level 3 is just trying to get a better deal than backbones usually get for delivering traffic. Ordinarily, if this were true, Comcast would have a point.

What complicates this story is that Comcast is not just a backbone in a competitive backbone market; it is also an ISP that controls access to the Internet in 16 million households in an uncompetitive market usually controlled by one local cable monopoly and one local phone monopoly. Moreover, cable companies dominate the market for local wireline Internet access. Phone companies cannot compete well because cable technology enables faster Internet access. Plus, not all phone companies can offer TV and Internet in a “bundle” like cable companies can. So Comcast has what economists call a termination-access monopoly over 16 million homes, meaning if Level 3’s customers want to reach those 16 million people, Level 3 has no choice but to deal with Comcast. Comcast has essentially a monopoly over those people (even if a temporary one).

Comcast’s actions reflect the usual concern in telecom regulation: a company leveraging its market power in the last-mile network (traditionally the least competitive part, and the one least susceptible to competition). It is leveraging that power into the parts of the network that are potentially competitive: the backbone market and the application market. This is exactly the network neutrality concern and the Carterfone concern.

What application will be affected? Netflix. And so will any online TV company that competes with Comcast cable offerings, its video on-demand offerings, and its online on-demand offerings.

So–is this just a backbone dispute or a threat to the open Internet by a last-mile provider?

It looks like a threat to me, but the facts are still emerging.

What to Do?

The implication of these violations is clear: we can’t put our head in the sand and hope that the Internet remains the amazing general-purpose engine of innovation, speech, and competition it has been traditionally been.

The FCC–our telecommunications agency–needs to ensure it has the jurisdiction and substantive rules to address new and dangerous threats to users’ and upstarts’ ability to reach consumers through the telecommunications networks. Very simply, the rules should ensure that the FCC can reach actions by phone and cable companies that threaten Internet freedom, even if those actions are laundered through contracts with phone-device makers like Apple or backbone contracts. The FCC need not predict these actions in advance; phone and cable companies will be creative in their attempts to avoid any rules that exempt, say, undefined classes of “managed services.”

Beyond that, upstarts and consumers need a place to go where they can file complaints, seek redress, and get legal clarity. The FCC needs to ensure that its rules for addressing complaints are cost-effective, quick, neutral, and relatively simple. Otherwise, with labyrinthine FCC procedures, the billion-dollar  phone and cable companies will be able to use their political power and vast wealth to wear down and defeat any upstart. Unless the FCC is willing to act, and impose severe penalties, it’ll be cheaper for phone and cable companies to block competitors than to invest in innovation.

The FCC has an opportunity to address these issues in an upcoming net neutrality rule. It should take that opportunity, as the carriers may soon not be on their “best” behavior.

2 thoughts on “Making Sense of Recent Internet Controversies: Level 3, Zoom, OpenDNS

  1. Tim Wu says:

    Very helpful Mr. Ammori, thank you for posting.

  2. Michael Carley says:

    Well written. I look forward to reading more of what you write.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 51 other followers