Comcast complains it will make less money under Calif. net neutrality law

California’s net neutrality law will cause “significant lost revenues” for Comcast, the nation’s largest cable company said in a court filing this month.

Comcast described the net neutrality law’s potential impact on its ability to charge online service providers and network operators for network interconnection.

“The paid interconnection provisions will harm Comcast’s ability to enter into new, mutually beneficial interconnection agreements with edge providers that involve consideration, leading to a loss of existing and prospective interconnection partners and significant lost revenues,” Comcast Senior VP Ken Klaer wrote in the filing in US District Court for the Eastern District of California. (“Edge provider” is the industry term for websites and other online platforms, such as Netflix and Google.)

Comcast submitted its filing on October 3 as part of the broadband industry lawsuit that seeks to overturn California’s net neutrality law (SB 822), which is slated to take effect on January 1, 2019 unless the court grants a stay halting implementation. Comcast’s filing is meant to support the industry’s request for an injunction that would halt enforcement of the law while litigation is pending.

California enacted its net neutrality law because the FCC repealed federal net neutrality rules at the request of ISPs including Comcast.

Not quite a ban on paid interconnection

The California law’s actual impact on network interconnection deals is not clear-cut. The law explicitly prohibits blocking and throttling and bans paid prioritization in the “last mile” portions of broadband networks that lead directly to consumers’ homes. The law also prohibits ISPs from requiring payment in exchange for delivering Internet traffic to consumers.

But the law applies a different standard to network interconnection, a type of traffic exchange that happens at the edge of each broadband provider’s network. The law says that ISPs like Comcast may not engage in interconnection practices “that have the purpose or effect of evading the prohibitions” of the net neutrality law. In other words, Comcast can’t block or slow down traffic at interconnection points, and it can’t make paid interconnection the only viable option for reaching Comcast customers.

Websites can reach Comcast customers without paying for interconnection, but buying the interconnection service ensures a smoother path into the Comcast network.

Comcast famously courted controversy when it required Netflix to pay for interconnection. Netflix has been paying Comcast since 2014, but previously argued that interconnection should be free since Comcast customers were requesting Netflix traffic while Netflix bore the cost of building a network to deliver that traffic directly into Comcast’s network.

Although the California law would not ban payments such as what Netflix pays Comcast, Comcast argues that the law is ambiguous enough “that some edge providers and even intermediary networks, such as CDNs and transit providers, will assert that the law prohibits Comcast from receiving consideration for interconnecting and exchanging Internet traffic.”

These intermediary networks “will contend that Comcast and other ISPs must provide unlimited free capacity to them for their delivery of other parties’ (i.e., edge providers’) traffic onto Comcast’s networks,” Comcast argued.

The law will make it difficult for Comcast to negotiate new interconnection agreements with edge providers, Comcast wrote:

Comcast has been engaged in discussions with at least two large edge providers about entering into new interconnection agreements that would involve monetary consideration. The prospect of SB 822’s enactment and its ambiguous “prohibition” on paid interconnection have already delayed these commercial negotiations. If the law becomes effective, it will likely be the death-knell of these commercial discussions, as it would put Comcast in the untenable position of risking an enforcement action or litigation by entering into interconnection agreements that could be claimed—and ultimately deemed by the California Attorney General or a California state court—to violate SB 822’s paid interconnection provisions. Our ability to negotiate new paid interconnection agreements with other edge providers will likewise be harmed.

The law could put Comcast’s existing financial agreements with edge providers “under a similar legal cloud,” Comcast said. The California attorney general or a company that pays Comcast for interconnection “could contend that the compensation provisions in our existing interconnection agreements are void or unenforceable,” Comcast wrote.

“Edge providers could seek to legally compel us to provision additional network capacity without any reciprocal consideration, or refuse to pay invoices for interconnection and force us to sue for non-payment,” Comcast also wrote.

Comcast claimed the law “will harm our customers, resulting in a loss of good will and damage to our reputation as an ISP.” It’s not clear how much revenue Comcast would lose, as the company said, “The loss in revenues and other monetary damages that the law will cause to Comcast will also be significant and are difficult to calculate.”

Comcast said it has about 100 interconnection customers, “including with many large edge providers and with CDNs such as Akamai, Limelight, and Cloudflare.”

Comcast reported $21.7 billion of revenue and $3.2 billion of net income in the most recent quarter. It’s not clear how much of that comes from interconnection, but it’s likely a small percentage—most Comcast revenue comes from service fees paid by cable customers and its NBCUniversal subsidiary.

AT&T also objects

AT&T also complained about the California law’s interconnection provisions in a court filing, saying that the law “purports to regulate such [interconnection] agreements and may be construed to prohibit payment for direct interconnection in many circumstances.”

“Enforcement of this new legislation threatens to involve regulators in the minute details of carefully reticulated interconnection agreements—deciding, for example, when particular networks are entitled to ‘free interconnection,’ at what physical locations, and at what levels of capacity,” AT&T wrote. “Such unprecedented regulatory intervention would threaten the interconnection arrangements supporting the modern Internet and impair network performance to the detriment of network operators and their customers. That outcome would not only disserve the public interest, but cause AT&T substantial irreparable harm.”

AT&T noted that it has interconnection agreements “with providers such as Facebook, Netflix, Google, Amazon, and Apple” and said the law could “cast doubt on whether AT&T should continue providing interconnection services under these contracts, which presuppose that AT&T will be compensated for the costs it incurs.”

Comcast vs. Cogent

Comcast spent much of its filing discussing Cogent, a network operator that exchanges traffic with Comcast in about a dozen US data centers and has refused Comcast’s payment demands. Comcast said it fears that Cogent will “claim that the ban on paid interconnection extends to transit providers like Cogent directly or as potential agents of or ‘proxies’ for edge providers.”

Cogent operates a global network and has direct connections with many major ISPs. Edge providers pay Cogent for transit, and in turn Cogent distributes their traffic to wherever it needs to go.

Internet traffic flows in both directions between Cogent and Comcast. Comcast argues that Cogent should have to pay Comcast because Cogent sends more traffic into Comcast’s network than vice versa, and Cogent argues that Comcast should have to pay because Comcast doesn’t operate a global network. The result is a stalemate with the companies exchanging traffic without payment, but Cogent occasionally complains that Comcast isn’t upgrading its side of the network connections quickly enough.

Comcast’s court filing said the California net neutrality law will benefit Cogent:

Notably, reading SB 822 to ban paid interconnection, as some entities will no doubt do, is unlikely to save most edge providers any money. Rather than connecting directly to Comcast, they will now likely pay a third-party transit provider, such as Cogent, to reach Comcast’s network. So while middlemen such as Cogent will make money by routing additional traffic onto Comcast’s network, Comcast and other ISPs will not be able to offer these edge providers competing paid interconnection services, which could be more efficiently and economically desirable for both parties.

Comcast said it would thus have to pay more for network upgrades, “which will shift the costs onto Comcast’s end users.”

Cogent responds

Cogent CEO Dave Schaeffer was, as always, quick to challenge Comcast’s assertions. Cogent generally only exchanges traffic for free with other global network operators that can also distribute traffic to the entire Internet, he said. Since Comcast only operates a US network, it should have to pay for transit to reach the rest of the Internet, he said.

“They do not meet Cogent’s requirements [for free peering] yet we do peer with them, and it’s only because of their ability to hold their customers hostage and use that market power to gain connectivity,” Schaeffer told Ars.

Comcast’s court filing is “totally silent on how they get connectivity to the rest of the world,” Schaeffer continued. “They claim they built out a US network but make no claim of an international network. They state they do not buy transit. What they in fact do is force other networks such as ourselves to carry that traffic for them for free. Their allegation of us getting a free ride is really in fact what they are doing, as opposed to bearing the cost of operating a global network.”

Comcast argued in its court filing that paying Comcast for interconnection can ensure better performance for edge providers such as Netflix “due in part to fewer hops over which the traffic must travel.”

Schaeffer said there are disadvantages for edge providers that purchase interconnection from Comcast instead of buying transit from Cogent or other transit providers.

“You have to pay Comcast a higher price per megabit,” and interconnection with Comcast provides a path only to Comcast’s customers, he said. “You still have to buy transit to get to the rest of the Internet.”

Some edge providers purchase interconnection from Comcast because “they’re afraid without that they have no way of reaching Comcast customers” when the other paths into Comcast’s network are congested, Schaeffer said.

Without regulation such as California’s, Comcast can delay upgrades in order to let its connections to Cogent become congested, Schaeffer said. To avoid congestion when bandwidth needs increase, both Comcast and Cogent have to upgrade the ports that allow traffic to pass between them.

“They reluctantly honor their agreement with Cogent and they do upgrade capacity, but they do it in a very slow manner and it usually results in some level of congestion,” Schaeffer said.

But after California passed its net neutrality law, Comcast “began to turn up those additional ports much more quickly,” he said. Comcast accelerated the upgrades nationwide, not just in California, he said.

“I think the importance of California as a state has forced them to modify their performance everywhere,” he said.