The Next Round of Fighting Over Net Neutrality (NFLX, LVLT, CMCSA, GE, VZ, GOOG)

When Netflix Inc. (NASDAQ: NFLX) recently signed a contract with Level 3 Communications Inc. (NASDAQ: LVLT) to store and deliver streaming video, the stage was set for the next round in the battle over who pays, and how much, for bandwidth-hogging video. One of the major broadband providers, Comcast Corp. (NASDAQ: CMCSA), had an answer: Level 3.

Level 3 doesn’t agree. The company accuses Comcast of sticking it with new fees for delivering content to Comcast’s own customers. Level 3 also points out that Comcast’s pending acquisition of NBC Universal from General Electric Co. (NYSE: GE) puts Comcast in the position of possibly favoring its own content over that of other providers. In a press release, Level 3 charges that Comcast’s action “threatens the open Internet and is a clear abuse of the dominant control that Comcast exerts in broadband access markets as the nation’s largest cable provider.”  Comcast replies that it should not have to bear the cost of double the network traffic that the Level 3/Netflix deal will bring to its network.

In a way, it all boils down to who gets to wear the black hat and be the bad guy. Clearly, doubling traffic implies additional cost to Comcast. But who gets to send its customers the bill? Comcast does not want to raise its rates to its customers, and Level 3 doesn’t want to raise its rates for Netflix, which in turn would need to raise its rates to its customers. For the moment, Level 3 has agreed to pay Comcast’s proffered rates “under protest” so that Level 3’s own customers weren’t left out in the cold.

What do we have here? A negotiating tactic or a genuine battle over net neutrality? Comcast won an earlier decision when a federal court ruled that the Federal Communications Commission does not have the authority to regulate broadband Internet service providers. Then Verizon Communications Inc. (NYSE: VZ) reached a separate deal with Google Inc. (NASDAQ: GOOG) that would keep wired Internet services neutral, but allow providers like Verizon and Comcast to charge more for mobile wireless access. Neither of these actions strengthens the position of those who support net neutrality.

Level 3 is taking its cause to regulators and legislators hoping to get a quick resolution in its favor.  Perhaps the market is picking a favorite. Both Level 3 and Netflix shares are up about 0.5% in early trading today, while Comcast is down by about an equal amount.

Paul Ausick