Level 3 Unlikely, Unwilling Champion in Backbone Battle

Level 3 has emerged has an unlikely -- and unwilling -- champion of Internet backbone carriers in its battle with Comcast, industry and public-interest officials told us. Level 3 was “certainly reluctant” to engage in a public battle, but “there is no way to route around Comcast,” said John Ryan, Level 3 chief legal officer. “It is not in our DNA to seek government assistance. Our strong preference is where markets exist, the markets should discipline behavior.”

In December, Level 3 accused Comcast of violating net neutrality principles by charging what Level 3 claims is a “toll booth” to reach Comcast customers (CD Dec 1 p6). The controversy erupted within days of Level 3’s being named as the main backbone provider for Netflix. Comcast and its allies have accused Level 3 of a blatant shakedown timed just as Comcast was pressing the FCC to approve its merger with NBC Universal. “Merger conditions make great Christmas trees,” an executive of a tier-one company said.

Public-interest advocates have seized on the Level 3-Comcast dispute as proof of a need for net neutrality rules and of the growing power of cable companies, especially Comcast, over broadband access. “It pulls the curtain back for cable service providers,” said Susan Crawford, a telecom law professor who was a broadband policy adviser to President Barack Obama. “If there’s only one route and Comcast controls the route, they can kneecap their competitors.” Comcast did not respond to requests for comment.

The questions won’t go away, Free Press Research Director Derek Turner said: “They certainly can’t ignore it. And they're going to have to do something on it.” Technology companies like Level 3 have been slow to “grasp the need to be a player in Washington,” Turner said, but as cable companies continue to consolidate their grip on broadband, tech companies “are going to have make a tough decision” on whether they want to join in lobbying efforts. “The market has become less and less competitive, more and more concentrated and more and more vertically integrated,” Turner said. “And you'll see companies that have never been traditionally regulated getting involved, not because they're afraid of regulation but because they want to regulate somebody upstream.”

Allies of Level 3 are puzzled about why the company went public with its dispute. “Why they did that, I don’t know, but they did,” said Global Crossing Vice President of Regulatory Affairs Paul Kouroupas. “They're certainly outmaneuvered, outgunned in Washington.” Public Knowledge spokesman Art Brodsky agreed: “It’s sort of interesting that Level 3, which had stayed out of policy battles, suddenly found religion."

Some industry officials consider the Level 3-Comcast dispute a harbinger, as demand for online videos disrupts peering agreements (CD Jan 12 p7). “The Internet is becoming asymmetrical in that consumers are downloading more than they're uploading,” Kouroupas said. “The broadband ISPs are the ones who are going to benefit from that.”

Level 3 won support last week from fellow backbone carrier Voxel. In an ex parte filing dated Tuesday, Voxel said it wanted to “shed additional light on the escalating anti-competitiveness of Comcast’s technical practices.” Vice President Adam Rothschild wrote: “Through its ‘interconnect relations’ (peering) and network management practices, Comcast has deployed an ecosystem in which hosting companies such as Voxel are effectively forced to pay Comcast to serve its broadband subscribers.”

The matter is vital for Level 3, industry officials said. In 2005, the company’s liabilities outstripped its assets by $476 million. It recovered and has been in the black ever since, but the company’s overall equity has been erratic, and slipped nearly $600 million from 2007 to 2009, stock analyses show. “The primary ratings influence continues to stem from concerns that the company’s capital structure is not sustainable over the long term,” Moody’s Investors Service wrote about Level 3 on Tuesday.

Netflix’s star, meanwhile, is rising in Washington and Wall Street (CD Nov 15 p6). It therefore is a crucial partner that can help resurrect Level 3, which puts even more pressure on Level 3 in its battle with Comcast, Crawford said. “Getting this question right for them is very important to their bottom line,” she said. “So they must have been thinking about the role of Comcast in their negotiations with Netflix.”