Tickers in this Article: LVLT, CMCSA, NFLX, AKAM, LLNW, TWX, VZ
It seems like almost everybody enjoys a good tussle, but what do people do when both combatants seem unlikeable and disingenuous? That may end up being the dilemma for observers in the recent dust-up between Level 3 (Nasdaq:LVLT) and Comcast (Nasdaq:CMCSA). While the details of the dispute are arcane enough that it may only interest hard-core 'net-heads and those involved in the business side of the internet, the ramifications of this argument could stretch far and wide.

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The Facts, As They Seem
Both Comcast and Level 3 are spinning the details of this dispute to cast themselves in the best possible light, and numerous commentators are aligning themselves as well (generally against Comcast, it seems), but here is what the dispute really covers. Comcast is complaining that Level 3 is sending far more content to Comcast than they are sending back to Level 3 and that Level 3 is effectively acting as a content delivery network (CDN) "in disguise." As a CDN, then, Comcast argues that Level 3 should be required to pay the same sort of fees that it charges to other acknowledged CDNs like Akamai (Nasdaq:AKAM) and Limelight (Nasdaq:LLNW).

Level 3, though is arguing that this is unfair, that Comcast is erecting "tool booths" on the internet and trying to charge Level 3 for particular content. Level 3 pointedly mentioned that Comcast was demanding a fee "to transmit Internet online movies and other content," no doubt referring to the idea that Level 3's new deal with Netflix (Nasdaq:NFLX) will mean that a great deal more streaming movie content will go over Level 3's system and into Comcast, and suggesting that Comcast does not want the competition with its own pay-per-view and movie services. For its part, Comcast says it does not care what Level 3 is transmitting - only that the amount that Level 3 is sending into Comcast is far greater than what Comcast is sending back and that this violates the idea of peering. (For related reading, check out Netflix Moves The Goalposts Again.)

A Risky Move For Comcast?
On first blush, it seems odd that Comcast would pick this fight now. The company is already getting a lot of scrutiny as it attempts to close a deal to acquire 51% of NBC Universal in a deal with General Electric (NYSE:GE) and Vivendi. Certainly, that fact is not lost on Level 3 and it would hardly be surprising if Level 3 was counting on the idea that Comcast can ill-afford negative publicity and more attention from the FCC and/or public watchdogs right now.

On the other hand, Comcast may feel that it has to take action sooner or later and that the recently-announced change in Netflix pricing may lead to a surge of traffic over its systems. Moreover, Comcast has a valid point that Level 3 tries to hold itself out as an internet backbone provider to Comcast while selling itself to customers like Netflix as a CDN (Level 3 is in fact both).

Will Others Follow Suit?
If Level 3 feels the need to act now, it may be because more regulatory certainty on the issue of these fees would likely benefit the company (though not as much as avoiding fees entirely). If Comcast can charge Level 3, sooner or later it stands to reason that Time Warner (NYSE:TWX), Verizon (NYSE:VZ) and AT&T (NYSE:T) will want to do so as well. Perhaps, then, Level 3 is hoping that it can get something of a free-ride on these "last mile" providers under the banner of so-called net neutrality.

Once again, though, companies like Comcast are hardly sympathetic in this dispute. The quality of broadband service in the United States is pretty pathetic in terms of both bandwidth and cost, and last-mile providers like Comcast have to shoulder at least some of the blame. Still, Comcast can argue somewhat cogently that they cannot afford to increase speeds if they cannot share some of the burden with companies like Akamai and Level 3.

A Mess Now, Probably A Mess Tomorrow
Unfortunately for all involved, these disputes are likely to go on for quite a while. The current U.S. administration burned through a lot of political capital in its health care reform efforts, and may not want to wade into this mess. Without clear guidance from the executive branch, it may then trickle down to the FCC that maintaining the status quo is really the best option for now.

Clearly there are legitimate issues at stake between Comcast and Level 3. It also seems equally clear that having companies fight it out on a case-by-case basis is not good for industry, investors or internet users. Here's hoping, then, that all sides can sit down and work out a reasonable compromise that lets every link in the chain earn some economic return on its capital while giving better service to all of us. Don't hold your breath, though.

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