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Cable Technology Feature Article

February 26, 2014

There's No Such Thing as Free Beer - Or Free Internet Access

By George Ou, Policy Director, Digital Society

Proponents of free beer are outraged that Netflix has stopped buying beer from Cogent and instead agreed to buy beer from Comcast (News - Alert).  These activists are angry that Comcast has the temerity to charge Netflix for beer and they are taking their case to the Federal Beer Commission to demand Beer Neutrality.  They are outraged that Comcast has declined Netflix’s “generous” offers to join an “Open Beer Connect” program where Beer makers have the “opportunity” to donate their beer free of charge.

Of course, “beer” in this case, is analogous to network services and data delivery.  The story all started when a dispute erupted between business partners Cogent and Comcast.  Cogent and Comcast are two beer makers who had mutually agreed to a monthly beer trade.  The companies agreed to trade a roughly equal amount of beer without compensating each other financially.  Roughly equal in this industry means that neither company takes more than two times the beer than they give in return.  This is to account for natural volatility so that a temporary surge one way or the other doesn’t nullify the trade agreement.

One day, Cogent started taking more than twice the beer they gave back to Comcast.  Comcast could have demanded a nullification of the trade agreement but Cogent has a nasty history of disputes in the past where they will adopt a scorched earth strategy.  Cogent would refuse to buy from or sell any beer to Comcast and this would have resulted in a backlash on both sides since each company has unique distribution channels.  Many customers on each side would have been unable to obtain Comcast or Cogent beer.  Fearing a potential beer embargo, Comcast declined to enforce the trade imbalance and allowed Cogent to continue taking far more beer than they gave in return.

Image via Shutterstock

But Comcast beer is rapidly growing more popular among Cogent’s customers.  In fact it’s so popular that some of Cogent’s largest customers like Netflix almost exclusively buys Comcast beer rather than Cogent beer.  This is because Cogent was offering Comcast beer at below cost since Cogent pays nothing for the beer they take from Comcast.  Comcast bears all the cost of production while Cogent takes all the profits from Comcast beer sales.  Comcast could have theoretically taken just as much Cogent beer in return but nobody wants much of Cogent’s beer.

Cogent could essentially steal as much beer as it could carry, but how much it could carry away became a bottleneck.  The pipes that transport beer between Cogent and Comcast manufacturing facilities are already at full capacity.  Cogent’s CEO called Comcast’s CEO and demanded an upgrade of those pipes, but Comcast refused for obvious reasons.  This was a problem for Netflix, which desperately needed to buy a lot more Comcast beer than Cogent could supply, but didn’t want to pay full price from Comcast.  Cogent’s CEO went crying to the media and the regulators that his company is the victim of big bad Comcast because Comcast won’t upgrade their pipes to Cogent.

Comcast was losing huge amounts of beer to Netflix through Cogent without compensation but Netflix didn’t want to pay the full rate that Comcast has been asking for all these years.  So Comcast and Netflix came to a compromise price that’s probably higher than the below-cost prices charged by Cogent, but less than the price Comcast previously asked for.  Now Netflix buys beer directly from Comcast and they’re able to get as much beer as they need.  Cogent still gets to take and resell Comcast beer to other customers but they no longer act as the middleman in the Netflix deal.  Level 3 was in a similar position to Cogent a few years ago and they also cried to the media and the Federal Beer Commission but their complaints went unheeded.  In response, Level 3 agreed to pay Comcast for additional beer pipes but they managed to keep their existing trade deal that involved no money exchange.

Now this piece is obviously written as satire, but this analogy explains a serious issue in simple terms.  The implications are far reaching and Netflix is in a similar negotiation with Verizon (News - Alert) and probably other network providers.  It’s crucial for the media, the public, and regulators to understand what’s going on.

The beer trade agreement is analogous to a peering agreement between network providers.  Network providers ask other network providers to deliver each other’s data at no charge and it benefits both providers so long as they’re doing an equal amount of work.  If one network provider sends more data than it receives, it is demanding more work from its partner than it offers in return.  This is no different than taking more beer than you can give.

Both network services and data delivery require capital to create and the companies producing them need to earn a return.  This is why there is no such thing as “free beer” and no such thing as “free Internet” access.  Someone has to pay for these services and products that cost money to create.  Some might argue that Comcast charges too much, but Budweiser’s 2013 net income is 18.2 percent of revenue while Comcast’s 2013 net income is 10.5 percent of revenue.  The financial numbers are hardly indicative of price gouging.

Edited by Alisen Downey

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