Netflix Refuses ISP Restrictions

POSTED BY Alex Zamenhof

Earlier this month, Netflix and Comcast announced a special arrangement that the two have entered into: namely, that Netflix streaming will be faster for people who have Comcast as their ISP. In a recent article, I found a fantastic description that breaks down exactly how video traffic on the internet works:

“Video traffic on the Internet, like the service that Netflix runs, is very sensitive to delays. As a result the Internet is built in such a way that content is distributed throughout the network in what’s known as content delivery networks, or CDNs. These services strategically place servers throughout the Internet and then they cache certain content, like streaming video, on these servers, so that when customers request a particular video it can easily and quickly be delivered to them. This reduces overall traffic on what’s known as the Internet backbone. And it results in a more efficient use of network resources. It also greatly improves performance and quality of service.”

Netflix has already built its own CDN (Content Delivery Network). The idea behind this is that Netflix would not have to pay a third party to provide its service to an ISP. However, big ISPs believe that Netflix should have to pay for the requisite increase in service necessary to stream effectively. While Netflix is trying to cut out the middle-man, the big ISPs are aiming to charge Netflix just as if it were a CDN itself. How do they achieve this? By dropping not so subtle hints that should Netflix refuse their offers of deals, then Netflix streaming may experience a slower connection on their servers.

This is tantamount to extortion in my book. Netflix is stepping on the toes of big ISPs, and they recognize this. With Comcast’s imminent merger with Time Warner, the ISP provider is slated to become the biggest provider in the US, owning some 30% of the market. Aside from antitrust issues, which are already being lobbed, it creates problems for emerging services like Netflix, Hulu, and Amazon who are all on the verge of premiering their own video streaming services, networks, or other similar things that have historically been the sole ground of the ISPs.

Netflix has made the logical statement that users who stream using Netflix’s own CDN experience significantly better viewing – a fact that is not in dispute by ISPs. This is now the critical juncture, where either Netflix tries to stand up for itself, or gets amalgamated into one or more of the existing ISPs.  Unfortunately, because Netflix is on top of its game in the streaming world, it is true that ISPs must spend more money to upgrade their servers to keep pace with Netflix – therefore, it does make sense that those ISPs want a portion of the pie in exchange for upgrading their servers. I believe that in the near future, we will either see one or two ISPs dominate, or a whole host of choices: perhaps Netflix, Amazon, Hulu, Facebook, etc. will begin to pioneer their own subscription services to compete with the big ISPs. This would put the US more in line with other nations around the world, where there are a multitude of choices, rather than just a few big names.

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YOU, ME, and the LECs

POSTED BY Alexander D. Schultheis

The Telecommunications Act of 1996 (TCA), codified at 47 U.S.C. § 222, was a major step forward in improving competition for Competitive Local Exchange Carriers (CLECs) in their respective marketplaces.  A recent ruling by the SecondCircuit in Southern New England Telephone Co. v. Comcast Phone of Connecticut, Inc., 718 F.3d 53, (2nd Cir. 2013), made sure the TCA’s purpose was not undermined. The Second Circuit held that “former” monopolist ILECs, such as AT&T, are still required to provide indirect transit service access to CLECs at regulated rates, despite no longer holding exclusive monopolies under state law.

Section 251(a) of Title 47 of the United States Code requires all telecommunications carriers to “interconnect” their networks with one another for the sharing and mutual exchange of traffic. Specifically, § 251(c)(2) and § 252(d)(1) require ILECs, like AT&T, to connect all other carriers (including CLECs) at what is known as Total Element Long-Run Incremental Cost (TELRIC). This is a regulated rate by the TCA, and uses a complex formula to determine a price range for what ILECs may charge. The policy in requiring ILECs to connect all other carriers into their network, and in some cases their physical facilities, is to ensure that they do not exploit their previous monopoly status prior to the TCA’s passage.

There are two kinds of interconnection: Direct and indirect. Direct interconnection occurs where the carriers link or attach their equipment to the actual network infrastructure of another ILEC. Indirect interconnection occurs where the carriers attach their equipment to the physical facilities or equipment of the ILEC, thus gaining access to the network in a “round-a-bout” manner. The main difference between the two methods of interconnection boils down to financials. When carriers are directly connected to one another, there is a free-flow of exchanging traffic between them. However, new market entrants (the CLECs) do not possess the balance sheet to directly connect to the network infrastructure of the ILEC, and thus choose to attach their equipment to the ILEC’s equipment and facilities. Naturally, the ILECs charge a rate of use for this service, which routes traffic transit service between the ILEC and the CLEC.

In the particular case at issue, a small communications company known as Pocket Communication (Pocket), a CLEC based in Connecticut, negotiated a transit service agreement with AT&T. Pocket originally petitioned the Connecticut Department of Public Utility Control (DPUC) to review the terms of the agreement. Pocket alleged AT&T violated Connecticut state law and the DPUC’s prior 2003 decision in a proceeding under the auspices of the TCA involving Cox Communication, both which required AT&T to charge the TELRIC regulated rates for transit service. Specifically, Pocket alleged AT&T engaged in price discrimination by charging Connecticut carriers higher rates than carriers in other states, and requested the DPUC to lower them. AT&T argued that its service did not constitute interconnection under § 251, thus allowing them to charge higher negotiated rates. The DPUC ultimately sided with Pocket, and ordered the rates lowered not only to Pocket but to other carriers who provided transit service through AT&T as well.

On first appeal, the District Court rejected AT&T’s argument that the DPUC was “preempted” by the FCC into adjudicating this matter. The District Court held that “interconnection” under § 251 of the TCA included indirect interconnection through transit service with other CLECs because the goal of the TCA was to promote competition, and it would be very difficult for CLECs to compete without at least minimal, indirect interconnection. Thus, the DPUC’s order to lower rates to Pocket was affirmed. However, the District Court reversed the mandatory lowering of rates, especially to carriers in other states who were not parties to the litigation. This is because the TCA’s preferred rate-setting method is still private contract negotiations, with the TELRIC rates serving as a guide of sorts in determining what to charge.

On a second appeal, the Second Circuit had to answer the classification question: Does AT&T’s status fall under § 251(a), which addresses the general duties of all telecommunications carriers, thus allowing them to charge higher negotiated rates, or are they under § 251(c), which addresses the obligations of “former” monopolists, who must provide service at the lower regulated rates? The Second Circuit held that AT&T’s obligation to provide indirect interconnection transit service is an obligation under § 251(c), because it ensures that indirect interconnection will facilitate mutual transit service between new CLECs in the market. The Court reasoned that while AT&T may argue they fall under § 251(a), this section only provides a broad policy goal that all carriers interconnect, but does not specify how, whether direct or indirect. Whereas, under § 251(c), ILECs are required to provide at least indirect interconnection to any CLEC who asks to be connected to their network.

Given the importance of disseminating information in today’s marketplace, there is an increasing importance to ensure competition in the telecommunications industry. It is important to ensure that industries like this do not contain a high degree of concentration, for such concentration may act as a barrier to communicating salient and valuable information between consumers and businesses alike. By strengthening the TCA’s primary goal of increasing competition, the Second Circuit has taken a step towards ensuring that consumers are not left with a limited number of choices from which to access information, or having to pay higher rates to access this information. This public benefit far outweighs any private commercial gain that ILECs may experience through charging higher negotiated rates CLECs.

In particular, it is persuasive that the Second Circuit pointed out that while ILEC “giants,” like AT&T, no longer possess state-sanctioned monopolies because of the TCA’s implementation, they still do possess leverage by controlling access to their network. If “former” ILECs were permitted to still charge higher negotiated rates for access to their transit services, despite no longer possessing a state-sanctioned monopoly, they could effectively continue their dominance of the industry, preventing its de-concentration, and thus limiting competition. Given how important Local Exchange Carriers are today in providing a means of communication across the nation, the Second Circuit’s ruling is consistent with ensuring the TCA’s primary goal of increasing competition, and, as a secondary matter, ensuring the public’s benefit to accessing information from a carrier of their choice.

The Denial of NCAA’s Motion to Dismiss Student-Athletes Name and Likeness Licensing Litigation

POSTED BY Rajat Bhardwaj

The recent denial of Motion to Dismiss of National Collegiate Athletic Association (NCAA) Student-Athlete Name and Likeness Licensing Litigation by District Judge Claudia Wilken marked a drastic change in thought on compensating student athletes. A group of twenty-five current and former college athletes pursued two claims against the NCAA: four pursued a right of publicity claim for misappropriation of their names, images, and likeness; and twenty-one pursued an antitrust claim for NCAA conspiring with Electronic Arts Inc. (EA) and Collegiate Licensing Company (CLC) to restrain competition in the marker for commercial use of their names, images, and likeness. The most recent dismissal only addressed the latter under the Sherman Antitrust Act, 15 U.S.C. §1.

This action stems from May 2011 when the Plaintiff’s filed the second Consolidated Class Action Complaint (2CAC). They alleged that the NCAA required student athletes to sign forms relinquishing all rights to commercial use of their images, including after they graduated and no longer subject to NCAA regulations. NCAA subsequently relied on these “misleading” forms and sold and licensed the student-athletes names, images, and likeness to third parties such as EA and CLC, who then made profit from these agreements. In September 2012, the Plaintiffs narrowed their claims specifying the class of students to include whose names, images, and likeness were featured in game footage or videogames; emphasizing damages from review generated in live television broadcasts; and identifying specific markets: “Division I college education market where colleges and universities compete to recruit the best student-athlete” and the “market for the acquisition of group licensing rights for the use of student-athletes’ names, images and likenesses in the broadcasts or rebroadcasts of Division I basketball and football games and in videogames featuring Division I basketball and football.”

This was followed by a third Consolidated Class Action Complaint (3CAC) which maintained the Plaintiffs’ price fixing and group boycott claims; added the class specification; and included six current NCAA football players to the complaint. In September 2013, EA and CLC agreed to a settlement with Plaintiffs but the NCAA claim remained affective. The court recently denied the motion to dismiss the complaint on three grounds.

First the court recognized the Plaintiffs’ theory alleges that NCAA’s prohibition of monetary compensation on student athletes hinders competition in the market for Division I student-athletes which would otherwise prevail in a competitive market. Although the court recognized tradition of amateurism in college sport, it asserted that this does not bar students from receiving monetary compensation for commercial use of their names, images, and likeness.

Second, considering the allegations in 3CAC most favorable to the Plaintiff, the court suggested that it is plausible broadcast footage, especially stock footage and broadcast footage sold to advertisers, was used primarily for commercial purposes. Thus, the First Amendment does not dismiss Plaintiffs’ claims related to broadcasting.

Finally, NCAA argued that the Copyright Act preempts the application of right of publicity to broadcast college football and basketball games. However the court noted that the right of publicity claims of the Plaintiff was notably different than those protected by Copyright Law since they do not actually own any game footage described in the complaint. On the contrary, the Plaintiffs’ seek the right to license the commercial use of their names, images, and likeness in certain broadcast footage. Furthermore, federal courts have emphasized, “Intellectual Property rights do not confer a privilege to violate the antitrust laws.” Thus, the Copyright Act does not affect the underlying claims because they are based on injury to competition and not on misappropriation.

The Plaintiffs and NCAA have not yet engaged in settlement talks but this case may carry a risk of tens of millions to even billions of dollars. Where one side of the continuum maintains lack of compensation to be essential to maintain integrity of the amateur culture of college sports, the other asserts fairness in providing athletes with compensation, beyond college scholarship, for using the students’ names, images, and likeness. If settlement talks do not commence soon, we are sure to see an energetic debate where tradition clashes with equity.

It is clear that NCAA is generating significant revenue, $871 million  in revenue for 2011-2012 with 81 percent from television and marketing rights fees, by utilizing the likeness of their athletes. A duty is owed to these athletes to ensure that at least a certain level of consideration is allotted to them for their service beyond a college scholarship. Not all student athletes are able to ensure a decent standard of living after they graduate and some come from fairly unprivileged backgrounds. It is important to look out for their futures, as it is their hard work and dedication that has provided the NCAA with its level of success.