As the politics of net neutrality keep heating up, Senator Pat Leahy and Representative Doris Matsui introduced the Online Competition and Consumer Choice Act of 2014.

This bill requires the FCC to forbid paid prioritization of data. But then, Senator Leahy was quoted in several media outlets talking about how the bill would stop things like the recent peering deal between Netflix and Comcast. I’ve read the proposed bill and it doesn’t seem to ban those kinds of peering arrangements. His comments point out that there is still a lot of confusion between paid prioritization (Internet fast lanes) and peering (interconnection between large carriers). The bill basically prohibits ISPs from creating internet fast lanes or in disadvantaging customers through commercial arrangements in the last mile

The recent deals between Netflix and Comcast, and Netflix and Verizon are examples of peering arrangements, and up to now the FCC has not found any fault with these kinds of arrangements. The FCC is currently reviewing a number of industry peering agreements as part of investigating the issue. These particular peering arrangements might look suspicious due to their timing during this net neutrality debate, but similar peering arrangements have been around since the advent of the Internet.

Peering first started as connection agreements between tier 1 providers. These are the companies that own most of the long haul fiber networks that comprise the Internet backbone. In this country that includes companies today like Level3, Cogent, Verizon and AT&T. And around the world it includes companies that you may not have heard of like TeliaSonera and Tata. The tier 1 providers carry the bulk of the Internet traffic and peering was necessary to create the Internet as these large carriers need to be connected to each other.

Most of the peering arrangements between the tier1 carriers have been transit-free or what is often referred to as bill-and-keep. The traffic between the major carriers tends to balance out in terms of originating and terminating volumes and in such cases it doesn’t make a lot of sense for two carriers to bill each other for swapping similar amounts of data traffic.

But over time there were peering arrangements made between the tier 1 carriers and tier 2 providers that includes the large ISPs and telcos. Peering was generally done in these cases to make the network more efficient. It makes more sense to interchange traffic between and ISP and somebody like Level3 at a few places rather than at hundreds of places. It’s always been typical for these kinds of peering arrangements to include a fee for the tier 2 carrier, something that is often referred to as a transit fee.

There is no industry standard arrangement for interconnection between tier 1 and tier 2 providers. And this is because tier 2 providers come in every configuration imaginable. Some of them own significant fiber assets of their own. Others, like Netflix have a mountain of one-directional content and own almost zero network. And so tier 2 providers scramble to find the best commercial arrangement they can in the marketplace. One thing that is almost universal is that tier 2 providers pay something to connect to the Internet. There is no standard level of payment and transit is a very fluid market. But payment generally recognizes the relative level of mutual benefit. If the traffic between two parties is balanced then the payments might be small or even free. If one party causes a lot of costs for the other then payments typically reflect that imbalance.

Netflix has complained about paying Comcast and Verizon. But those ISPs wanted payments from Netflix since the traffic from Netflix is large and totally one-directional. Comcast or Verizon needs to construct a lot of facilities in order to accept the Netflix traffic and they don’t get any offsetting benefit of being able to send traffic back to Netflix on the same connection.

In economic terms, on a national scale the peering market is referred to as an n-dimensional market, meaning that a large tier 2 provider has the ability to negotiate with multiple parties to achieve the same result. For example, Verizon has a lot of options for moving data from the east to the west coast. But eventually the Internet becomes local, and that is where the cost and the contention arises. As Internet traffic enters a local metropolitan market it begins to hit choke points where the traffic can overwhelm the local facilities and cause congestion. The payments that Comcast or Verizon want from Netflix are to build the facilities needed for getting Netflix movie traffic to and through these local hubs and chokepoints.

Peering arrangements like this make sense. I find it hard to believe that the FCC is going to get too deeply involved in peering arrangements. It’s an incredibly dynamic market and carriers are constantly rearranging the network as they find better prices or more efficient network arrangements. If there is any one place where the market works it is between the handful of large carriers that handle the majority of the Internet traffic. Most of the bad things that can happen to customers are going to happen in the last mile network, and that is where net neutrality should properly be focused.

And why the picture of the kitten? I work at home and at my very local part of the network this is the kind of peering that I often get.