Netflix stirred buzz last week by offering its customers a chance to bypass both its traditional DVD-rental business and its cable-TV channels: For $7.99 a month, subscribers could use a broadband Internet connection and stream movies or TV shows directly to their home computers or televisions.
Now, Netflix's new business model has erupted into a very public fight pitting Comcast Corp., the nation's largest broadband company, against a little-known but leading provider of so-called Internet backbone services, Level 3 Communications, which handles Netflix content.
Level 3 says Comcast wants to install a "toll booth" at the edge of its network to limit the impact of potential competitors. The Colorado company says it is fighting to protect the Internet as a level playing field for companies such as Netflix that want to use it to deliver content or applications of users' choice.
Comcast calls the battle an "old-fashioned" commercial dispute between two large companies that handle and exchange large volumes of data traffic. The Philadelphia company says Level 3 is trying to "disrupt the settled economics of Internet traffic to meet its new business plan."
Elevating the dispute's profile is its timing in the midst of two major dramas that feature Comcast as a lead player.
One is its proposed takeover of NBC Universal, which awaits approval by the Federal Communications Commission and the Justice Department. The deal would give Comcast control of a vast array of valuable content from NBC's fabled television network, its popular cable channels, and Universal Studios.
The other is the debate over a set of Internet-management principles known as "net neutrality," which would bar network owners from blocking, prioritizing, or disfavoring Internet data based on its content or origins.
A key decision by the FCC on net neutrality could come later this month, analysts say. Open-Internet advocates have been pushing Chairman Julius Genachowski to adopt strong neutrality principles, against staunch opposition from Comcast and other network owners.
Some net-neutrality advocates said the Netflix dispute, like the NBCU merger, illustrated market risks that arise when an Internet service provider also controls vast amounts of video content.
"If Netflix wants to reach Comcast customers, they have to go through Comcast - there's no alternative," said Derek Turner, research director at Free Press, a nonprofit media-policy group. "We need a cop on the beat to have the ability to intervene in these kinds of disputes on behalf of consumers."
The details of the fight between Comcast and Level 3 were themselves in dispute Tuesday, after days of back-and-forth statements over the fees Comcast has been seeking.
"By taking this action, Comcast is effectively putting up a toll booth at the borders of its broadband Internet-access network, enabling it to unilaterally decide how much to charge for content which competes with its own cable-TV- and Xfinity-delivered content," Level 3 said. "This action by Comcast threatens the open Internet and is a clear abuse of the dominant control that Comcast exerts in broadband-access markets as the nation's largest cable provider."
Comcast responded with a blog post from senior vice president Joe Waz, who said Level 3's position was "simply duplicitous."
In a letter Tuesday to the FCC, Waz rejected arguments that the dispute was about anything other than ordinary negotiations between two network owners that exchange data via a relationship known as "peering" - a relationship Comcast said was changing because Netflix would soon bring a large influx of traffic.
"Despite Level 3's effort to portray its dispute with Comcast as being about an 'open Internet,' it is nothing but a good old-fashioned commercial peering dispute, the kind that Level 3 has found itself in before," Waz wrote. ". . . This is not about online video, it is not about 'paid prioritization,' it does not involve putting 'toll booths' on the Internet, and it is not about net neutrality."
Netflix declined to comment on the dispute. But Level 3 officials accused Comcast of doing the distorting.
John Ryan, Level 3's chief legal officer, said more data always flow from content and application providers toward end users than in the opposite direction. He said Comcast was using an expected increase in data requested by its own customers as an excuse to impose a toll, indirectly, on Netflix.
"I can't guess what their motivation is. But the result of their action is that it ends up favoring their own proprietary content and applications and disfavoring competitive content and applications," Ryan said.
Level 3 "chose to go public reluctantly," Ryan said. "We thought it was important for policymakers to understand that Comcast not only had the means, the motive, and the opportunity to discriminate, but that it, in fact, was doing so."