Had the cable giant not made the agreement, Level 3 -- which has had somewhat contentious dealings with Comcast for years -- would have been able to file a complaint with the Federal Communications Commission as of June 12. The ability to formally protest alleged wrongdoings was part of the historic net neutrality package passed earlier this year in the face of opposition from big cable.
This deal was expected, but it's a concession for Comcast which likely sacrificed both money and leverage in the agreement. This is not a case of the cable giant being forced into a deal in which it has to pay more money. Level 3 actually paid money to Comcast in previous deals. Instead, Comcast lost its ability to wrangle monetary concessions out of the various Internet backbone providers.
"Level 3 and Cogent (NASDAQ:CCOI) have threatened to complain to the FCC about Internet service providers demanding money for upgrades needed to ensure good quality for other Internet services," ARS Technica reported.
The threat of being investigated by the FCC after a formal complaint likely caused Comcast to blink. Level 3 has also made similar deals with AT&T (NYSE:T) and Verizon (NYSE:VZ), while Cogent reached an agreement with Verizon.
These deals were inevitable, but the threat of FCC action forced big cable's hand.
What is interconnectivity?
Interconnection, also called peering, lets networks exchange traffic directly, explained Ars Technica: "Large network operators known as 'transit providers' carry the traffic of many online content providers and connect directly to ISPs so that the traffic can get to Internet users."
The biggest issue in interconnectivity for the past few years has been Netflix (NASDAQ:NFLX), which has had to make deals with ISPs directly. The streaming company is not a typical case because it accounts for such a large percentage of overall Internet traffic.
In a broad sense, interconnectivity has been a source of squabbles between major content players and ISPs and between ISPs and backbone providers. The new net neutrality rules provide a framework for the FCC to referee those disputes.
What did the FCC do?
As part of the neutrality package the agency gave behind-the-scenes companies such as Cogent and Level 3 a method for seeking regulatory help if the cable companies operate in bad faith.
"For the first time the Commission can address issues that may arise in the exchange of traffic between mass-market broadband providers and other networks and services," an FCC press release said. "Under the authority provided by the Order, the Commission can hear complaints and take appropriate enforcement action if it determines the interconnection activities of ISPs are not just and reasonable."
What did Comcast and Level 3 agree to?
Basically, the two companies agreed to enhance their networks so they can meet the needs of Comcast's customer base going forward. Terms of the deal were not disclosed, but the companies issued a press statement ghat at least somewhat explained things:
Under the terms of the agreement, Comcast and Level 3 will enhance their existing network capacity while extending their mutual interconnection agreements, ensuring that both maintain ample capacity to exchange Internet traffic between their networks. The agreement covers both companies' existing networks as well as any expansion that may occur during the term of the agreement.
It's reasonable to suspect Comcast did not get what it wanted from the deal because it was forced to agree under the threat of a complaint to the FCC.
Is this a blow to big cable?
Before the net neutrality rules, Comcast and the other ISP leaders could negotiate however they wanted with Level 3 and its peers because those entities had no means of fighting back. Now, the FCC has given these companies a way of challenging unfair practices.
Comcast does not want any more attention from the FCC, particularly after the agency killed its deal to acquire Time Warner Cable (UNKNOWN:TWC.DL). The rest of big cable -- where many players are in the process of acquiring assets or being acquired -- also wants to stay on the agency's good side.
Just the threat of a complaint gives Level 3 and Cogent the ability to keep Comcast and the rest at the bargaining table. That almost certainly means deals are being made that don't favor big cable quite as much as past agreements did.
This is the FCC costing the major cable and Internet companies money while forcing them to do what's right for their customer base.
Daniel Kline owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), Netflix, and Verizon Communications. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.