UPDATE 2-Netflix partner Level 3 ups attack on Comcast fee

* Level 3 says open Internet threatened by toll

* Calls on Comcast to reconsider "untenable position"

* Move comes after Level 3 clinched deal with Netflix

* Dispute could hurt Comcast's NBC Universal merger plan (Adds comments from analysts and FCC, details on dispute)

By Ritsuko Ando

NEW YORK, Nov 30 (Reuters) - Level 3 Communications LVLT.O, which helps online movie rental site Netflix (NFLX.O) stream videos to viewers, stepped up its attack on top U.S. cable provider Comcast Corp (CMCSA.O) for demanding a fee to carry videos and other bandwidth-heavy Web traffic.

The escalating dispute reflects how booming content businesses like Netflix are disrupting the economics of Internet services, and it could disrupt Comcast's planned merger with NBC Universal, analysts said.

Level 3 operates Internet backbone networks but also offers content delivery network (CDN) services, which enable clients like Netflix to store and stream movies online. The CDN business has grown as consumers increasingly turn to the Internet for entertainment and shopping.

The sheer rise in Internet traffic has prompted Comcast, which provides the "last mile" of Internet connection to consumers' homes, to demand a recurring fee from Level 3 to transmit video and other online content to customers. Level 3 said such a fee threatens freedom on the Internet.

"Our interest is in preserving and protecting openness and innovation within the Internet, which is threatened if those who control access to subscribers can charge a toll set at their discretion for delivery of independent content and applications," Level 3's assistant chief legal officer, John Ryan, said in a statement on Tuesday.

"Respectfully, we once again call on Comcast to reconsider its untenable position."

Level 3 has said it agreed to pay "under protest" to avoid service disruption.

Comcast has complained that Level 3 wanted to increase traffic more than twofold for free. Level 3 recently clinched a deal to become one of Netflix's primary CDN providers. Netflix streaming accounts for around 20 percent of prime-time U.S. Internet traffic and is growing rapidly, according to network equipment firm Sandvine.

Comcast has said that Level 3 had "misportrayed" commercial negotiations, and that it had offered the same terms to Level 3 as did to other CDN companies.

CDN providers Akamai Technologies Inc (AKAM.O) and Limelight (LLNW.O) have both declined comment about their own dealings with Comcast.

A DISRUPTIVE FORCE

Netflix has been trying to negotiate lower prices from CDN partners. Analysts said the latest dispute showed how difficult it was for those partners to profit from the growing popularity of online video.

The conflict also highlights troubles in the cable industry, which is upgrading infrastructure to handle the growing popularity of services like Netflix but isn't necessarily benefiting as its own pay TV service loses viewers.

Cowen and Co analyst Colby Synesael said Comcast's move could set a new precedent and create a cascading effect throughout the cable and Internet services industry.

"It could eventually alter the financial model for delivering bandwidth," he said. "It's going to be a multiyear thing, but I think the takeaway is that if this is to be upheld, this is the beginning of a new, much bigger trend than what we see between just Comcast and Level 3."

The dispute also comes as Comcast's proposed merger with NBC Universal is being reviewed by regulators, and at a time that regulators are examining so-called net neutrality rules aimed at ensuring nondiscriminatory delivery of Internet traffic to consumers.

If regulators side with Level 3, that could disrupt or delay the deal, analysts said. Comcast has said it expects approval for the deal by year-end. [ID:nN16160542]

"We are still sorting through the allegations and their potential fallout, but they come at a bad time for Comcast, and unless they're definitively and quickly knocked down or explained away, they could further complicate its push to receive final regulatory approval for the NBCU deal by year-end," Stifel Nicolaus analyst Rebecca Arbogast said in a note.

The FCC said its staff was looking into the issue.

"It would be premature to comment on it without knowing what the facts are. We're looking into it," FCC Chairman Julius Genachowski said after the agency's Tuesday meeting. (Reporting by Ritsuko Ando, additional reporting by Jasmin Melvin; Editing by Dave Zimmerman and Steve Orlofsky)