The Evolution of Internet Interconnection from Hierarchy to 'Mesh': Implications for Government Regulation
30 Pages Posted: 13 Jul 2012
Date Written: July 11, 2012
The Internet has evolved from a “hierarchy” — in which interconnection was achieved by having Internet Service Providers (ISPs) purchase transit services from top-level backbones and top-level backbone providers engage in direct settlement-free peering — to a “mesh” in which peering occurs among a much larger number of participants and some peering arrangements involve payments from one peer to another. In this new environment, backbone providers, ISPs, and suppliers of content have a far wider array of interconnection alternatives, both technical and financial, than they did only a short time ago. As is often the case, the introduction of new alternatives and contractual arrangements has led to calls to regulate which alternatives and arrangements are acceptable. In this paper, we explain why such regulation would be harmful, as it would (i) reduce the incentives of industry participants to minimize total costs; (ii) lead to higher access prices to end users; (iii) result in prices that do not adequately reflect costs; (iv) and create regulatory inefficiencies. We also explain why the alternative interconnection arrangements to which Content Delivery Networks (CDNs) and ISPs generally have access already impose limits on the exercise of market power.
Keywords: Internet transit, Internet peering, Secondary peering, Settlement-free peering, Regulation, Regulatory Costs, ISP, CDN
JEL Classification: L96, L51, L41
Suggested Citation: Suggested Citation