The Evolution of Internet Service Providers from Partners to Adversaries: Tracking Shifts in Interconnection Goals and Strategies in the Internet's Fifth Generation
29 Pages Posted: 14 Jul 2015
Date Written: July 2015
This paper will examine new models for the carriage of Internet traffic with an eye toward providing insights on how the interconnection process has changed and what positive and negative consequences have resulted. Internet Service Provider (“ISP”) interconnection used to constitute a cooperative undertaking, but now it increasingly requires difficult and protracted negotiations between ventures that consider themselves adversaries in a winner take all transaction.
The paper concludes that new commercial arrangements, such as paid peering, can achieve mutually beneficial outcomes. However, the paper also identifies instances where migration from traditional interconnection arrangements can harm consumers by reducing some of the benefits accruing from network externalities.
At the Internet’s inception, carriers providing essential bit switching and transmission functions largely embraced twin goals of expanding connections and the number of users. These ventures refrained from metering traffic and charging for carriage based on the assumption that traffic volumes roughly matched, or that traffic measurement was not worth the bother in light of external funding from government grants. Most ISPs bartered network access through a process known as peering in lieu of metering traffic and billing for network use.
As governments removed subsidies and commercial carriers invested substantial funds to build larger and faster networks, ISPs more accurately identified carriers and customers triggering higher costs and targeted them for rates increases. Currently the issue of cost causation has become a key commercial and regulatory policy issue, because of the potential for traffic disconnections and service degradation when parties cannot agree on interconnection terms. The FCC has responded with ex ante, common carrier regulatory safeguards designed to anticipate and prevent anticompetitive practices with emphasis on ISPs that provide retail broadband services and also negotiate and implement interconnection agreements with upstream carriers and content distributors.
A number of highly publicized traffic interconnection and compensation disputes have recently occurred among ISPs, and between them and content distributors. The most controversial clashes have involved Netflix and ventures handling its extremely large volume of downstream traffic, on one hand, and “Retail ISPs,” such as Comcast and Verizon, that provide last mile delivery of traffic to end users.
These disputes evidence a substantial change in strategies and tactics among ventures operating within the Internet ecosystem. In particular, the process for negotiating network interconnection appears increasingly contentious instead of cooperative as carriers attempt to extract higher compensation. Retail ISPs appear most able and inclined to exploit possible market power as terminating monopolies particularly when negotiating with content distributors and Content Distribution Networks (“CDNs”) that provide downstream video delivery.
Most broadband subscribers in the United States have limited facilities-based carrier options. Consumers typically subscribe to only one ISP and they may not readily change carriers even if options exist. Additionally, end users require higher transmission speeds and downloading capacity in light of growing demand for bandwidth intensive video, often by multiple users at the same location.
Under current marketplace conditions, Retail ISPs have raised rates and segmented service into different tiers of transmission speed and downloading capacity. Additionally they have imposed surcharges on upstream CDNs and other carriers. Exploiting superior bargaining leverage has translated into a number of new interconnection and compensation arrangements that deviate from both traditional telecommunications and Internet carriage models. This paper will identify instances where price and quality of service discrimination benefits and harms consumers.
Keywords: Internet interconnection, Internet compensation arrangements, peering, paid peering, IPTV, Content Distribution Networks, Over the Top applications, broadband
JEL Classification: K23, K29, L51, L82, L86, L96, L98
Suggested Citation: Suggested Citation