Regulatory Issues

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Regulatory Issues Policies in Broadband
Interconnection A Korean Case

• 2003. 7. 11
• ASIA  PACIFIC FORUM ON TELECOMMUNICATION POLICY
  AND REGULATION

Hee-Su Kim Research Fellow Fair Competition
Division KISDI hskim_at_kisdi.re.kr
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Contents

• The role of Interconnection in the Internet
• Types of Internet Interconnection arrangements
• International Trends in Internet Interconnection
• Anti-competitive conducts in Internet
  interconnection (in theory)
• Anti-competitive conducts and regulatory
  inquiries in practice
• Internet Interconnection in Korea
• Competitive Conditions of Domestic Connectivity
  Market
• IBPs Conducts Open to Debate
• Signs of Healthy Competition
• Overall assessment of Effective Competition
• Proposals to Regulatory Prescriptions
• References

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The role of Interconnection in the Internet

• The hallmark of the Internet is that it appears
  to end users as a single network you can access
  any website or any other user once you subscribe
  to an ISP via whatever access method you choose.
• This is because all networks in the Internet,
  operated by different parties (ISPs), are
  interconnected directly or indirectly.
• Maintaining and improving the seamlessness of
  interconnection is extremely important for
  continued growth of the internet.

Source OFTEL (2001)
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Types of Internet Interconnection arrangements

• Peering Between ISPs in the same tier,
  settlement-free (bill and keep).
• Traffic from one another (and from one anothers
  customers) accepted.
• No obligation to carry traffic to third parties.
  
• Transit Between ISPs in different tiers,
  unilateral charging (volume based).
• Transit Providers (Backbone ISPs) provide
  connectivity to the entire Internet.

peering
Peering
Transit
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International Trends in Internet Interconnection

• OECD (2002) and Ovum (2002)
• The price of transit services is declining.
• The increasing use of (secondary) peering
  indicates that the Internet is becoming less
  hierarchical.
• In liberalized markets, commercial responses and
  solutions in backbone markets are rapidly
  developing and thriving. (e.g. to reduce costs by
  peering at local IXPs)
• A move away from multilateral interconnection at
  Internet exchanges, and towards bilateral
  interconnect at private peering points
• ISPs attach increasing value to users rather than
  websites. So the ISP with lots of users has
  increasing negotiating power.
• Internet traffic patterns are becoming less
  US-centric.
• The amount of multi-homing is increasing.

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International Trends in Internet Interconnection

• Implications on Regulation OECD (2002)
• Competition is increasing in Internet backbone
  markets.
• ? Regulation is unnecessary for the present.
• Nevertheless, regulators need to be vigilant in
  ensuring a strong competitive framework. Where
  there is insufficient competition, regulators
  should be in a position to apply appropriate
  safeguards even in internet interconnection.
• Are the trends pointed by Cukier (1998) no longer
  valid?
• The Number of Tier-1 ISPs has shrunk due to
  consolidation.
• The margin between Tier-1 and Tier-2 ISPs has
  grown wider.
• Tier-1 ISPs have decreased the number of ISPs
  they peer with.
• The terms of peering are not made public by
  Tier-1 ISPs.
• Interconnection and peering arrangements can be
  discontinued at short notice.

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Anti-competitive conducts in Internet
interconnection (in theory)

• Internet connectivity, an essential input for
  Internet services, can be used for the following
  market power abuses (especially by vertically
  integrated IBPs).
• Fixing exorbitantly high transit fees (access
  price)
• Price squeeze for downstream market competitors
• Refusal to interconnect/peer
• Drive out downstrean market competitors (vertical
  foreclosure)
• Undue discrimination Treat other ISPs as
  customers while reserving to it the peer
  treatment
• Reduce the quality of the connectivity sold to
  downstream competitors
• (Cremer, Rey and Tirole (2000) called it a
  targeted degradation strategy)

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Anti-competitive conducts and regulatory
inquiries in practice

• Thus far, government intervened only in
  anti-competitive merger attempts. However, legal
  frameworks are being proposed to make Internet
  interconnection no longer exempt from ex ante
  regulation, although its implementation doesnt
  look imminent.

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Internet Interconnection in Korea

• There are 2 IBPs, 2 IXs and about 80 Tier-2
  ISPs.
• One of the IBPs is the incumbent PSTN carrier
  with the largest number of broadband subscribers
  and the other IBP used to be the largest data
  center.
• IBPs peer with each other and Tier-2 ISPs buy
  transit from IBPs.
• Some Tier-2 ISPs peer with one another directly
  or at the public IX.

Source National Computerization Agency
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Internet Interconnection in Korea

• Internet interconnection is quite hierarchical.
• Bilateral/multilateral peering among Tier-2 ISPs
  are not active
• IBPs do not serve as a public Internet Exchange.
• Korea Internet Exchange (KINX), the only
  commercial and public IX in Korea, is not
  functioning well because IBPs do not interconnect
  their.
• Tier-2 ISPs purchase transit from both IBPs at
  the same time to secure redundancy and better
  connectivity (i.e. reduce trace routes and avoid
  congestion).
• End-user based ISPs tend to prevail over
  data-centric ISPs.
• Recently, a Tier-2 ISP with the second largest
  broadband subscriber base interconnects with the
  leading IBP on a (limited) peering basis for par
  of the exchanged traffic.
• Regional traffic need to traverse the PoIs Seoul
  metropolitan areas.
• A Regional IX was established just recently.

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Competitive Conditions of Domestic Connectivity
Market

• Market definition
• Demand-side substitution no substitute for
  domestic Internet full connectivity
• Supply-side substitution need backbones and
  sufficient interconnection arrangements
• Domestic Internet full connectivity is defined as
  a separate market as in OFTEL (2001)
• Market share of two IBPs 5743
• Entry into a simple ISP business is easy, but it
  is very difficult to have full connectivity by
  signing sufficiently many interconnection
  arrangements (some of them need to be taken away
  from the incumbents) (Its hard to break the
  current coalitional equilibrium.)
• Peering policies are not disclosed.

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IBPs Conducts Open to Debate

• IBPs have refused to peer with a near equal
  Tier-2 ISP.
• IBP A is the 1 carrier in the number of
  broadband end-users and interconnecting ISPs.
• This tier-2 ISP ranks the 2nd and 3rd in the
  number of broadband end-users and interconnecting
  ISPs, respectively.
• Actual traffic exchanged is almost equal between
  them.
• Rationale Its not fair to provide free access
  to the most valuable network with the largest
  end-user ISP base.
• Counter argument Peering is good even for the
  IBP. Your ulterior motive is to limit/downgrade
  the network value of your rivals (both in
  backbone and end-user markets).

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IBPs Conducts Open to Debate

• IBPs have refused to peer with a tier-2 ISP (IDC)
• This ISP is a web hosting firm with a few
  business users. ? About 90 of data traffic goes
  one way from ISP to IBP.
• Rationale I do not get inter-networking services
  from you.
• Counter argument My access to your network
  increase the value of your network. Im your
  business partner not your customer.
• IBPs have refused to interconnect (let alone
  peer) with the public IX.
• As a result, all lower-tier ISPs should directly
  interconnect with IBPs for connectivity (thus buy
  more leased lines) in addition to
  bilateral/multilateral peering at the IX. ISPs
  ask for full-mesh interconnection among IBPs and
  IX.
• Rationale My transit customers will leave me to
  become a collective peer through the IX. This is
  a nonsensical denial of competition and request
  for a free riding.

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IBPs Conducts Open to Debate

• Bundling of Transit Fees and Leased Lines
• If an ISP wants to buy a transit service from an
  IBP, it should also rent the leased lines from
  that IBP.
• Rationale
• Due to the difficulties of calculating the
  appropriate level of transit price, IBPs used to
  adopt a simple mark-up pricing model, setting the
  price of transit equal to 20 of the price of
  leased lines used for interconnection.
• The transit fees that are proportional to
  interconnection bandwidth can represent the
  benefit a requesting party gets from
  interconnection as well as transit provisioning
  costs.
• If unbundled, due to the loss of scope/scale
  economies from bundling, the price of a pure
  transit service will be higher than the implicit
  price in the bundle.
• Counterargument
• Since the price of leased lines is basically
  discriminatory (thus hard to detect) on an
  individual contract basis, a dominant IBP can set
  an exorbitantly high transit price.
• The leveraging argument applies Market power
  extension from a dominant sector to a
  non-dominant sector and restrained choice of
  cheaper lines.

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IBPs Conducts Open to Debate

• Limited Provision of Full Transit
• Here, full transit means accepting transit
  requests from the customers of the original
  transit buyers. Currently, only a selection of
  tier-2 ISPs is provided with full transit.
• Rationale Need to block free riding.
• Counterargument Full transit should be sold at
  least to the public IX. (Currently, IBPs do not
  interconnect with the IX.) IBPs refusal to do so
  restrains the formation and growth of public IXs.
  (Erection of entry barriers)
• Raising Rivals costs with Double Bottlenecks
• In addition to having good control of Internet
  connectivity, as a vertically integrated firm,
  IBP A is allegedly raising the price of lease
  lines on the local loop side, over which it has
  market power. This also restrains the formation
  and growth of vertically integrated ISPs with a
  strong end-user base.

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Signs of Healthy Competition

• The two IBPs transit fees (bundled with
  interconnect leased lines) seem to have moved
  together, but are falling recently
• After some Tier-2 ISPs filed complaints with the
  regulatory authority, the two IBPs are working on
  developing a standard peering policy that can be
  widely accepted as fair.
• A leading Tier-2 ISP recently peers partly with
  the leading IBP.

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Overall assessment of Effective Competition

• Although some conducts of IBPs are less
  questionable than others, these perceived abuses
  actual or potential indicate that the market for
  domestic Internet connectivity is not effectively
  competitive and that regulatory safeguards are
  needed.
• However, as some positive signs of healthy
  competition emerge and there is a need to
  consider the dynamic nature of the Internet
  market, regulatory measures need to be carefully
  and cautiously designed with further monitoring
  of competitive developments.

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Proposals to Regulatory Prescriptions

• Light-handed Approach
• Create a legal framework whereby government can
  readily intervene whenever competitive conditions
  deteriorate.
• Currently, ISPs are categorized as value-added
  service providers ? Internet interconnection
  cannot be under the traditional interconnection
  regulation.
• In line with the new EU directives and the recent
  moves of the ACCC of Australia.
• Enhance transparency by encouraging voluntary
  disclosure of transit/peering agreements/ policy.
• Design a standard peering policy that can be
  accepted industry-wide as fair.
• ISPs satisfying a minimum criteria cannot be
  denied peering.
• Promote (regional) ISPs to build a public IX (on
  the initiative of regional governments).

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Proposals to Regulatory Prescriptions

• Heavy-handed Approach
• An obligation to peer imposed upon all ISPs or,
  alternatively, an obligation to negotiate peering
  with all ISPs if a peering agreement is concluded
  with any ISP.
• Regulation of transit prices.
• Prohibition of vertical integration on the part
  of IBPs into related activities. (Structural or
  accounting Separation of IBP and retail ISP
  functions)
• Prohibition of exclusive dealing by a vertically
  integrated IBP.
• Compulsory disclosure of transit/peering
  agreements/ policy.
• Allow only a qualified public IX to interconnect
  with the Government IX as an inducement to
  peering.
• Many of these policy options have been proposed
  by Cukier (1998) and OECD (1999).
• Obviously, whether to intervene and what options
  to choose depend on how insufficient is
  competition and how much is the risk of
  regulatory failure.

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References

• ACCC (2003), Internet interconnection service
• Cremer, J., P. Rey and J. Tirole (2000),
  Connectivity in the Commercial Internet, Journal
  of Industrial Economics, 48(4).
• Cukier (1998?), Peering and fearing ISP
  interconnection and regulatory issues.
• EC (1998), Declaring a concentration to be
  compatible with the common market, Official
  Journal of the European Commission.
• Lucien Rapp (1999), Competing for the Internet,
  Communications Strategies, no. 34
• OECD (2002), Internet traffic exchange and the
  development of end-to-end international
  telecommunications competition
• OECD (2001), Workshop on Internet traffic
  exchange
• OECD (1999), Workshop on interconnection policies
  and frameworks
• OFTEL (2001),
• Ovum (2002), IP Interconnect.

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Thank You!