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Title: Hijacking the Internet: The Growing Threat to Net Neutrality


1
Hijacking the InternetThe Growing Threatto
Net Neutrality
Lee L. Selwyn President Economics and
Technology, Inc. Boston, Massachusetts 02108
Presented at the 2006 NASUCA Mid-Year
Meeting Memphis June 13, 2006
2
Internet competition Today
  • As participants in a network-based industry,
    telecom carriers do not operate in isolation from
    one another, but must interact at a variety of
    levels to interconnect their networks.
  • This network effect means that providers with
    the largest and most diverse networks can dictate
    the terms and prices of interconnection to
    smaller rivals, to capture most of the smaller
    firms potential profits, and even to undermine
    their very existence.

3
Internet competition Today
  • Until the SBC/ATT and Verizon/MCI mergers
  • Competition among IP providers was pervasive no
    single entity had consequential market power.
  • Relatively little vertical integration of ISPs,
    backbone networks (IBPs) and content providers.
  • Intercarrier connectivity arrangements had been
    entirely market-driven.
  • Voluntary arrangements and agreements.
  • No regulatory intervention.

4
Internet competition Today
  • Up to now
  • All Internet stakeholders end users, content
    providers, portals, ISPs, backbone networks
    have enjoyed unrestricted access to the entire
    worldwide Internet.
  • But the SBC/ATT and Verizon/MCI mega-mergers
    and the FCCs BWIA decision -- could change all
    of that.
  • And not for the better.

5
A brief tutorial
  • When multiple carriers participate in an
    end-to-end connection, they need to establish a
    process for allocating the associated revenues.
    There are several ways that this can be
    accomplished
  • Separate customer transactions with each carrier
  • Customer deals with one carrier, who purchases
    interconnecting services from other carriers
  • Carriers jointly participate in a mutual and
    reciprocal settlement arrangement a quid pro
    quo
  • When one carriers network is substantially
    larger than the rest, it can dictate the terms of
    these financial arrangements to its own advantage

6
A brief tutorial
  • Different intercarrier payments arrangements
  • Circuit-switched (voice) world
  • Packet-switched (IP) world

7
Circuit-switched Revenue ModelAccess charges
Call Route
Payments
CALLING PARTY/ CUSTOMER
CALL RECIPIENT
IXC
LEC
LEC
Customer Pays IXC For Call
IXC Buys Access From LECs
8
Circuit-switched Revenue ModelBill-and-Keep
Call Route
Payments
CALLING PARTY
CALL RECIPIENT
Originating carrier
Intermediate carrier
Terminating carrier
Receives No Payment From Originating carrier
Will be charged by Terminating carrier to receive
call
Makes No Payment to Terminating carrier
9
A brief tutorial
  • Hosts and eyeballs
  • Hosts A networks end-users that are content
    providing businesses such as Google, Yahoo, and
    individual corporate websites
  • Eyeballs A networks end-users that are
    consumers and/or businesses that view
    content-provider websites

10
A brief tutorial
  • Peering
  • Bilateral agreements that allow a Tier-1 IBP to
    transfer, at specified handoff points, IP data
    packets originating on its network and addressed
    to a customer of the other Tier-1 network, and
    vice versa.
  • Settlement-free exchange of traffic, analogous
    to bill-and-keep agreements for exchange of
    circuit-switched intercarrier traffic
  • A network that is unable to peer with other
    networks is placed at a serious financial and
    competitive disadvantage

11
IP Revenue ModelPeering (Bill-and-Keep)
Packet flow
Payment flow
INTERNET
Backbone Network
Backbone Network
HOST
ISP
EYEBALL
ISP
Peer-to-Peer Settlement-free exchange
Pays ISP for DSL or cable modem access
Pays IBP for capacity on backbone network
Pays ISP for high-capacity Internet access
Pays IBP for capacity on backbone network
12
A brief tutorial
  • Peering works when parties to a peering
    agreement send approximately the same total
    amount of traffic (IP packets) to each other.
  • Origination and termination in the IP context
    refer to the flow of packets from one network to
    another, not to the party that initiated the
    contact.
  • Many Tier-1 IBPs will exchange traffic on a
    settlement-free basis only with a network that
    originates less than twice as much traffic as it
    terminates (i.e., less than a 21 ratio).

13
A brief tutorial
  • Today, end users (eyeballs) normally originate
    proportionately fewer packets than content
    providers
  • An eyeball-heavy IBP would refuse to peer with
    a content-heavy IBP.
  • Following the integration of their extensive ILEC
    DSL eyeballs customer bases with their
    respective IXC Tier 1 backbone networks, both
    att and Verizon will originate far fewer packets
    than they terminate.
  • They will then likely refuse to peer with most
    other IBPs, but will continue to peer with each
    other.

14
The Threat to Net Neutrality
  • The two Bell mergers introduce significant
    vertical integration between end user ISP
    services and backbone networks.
  • Déjà vu all over again.

15
The Threat to Net Neutrality
  • When end users gained access to the Internet via
    dial-up connections, multiple ISPs competed
    despite telco last-mile monopoly.
  • But as consumers migrate to DSL and cable, the
    Internet Access and Last Mile connection become
    inextricably linked, forcing most independent
    ISPs out of business.
  • Bells and cablecos now dominate consumer Internet
    access.

16
Consumer impact
  • Why should we care?
  • If Bells and cablecos have market power over
    consumer Internet access, they can leverage that
    market power to dominate what has up to now been
    a highly competitive IP backbone market.

17
Consumer impact
  • Sounds familiar? Well, it should.
  • Prior to the 1984 ATT break-up, Bells had
    successfully prevented the IXCs from gaining
    access to Bell local customers.
  • 1984 divestiture blocked BOC entry into long
    distance, making Bells indifferent as to their
    customers choice of long distance carrier.
  • But once Bells were allowed to reenter long
    distance beginning in about 2000, they rapidly
    reacquired market dominance and forced the two
    largest IXCs to join them rather than compete
    with them.

18
Consumer impact
  • Translate this situation into Internet
  • When Bells and cablecos control market for
    consumer eyeballs
  • they are in a position to force content providers
    to connect directly to the Bell/cableco
    backbones.
  • they are in a position to charge fees to content
    providers for access to the Bell/cableco
    customers.

19
Potential nightmare scenarios
  • Company websites allowing customers to order its
    products and services online
  • Verizon, att and Comcast may demand a cut of
    those transactions when their end user customers
    are involved
  • May force smaller providers of all sorts of
    products and services out of the market
    limiting consumer choice and restricting
    competition across a broad range of economic
    activity

20
Potential nightmare scenarios
  • If the Bells and cablecos have their way, charges
    to content providers for Internet access will be
    based on the value to the content provider of the
    Internet-facilitated transactions
  • In other words, a piece of the action, a share
    of the profits, vigorish
  • Providers of content that is currently available
    free may be forced to start charging
  • Small and new content providers will be unable to
    reach their audience and vice versa

21
Potential nightmare scenarios
  • Are these nightmares realistic?
  • You bet.
  • Its already started.
  • The FCCs merger conditions will be ineffective
    and inoperative in preventing this worst-case
    outcome.

22
The battle lines
Whos opposing Net Neutrality? The telcos and
cablecos that control the end-user consumer
eyeball market.
23
The battle lines
  • SBCs CEO Ed Whitacre
  • How do you think theyre going to get to
    customers? Through a broadband pipe. Cable
    companies have them. We have them. Now what
    they would like to do is use my pipes free, but I
    aint going to let them do that because we have
    spent the capital and we have to have a return on
    it. So theres going to have to be some
    mechanism for these people who use these pipes to
    pay for the portion theyre using.

24
The battle lines
  • FCC Commissioner Michael J. Copps got it
  • right
  • The more powerful and concentrated our
    facilities providers grow, the more they have the
    ability, and perhaps even the incentive, to close
    off Internet lanes and block IP byways.

25
The battle lines
  • The FCC is engaging in double-speak
  • Chairman Kevin Martin at CES in Las Vegas
  • "It is critical that consumers have unfettered
    access to the Internet and all the services it
    provides Washington could be concerned if
    providers were to block access to information and
    sites traditionally available on the Internet.
  • But then he added that broadband providers
    seeking payment for new, costly, premium or
    value-added services need not fear FCC
    interference that under his leadership, the FCC
    won't step in to mediate between providers and
    consumers until it has received specific
    complaints.

26
Inadequacy of current regulation
  • The FCCs merger conditions
  • Settlement-free peering not required after
    three years public posting of peering policies
    not required after two years.
  • Naked DSL offering to begin within 12 months,
    end two years later.
  • att and Verizon commit for a period of two
    years to conduct business in a way that comports
    with the Commissions Internet policy statement
    relative to Net neutrality.

27
Inadequacy of current regulation
  • Once these merger conditions expire
  • att and Verizon are allowed to discontinue
    settlement-free peering -- potentially imposing
    high fees on competing IP backbone providers for
    access to Bell IP networks and customers
    ultimately putting them out of business.
  • Naked DSL will no longer be required --
    consumers can once again be forced to buy Bell
    phone service as a condition for obtaining DSL
    shutting down over-the-top VoIP providers like
    Vonage and Skype.
  • att and Verizon will have no Net Neutrality
    obligation after two years so dont expect any
    Net Neutrality after this condition goes away.

28
Inadequacy of current regulation
  • After peering and net neutrality requirements
  • terminate, when the two mega-Bells amass
  • sufficient Internet market power
  • They can refuse to peer with smaller IBPs
  • They will be able to dictate prices for IP
    interconnections at supracompetitive levels
  • They will be able to discriminate in favor of
    their own networks, increasing the costs imposed
    on smaller IBPs for interchanging IP traffic with
    RBOCs

29
Inadequacy of current regulation
  • Potential impact on content providers
  • Internet backbone networks that specialize in
    serving large content providers depend upon
    settlement-free peering with other IBPs.
  • Post-merger integration of DSL customer base with
    backbone network would enable the two mega-Bells
    to refuse to peer with smaller IBPs, raising
    those IBPs costs and reducing competition for
    hosting services.

30
NASUCAs role
  • So what do we do about the threat to
  • Net neutrality?
  • The FCC may be too focused on deregulating
    broadband to recognize the broader economic
    consequences of increased Bell market power
  • The Bells and cablecos are engaged in a massive
    disinformation campaign aimed at undermining net
    neutrality efforts

31
NASUCAs role
  • Advocates need to take an active role in
  • supporting net neutrality efforts and in
  • resisting Bell/cableco opposition
  • Develop alliances with other net neutrality
    advocates and stakeholders
  • Present consumer position at FCC, state PUCs, and
    state and federal legislatures
  • Raise net neutrality concerns in ongoing
    proceedings affecting industry structure, such as
    att/BellSouth merger
  • Develop programs to counter provider
    disinformation
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