Hijacking the Internet: The Growing Threat to Net Neutrality

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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
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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.

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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.

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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.

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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

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A brief tutorial

• Different intercarrier payments arrangements
• Circuit-switched (voice) world
• Packet-switched (IP) world

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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
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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
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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

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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

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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
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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).

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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.

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The battle lines
Whos opposing Net Neutrality? The telcos and
cablecos that control the end-user consumer
eyeball market.
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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.

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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.

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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.

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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.

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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.

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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

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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.

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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

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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