A new OECD report concludes that despite ongoing and future challenges, the existing market model for the Internet has performed remarkably well, boosting growth and competition and driving down prices for data to 100,000 times less than that of a one minute telephone call.
The report, entitled Internet Traffic Exchange Market Developments and Policy Challenges argues that governments should largely take a hands-off approach to regulating the Internet market.
The report surveyed 4,300 networks, representing 140,000 direct exchanges of traffic on the Internet, and found that 99.5% of “peering agreements” were on a handshake basis, with no written contract and the exchange of data happening with no money changing hands.
“If a regulatory obligation to interconnect were to be established, then this choice could be imposed unilaterally by one of the parties, which would dramatically change the dynamics of the market. It is extremely unlikely that the efficient outcomes produced so far would be maintained in this environment,” writes the report’s authors Dennis Weller, Bill Woodcock.
Their findings clash with the assertions of the European Telecommunications Network Operators' Association (ETNO) which proposes that the Internet moves to a “sender pays” business model. ETNO maintains the change is needed to respond to U.S. content providers like Google and Apple who they say are getting a free ride on their networks.
If adopted, it would effectively end the Internet's current market model based on unmetered peered traffic, and tax content providers to reach non-U.S. Internet users. The added costs would be passed on to Internet users who receive the content and Internet access would more closely resemble international telephone access where the recipient's network set the per-minute price.
ETNO is bringing its proposal to the landmark World Conference on International Telecommunications in Dubai this December. At the conference the International Telecommunications Regulations, which govern the way international voice, data and video traffic is handled will be updated and revised for the first time since 1988.
FCC chairman Julius Genachowski has warned that the ETNO proposal could fundamentally threaten the Internet, turning a "virtuous cycle of innovation and investment" into a "vicious cycle of lower broadband demand and less infrastructure investment."
Advocates of the sender pay model argue it would offer more transparent pricing and could significantly increase adoption rates benefiting the entire mobile content ecosystem. But Google and Apple argue the model would be a devastating blow to them and other content providers by essentially taxing every interaction they have daily with their hundreds of millions of users.
The OECD report argues the market model of Internet traffic exchange, based on voluntary commercial agreements for peering and transit, has performed very well.
“The market has generated the large investments needed to sustain growth, and has guided investment to the most productive uses. If the price of Internet transit were stated in the form of an equivalent voice minute rate, it would be about USD 0.0000008 per minute—five orders of magnitude lower than typical voice rates. This is a remarkable and under-recognised endorsement of the multi-stakeholder, market driven nature of the Internet.”
It recommends that governments should approach “any call for increased regulation of the Internet market with great caution, and with an appreciation for the risks involved.”
“Today‘s Internet market based on commercial agreements allows underlying economic factors to determine which subset of the millions of possible direct interconnection arrangements should actually be implemented. This market outcome has changed substantially over time through a dynamic process of evolution.”
It did note that investment in the Internet has slowed since the economic downturn in 2001 and that “speed of network interfaces has stalled, and this has led to a transition from exponential growth to linear growth. Investment in basic research needs to be reinstated to return to a level of growth that will meet the economic and social development goals OECD countries expect of the Internet economy.”
It added that the rapid growth and continuing evolution of the Internet market is impacting its architecture, technological innovation, and the ongoing development of the Internet market model for traffic exchange. The most immediate challenge for the architecture of the Internet is the transition of addressing from IPv4 to IPv6. It also noted that the rise of OTT services has led to changes in the “terms of trade among the different parties, and to experimentation with different variants on the existing agreements for peering and transit.”
The authors recommend several policies to address these challenges while “minimizing intervention.” The policies recommended include:
Reform of TDM interconnection: Several OECD member countries have undertaken efforts to reform their existing regulation of TDM interconnection. These efforts offer the potential to increase the efficiency of the TDM market, while at the same time smoothing the transition to the use of IP interfaces for the exchange of voice traffic.
Allowing for disagreement: In a market based on voluntary agreements, it is inevitable that parties will not always agree. In the Internet, where less than 1% of the possible bilateral arrangements are actually in effect, this is not a cause for concern. Occasionally disputes rise to the attention of policy makers, and more rarely may actually lead to some disruption. While there must be some limit to the amount of disruption that a private dispute can be allowed to cause, governments should generally resist the temptation to intervene.
Pricing models to support future investment:. The rapid growth of Internet traffic creates a challenge for local access networks to provision increased capacity in middle mile facilities. In particular, online delivery of video content is a challenge for access networks not designed with that in mind. Some parties have recently suggested a series of pricing options for access networks seeking to fund investment to meet increased demand. These include the imposition of a broad-based, mandatory termination charge. While investment by all stakeholders across networks is welcome, as general matter mandatory charges which are not accepted voluntarily by the other party to the transaction, or which would require either government intervention or collusion to enforce, are not consistent with the Internet model of traffic exchange, and should not be permitted.
Traffic exchange and network neutrality: The structural evolution of the Internet has led to realignment of the roles of Internet participants, including creators of content, online distributors of content, CDNs (Content Delivery Networks), backbone networks, and access networks. This has led to negotiation of new agreements for Internet traffic exchange. As agreements among online service and content providers, CDNs, and access networks are negotiated, a balance is being struck on the extent to which quality-enhancing resources will be brought to bear, who will provide those resources, and on what terms. In the process, the market for Internet traffic exchange is generating answers to many of the questions raised in recent debates over network neutrality.
It concludes that “In general, the market appears to be developing in an orderly way, with the outcomes falling within a relatively limited range that appears to be reasonable. … It is not clear how intervention in favour of any one party or group (content providers, CDNs, access networks) would improve the outcome.”
