Interconnection Issues Raised in the Interconnection Issues Raised in the Network Neutrality DebateNetwork Neutrality Debate

A presentation at theA presentation at the2015 Annual Meeting of2015 Annual Meeting of

The Association of American Law Schools, Washington, D.C.The Association of American Law Schools, Washington, D.C.January 5, 2015January 5, 2015

Rob Frieden, Pioneers Chair and Professor of Telecommunications and LawPenn State University

rmf5@psu.eduWeb site : http://www.personal.psu.edu/faculty/r/m/rmf5/

Blog site: http://telefrieden.blogspot.com/

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Renewed Attention to Interconnection and Compensation Arrangements

The Network Neutrality debate now includes questions whether and The Network Neutrality debate now includes questions whether and how the FCC should evaluate the commercial reasonableness of how the FCC should evaluate the commercial reasonableness of ISP interconnection agreements.ISP interconnection agreements.

The potential for conflicts has increased as interconnection has The potential for conflicts has increased as interconnection has become more contentious and less cooperative.become more contentious and less cooperative.

Different stakeholders offer conflicting frames: Different stakeholders offer conflicting frames:

A maturing, commercialized Internet ecosystem with double-sided A maturing, commercialized Internet ecosystem with double-sided markets necessitate unregulated flexibility to create new options markets necessitate unregulated flexibility to create new options for end-to-end connectivity vs.for end-to-end connectivity vs.

Retail ISPs operate as terminating monopolies have the incentive Retail ISPs operate as terminating monopolies have the incentive and ability to engage in anticompetitive practices that threaten and ability to engage in anticompetitive practices that threaten innovation and consumer choice.innovation and consumer choice.

What Has Triggered Conflict?

Current conflicts result from traffic imbalances, the growing torrent of video, new Current conflicts result from traffic imbalances, the growing torrent of video, new ventures concentrating primarily on downstream traffic delivery and possibly ISP ventures concentrating primarily on downstream traffic delivery and possibly ISP frustration with profit margins vis a vis companies making use of their conduits.frustration with profit margins vis a vis companies making use of their conduits.

However the seeds of conflict started far earlier when senior telecom managers grew frustrated with differences in cost recovery models between telecom and the Internet.

In 2005 then CEO of Southwestern Bell, Ed Whitacre lamented:

“Now what they would like to do is use my pipes free, but I ain't going to let them do that because we have spent this capital and we have to have a return on it. So there's going to have to be some mechanism for these people who use these pipes to pay for the portion they're using. Why should they be allowed to use my pipes? The Internet can't be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo! or Vonage or anybody to expect to use these pipes [for] free is nuts!” source: Businessweek, Online Extra: At SBC, It's All About "Scale and Scope“ (Nov. 6, 2005); available at: http://www.businessweek.com/stories/2005-11-06/online-extra-at-sbc-its-all-about-scale-and-scope.

The Whitacre-preferred mechanism: metering and charging for each leg of an end-to-end routing.

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Achieving End-To-End Connectivity in TelecomTelecom interconnection and compensation arrangements achieve “seamless” connectivity by segmenting and pricing out separate links voluntarily, or as required by law, policy or regulation.

Source: Michael Yoka , History of Telecommunications, (n.d.) available at: http://www.mikundan.com/Portfolio/winstaru/WUContents/courses/intro/1history1.htm.

Many different options: end-on-end (A + B + C); end-to-end (A+B + B+C); local, long distance; domestic; international; intrastate; interstate; intra-LATA; inter-LATA; roaming; sender pays; receiver pays, first mile, middle mile, long haul, last mile, international accounting rates, etc. 44

http://www.mikundan.com/Portfolio/winstaru/WUContents/courses/intro/images/1hist027.gif

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Achieving End-To-End Connectivity in the Internet Cloud

Seamless connectivity achieved between servers, routers and broadband subscribers using the telecommunications transmission networks of many, often-unaffiliated operators.

Interconnection arrangements initially less calibrated and metered in light of external Interconnection arrangements initially less calibrated and metered in light of external subsidies, assumption of traffic parity, complexity and expense in metering.subsidies, assumption of traffic parity, complexity and expense in metering.

Initially a peering vs. transit dichotomy; new options use metering and other better Initially a peering vs. transit dichotomy; new options use metering and other better calibrated usage measures.calibrated usage measures.

Source: George Ou, http://www.digitalsociety.org/2009/11/fcc-nprm-ban-on-paid-peering-harms-new-innovators/

66Source: George Ou, Digital Society, http://www.digitalsociety.org/2010/12/division-of-labor-between-broadband-and-cdn/

What Can Prior Telecom Interconnection Tell Us About Current and Future ISP Disputes?

Similarities

Digitization supports a single, common network for both voice and data services.

Both telecom and Internet carriers willingly interconnect, without a compulsory duty to deal.

The process works without much dispute until complaints of arbitrage and cheating, e.g., leaky PBXs, international call re-origination, and “bandwidth hogging” by unmetered end users and/or content providers.

Many senior managers oversee a combined telecom/ISP portfolio.

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What Can Prior Telecom Interconnection Tell Us About Current and Future ISP Disputes?

Differences

Telecom arrangements address only carriage, with limited consideration of the content. ISP arrangements may focus on bandwidth and bit transmission speed, but the value and profitability of content carried are not ignored.

Telecom cost causation is easier to identify and assign even with anomalies created by law or policy; ISPs may demand compensation from multiple sources for a single transaction, e.g., retail, end user broadband subscriptions plus transit, paid peering and surcharges from upstream ISPs and even content sources, e.g., Netflix.

Telecom interconnection rates assumed to have close linkage to cost while ISPs negotiations factor in supply and demand elasticity.

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Many Interconnection Models Work in the Current Phase

ISPs consider price and QOS discrimination essential for generating new profit centers; “better than best efforts” offered in lieu of a single “best efforts” model.

New alternatives to the peering/transiting dichotomy: use of Internet Exchange Points; paid peering (Comcast-Netflix); CDN surcharges (Level 3-Comcast), equipment co-location, e.g., Netflix Open Connect Network; “specialized networks” and Intranets; Multiprotocol Label Switching and non-carriers like Google securing Autonomous System identifiers.

Retail ISPs providing last mile service test pricing limits in their 2-sided market by tiering and raising end user monthly subscriptions at the same time as they impose surcharges on upstream ISPs, and offer paid peering options to highest volume content providers, e.g., Netflix.

Retail subscribers become agitated when QOS suffers and they come to understand that improvement is contingent on a surcharge payment upstream. What does their subscription guarantee?

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New Incentives Risk Network Balkanization and Challenges to the Goal of Ubiquitous Access

Level 3-Comcast Dispute

In late 2010 Comcast imposed a traffic delivery surcharge when Level 3 became a major CDN for Netflix in the U.S.

Level 3 characterized the surcharge as a discriminatory toll while Comcast framed the matter as a commercial peering dispute.

Comcast is correct if one narrowly focuses on downstream traffic termination.

But more broadly the dispute raises questions about the scope of duties Comcast owes its broadband subscribers and whether Level 3 is entitled to a good faith effort by Comcast to abate the traffic imbalances with upstream traffic.

It also raises questions about the flow of compensation due participating carriers downstream from sources with which retail ISPs do not directly interconnect.

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Misconceptions (or Misrepresentations) in the Level 3-Comcast Dispute

Retail ISPs providing the “last mile” delivery of traffic customarily do not directly receive compensation from upstream sources of content such as Google, Netflix, YouTube and Hulu.

The peering process traditionally involves directly interconnecting carriers. This means (absent paid peering) Netflix has the responsibility of securing the services of a CDN, such as Level 3, but Level 3 bears the direct interconnection burden with retail ISPs such as Comcast.

It is untrue to assert that hyper giant sources of traffic, do not pay for delivery of their content.

Note that Comcast successfully imposed a surcharge on its peering partner Level-3 when Netflix traffic upset the balance of traffic flows.

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Netflix-Comcast

Once an advocate for network neutrality, Netflix has opted for higher QOS through a paid peering arrangement with Comcast. Netflix directly interconnects with Comcast at many locations thereby reducing the number of networks and routers typically used. Virtually overnight Netflix traffic congestion problems evaporated thanks to lower latency and faster delivery speeds.

Paid peering, providing “Most Favored Nation” treatment of specific traffic streams, has triggered a vigorous debate over what constitutes reasonable price and QOS discrimination.

Netflix’s payments to Comcast are offset in part by reduced or eliminated payments to CDNs, but the accrual of more revenues for retail ISPs raises concerns about rising bottleneck/last mile control.

Will surcharge demands and better than best efforts become the new normal even for venture with modest traffic volumes previously accommodated by the standard best efforts model?

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Consequences of the Netflix-Comcast Deal

Pressure to Upgrade--More better than best efforts routing options with the possible risk that content sources with far less volumes than Netflix might face severe pressure to migrate from standard, best efforts delivery.

Higher Broadband Profit Margins--Broadband rate increases through tiering transmission bit rate and download allotments. Likely substantial narrowing in the gap between wireline (200 or more Gbytes) and wireless (250 Mbytes to 10 Gbytes).

More Subscriber Options for Avoiding Download Debits--ISPs will “soften the blow” of stingy download caps with expanded opportunities for “sponsored data” by content and service providers who pay the retail ISP in lieu of it metering the download.

ISPs Demand More Incentives to Upgrade--ISPs will leverage network upgrades in exchange for better interconnection terms with content providers, CDNs and upstream carriers.

More Interconnection Compensation Disputes—Lots of finger pointing when QOS declines. Was Netflix to blame when it made the entire 2d season of House of Cards available for “binging” or was it cheapskate CDNs, or something nefarious at the last mile? 1313

Conclusions

The FCC and other national regulatory authorities (“NRAs”) will continue to struggle to find a lawful way to impose ground rules on ISP interconnection and compensation arrangements.

NRAs will try to rely on commercial negotiations, but also may impose good faith, transparency, truth in billing and reporting requirements, especially for better than best efforts, specialized arrangements. NRAs may use a complaint resolution process to address disputes.

ISPs appear to have solidified their control over the Internet ecosystem, despite the conventional wisdom that content rules. When content demand triggers congestion, the content provider and its subscribers end up paying more.

ISPs will frame content prioritization as a necessary to manage a scarce resource, while opponents will accuse ISPs of creating scarcity and rationing a resource that previously managed to deliver content without surcharge or congestion.

Increasing advocacy for reclassification of Internet access as a public utility, common carrier service. However, in the U.S. common carriers can engage in “reasonable” discrimination. ISPs probably can offer paid traffic prioritization, provided it’s available to all “similarly situated” carriers and content providers.

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