Internet backbone competition and broadband penetration

Mgt 825

A Very Brief History of the Internet

1957 US DoD formed the Advanced Research Projects Agency (ARPA), which sponsored many research projects

1969 ARPANET a computer network of 4 nodes was commissioned. Expanded over the next decade.

1986 NSFNET built as a backbone linking 6 supercomputer centers. By 1989, it links 100,000 hosts. ARPANET’s TCP/IP made mandatory as the communication standard.

NSF encouraged its regional networks of the NSFNET to seek commercial, non-academic customers, expand their facilities to serve them, and exploit the resulting economies of scale to lower subscription costs for all.

On the NSFNET Backbone - the national-scale segment of the NSFNET - NSF enforced an "Acceptable Use Policy" (AUP) which prohibited Backbone usage for purposes "not in support of Research and Education."

This encouraged the growth of private competitive long-haul networks such as PSI and UUNET.

Commercialization of the Internet

Over the early 1990s, the NSF contracted for 4 network access points (NAPs)– each consisting of a shared switch to exchange traffic.

– Originally 4 NAPs, 4 different commercial operators.

On April 30, 1995, NSFNET was dissolved, and the network was transferred to commercial operators.

NSF maintained investments in a research network (vBNS), later the core of the Internet 2 project.

Digression

Crucial to this development– The earlier set of FCC decisions allowing customer

provided premise equipment. Hush-A-Phone Carterfone Modems

– FCC decisions that have consistently held (since the early 1970s) that data processing service providers are

Not subject to common carrier regulations– Such as universal service requirements

Entitled to non discriminatory service from telecomm providers. Didn’t have to pay the access charges paid by long distance

carriers. – Long distance carriers pay charges for every minute that a call is

connected to both originating and receiving local telco.

Backbone: Interconnection arrangements

Peering agreement– Network X and network Y exchange traffic without paying each other. – Applies only to traffic originating on X and terminating on Y & vice versa.– Initially how all traffic was handled.

Smaller IBP can “free ride” off of larger ones. Now only common between larger Tier-1 IBPs.

– Can occur at NAPs or at private peering points. Transit agreement

– Network X connects to network Y. X pays Y to reach Y and any other network that can be reached through Y.

These interconnection arrangements are totally unregulated--- well almost.

Backbone Market shares, 2003

MCI 32% GTE (Genuity) 17% AT&T 19% Sprint 7% Cable and Wireless 6% All other 19%

Source: Economides (2004)

Should we worry about market power in this market?

Arguments raised in objection to MCI/Worldcom merger about market power on the Internet backbone.– Concerns that MCI/Worldcom were refusing to

peer with smaller backbones.

Proposed Sprint/Worldcom merger (2000) opposed by DOJ over this issue.

If there were a dominant backbone provider

Could potentially refuse to interconnect with smaller backbone networks, and attempt to take the smaller backbone’s customers, extending the dominant backbone’s market power.

VI backbone-ISP could foreclose access to other ISPs.

Is this likely?

Number of major backbone providers. Commodity product: Multiple backbone providers

can/have an incentive to compete for transit arrangements.

Potential competition at the ready: Fiber used in voice networks redeployable into packet networks

The more connected I am the better off my customers are.

MCI-Worldcom allowed EU blocked MCI-Sprint merger in 2000

largely due to backbone concerns. Dispute now over AT&T/MCI’s position in

backbone market at the time of the AT&T/SBC and MCI/Verizon merger:

As a condition of the MCI-Verizon merger approval and AT&T-SBC and AT&T-Bellsouth, parties agreed to peer without settlement with as many parties for 2 years after the merger as before.

As a condition of AT&T-SBC and Verizon-MCI and AT&T-Bellsouth, parties agreed to adhere to net neutrality for 2 years.

Regulatory issues facing VoIP in US

On February 12, 2004, the FCC found that an entirely Internet-based VoIP service was an unregulated information service.

In November 2004, FCC rules that individual states may not regulate VoIP as a telephone provider.

May 2005, FCC rules that VoIP providers that interconnect with the PSTN must provide e911.

Broadband and NGNs: US versus the World

Broadband buildout: why do we care?

The number batted around in the US for the economic impact of universal broadband = $500 billion.

President Bush said, in 2004 “The US is in 10th place in broadband deployment, that’s 10 places too low…”

The FCC’s 5th report on Advanced Telecommunications Capability (2005):

“….. advanced telecommunications capability is indeed being deployed on a reasonable and timely basis to all Americans.”

“Fierce competition” in broadband markets. High speed lines increased 30% in 2004. April 2006: FCC Chairman Kevin Martin has an

article in the Financial Times, in which he explained that "with 42.9 million subscribers, the US has more people connected to broadband than any other country.“

Buildout Percent of zip codes(High speed lines)

0

10

20

30

40

50

60

70

2001 2002 2003 2004 2005

4 or more

No lines

Counterarguments

5/2006 GAO report criticizing definitions, methodology in FCC report.

US penetration low relative to other countries.

Subscribers per 100 inhabitants

0

5

10

15

20

25

30

2000 2001 2002 2003

Korea

Canada

US

Japan

Definitions

“Advanced telecommunications capability” is defined as a “high- speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology.”

FCC high speed line definition: 200 kbps; downstream OR upstream

Speeds

As of 6/2005, high speed lines in the US>200kbps in one direction only 12%

>200kbps in both directions with the faster direction:

<2.5 Mbps 34%

2.5 Mbps < x < 10 Mbps 54%

> 10 Mbps <1%

In Japan/Korea, >25% of subscribers have speeds >10Mbps

Why would we expect buildout and takeup to vary across countries?

Population Density GDP per capita Regulation

– Government subsidies– Competition and pricing– Effects on DSL vs. Cable

Given the geographic and demographic diversity of our nation, the US is doing exceptionally well. Comparing some of the "leading" countries with areas of the US that have comparable population density, we see similar penetration rates. For example, in Belgium, ranked eighth in broadband penetration by the OECD, there are about 343 inhabitants per sq km and 18 out of 100 people are broadband subscribers. In Japan, ranked 11th by the OECD, there are 350 inhabitants per sq km and 16 out of 100 people have broadband. These countries are comparable to Massachusetts where there are 317 people per sq km and 19 out of 100 people subscribe to broadband. Alaska, with less then one person per sq km, has a higher broadband penetration rate than France." Kevin Martin, 2006

Density

Competition/Number of providers

Careful

Provider serving one customer in the zip code marked as serving the zipcode, even if they don’t offer service to the entire zipcode.

Zipcodes with access to:– DSL 78%– Cable 62.1%– Fiber 27%– Satellite 86%

Satellite: for $100/month its <1Mbps download, and 128Kbps upload.

– Accounts for <1% US broadband subscriptions

Competition information:

U.S. zipcodes with:– Zero DSL/cable providers 15.1%– Two providers: DSL and/or cable 24.8%

3.8% of ADSL lines are non-ILEC

(Note: all as of June 2005)

Why is buildout better in other places?

Korea– 21% telephone penetration in 1980; per capita income

$9400US in 2001– Modest government subsidies– Open to competition starting in mid-1990s

KT privatized 1993 Competitors Hanaro and Thrunet laid fiber No line-sharing regulations until 2002

– Hanaro broadband 2003 price ~$31 for 8Mbps/8Mbps. 1.5x the price of 20 hours of dialup.

Japan: Competition and Price

NTT East (incumbent) provides DSL and fiber-to-the-home.

Yahoo! BB (competitor) has greater volume with 36 percent of Japan’s DSL market. YBB is $18/month (8Mbps/8Mbps)

BB cheaper than 20 hours dialup Regulation

– Line-sharing at very low regulated rates for both the local loop AND long-haul fiber.

Canada:

Canada is the only other of the top 20 broadband penetration countries to be dominated by cable modems.

Canada introduced unbundling requirements in 5/1997, but only for “essential facilities” and at actual incremental cost plus 25%.

In 1999 the Canadian Radio and Television Commission (CRTC) issued Telecom Decision CRTC 99-8 that ordered the country's four largest MSOs to file firm tariffs to provide competitive ISPs with wholesale access to their cable facilities.

In contrast, the Supreme Court upheld the FCC’s policy of treating cable operators as content providers rather than common carriers in a 2005 decision.

Key current policy questions

Should the Federal government get into the act?– Reed Hundt, former FCC chair advocates a government-

procured nationwide fiber network Gov’t. built the highways. Estimates costs of $25b.

Should municipalities get into the act?– Wi-Fi: connects computers in a small area such as a park or

restaurant.– WiMax: allows usage for 30 mile radius around a base tower

but requires special receiver. Base speed of 70 Mbps. 802.16d requires stationary antenna 802.16e allows mobile transmission up to 70mph.

Should we care about the “digital divide.”

Pros and Cons of municipal provision

Pros Unify a local area on one

Emergency system, close digital divide.

Incumbent telcos cable systems have under-incentive to provide content-neutral pipes.

Economies of scale.

Cons Can you trust a city

government to do this? Raise taxes on people who

don’t care about the service?

Crowds out and expropriates private investment.

– Though city will obvious procure through private companies.

Tech support and security issues.