IP interconnection – blog post number two

By: Link Hoewing

In the legacy telecommunications market place, economic regulation of interconnection – including price regulation as well as interconnection mandates – was taken for granted. IP networks, on the other hand, have neither been subject to economic regulation in general, nor to interconnection rules in particular.

This is why my second blog post about IP interconnection is about the economic and market incentives related to interconnection. My point here, as in my first post, is that commercial interconnection arrangements for IP traffic have worked well. There is no need for government involvement in these processes. In fact, government’s involvement would very likely harm innovation and the evolution of the Internet.

To set the stage, let’s look at the market that underlies IP interconnection arrangements. It is highly competitive with thousands of physical networks interconnected to provide access for consumers, governments and businesses to each other and to the wealth of information that resides in various sites on the Internet. These networks include everything from local access networks run by Internet Service Providers (ISPs), to backbones spanning the oceans to global facilities, to Content Distribution Networks (CDNs), to content and search engine sites and their facilities. In this world it is not uncommon for a player to be both a provider of access in one instance and a consumer in another.

A report from Analysys Mason illustrates the point that the players involved in the Internet ecosystem often have customers who want to connect to sites for content, or want to send information to others, or want to find information from the millions of sites that are a part of the Internet. While there can be bad actors, responsible companies know they have to cooperate to make this happen.

Take Verizon as an example. Our broadband connections allow our customers to connect to sites that are linked to other networks. Traffic from our customers often goes on backbones owned by other companies or it must connect to CDNs owned by other players for access to video content. If we tried to interfere with traffic to NBC, for example, Comcast could retaliate in a number of ways by, for example, stopping email traffic to our customers that travels over their networks. But why would they? The benefits of interconnection so greatly outweigh any possible advantage gained from interference that no rational company would even consider such a strategy.

The fact is that there are so many users (2.2 billion), networks (tens of thousands, but no one really knows), devices (35 billion), operating systems (dozens), apps and applications (hundreds of thousands) and web sites (255 million) that are interconnected today on the Internet that the incentives to cooperate and ensure that traffic flows to where consumers want it go are very strong.

While all of this can seem complex, it works amazingly well with no government involvement. For example, according to this study by Anna Maria Kovacs, there are literally tens of thousands of agreements between networks of various kinds to interconnect. The vast majority don’t even involve a formal written agreement. Clearly interconnection arrangements between networks are common place and arrived at in the vast majority of cases with very little fuss.

That does not mean, however, that all requests for interconnection between networks end in an agreement. A failure to reach one agreement does not imply that traffic is being “interfered” with, or that a network is isolated and unable to send traffic from its customers to other networks. It just means the two parties couldn’t agree on price or other commercial terms – something that happens every day in every business.

Beyond the myriad relationships that exist among networks and that exist at all levels of the Internet that drive communications and connectedness, competition also represents a strong form of discipline in the market. Competition is clearly in evidence with IP interconnection, and it shows in the prices for network services.

For example, according to Analysys Mason, the increase in competition among owners of capacity on global backbone facilities has resulted in substantial drops in the prices for international connectivity in the past few years in many countries. In one example, since 2008 prices declined by more than two-thirds for an international link between South Africa and the UK. These drops in prices helped push down the cost of broadband in many countries.

Within countries too, prices for transit have fallen dramatically. In spite of continued and massive increases in demand and the increased bandwidth of content, transit prices have fallen on average more than eighty percent in major markets around the U. S., again a major indicator of the competitiveness of the IP market place.

The Internet is constantly evolving, too, adding more networks, different business models and more competition. New networks are emerging or have emerged, such as Content Distribution Networks and hubs where large numbers of ISPs connect, called IXPs. Traffic is no longer hierarchical and no longer simply goes from local networks, up to backbones and back down. There are many more pathways and much greater efficiency than in the past. These new models increase options for players when it comes to interconnecting their networks, and serve as further evidence that the market is competitive and adapts to the benefit of consumers and the industry.

A final factor that encourages network players to work out interconnection disputes and reach agreements is crowdsourcing or pressure from consumers. Most consumers are basically users of the Internet and not engineers or network experts. But among the hundreds of millions of users of the Internet are many engineers and experts. The Internet’s protocols are not proprietary, and the openness of the Internet makes it very difficult to “hide” problems related to an interconnection dispute or a breakdown between networks. If these kinds of interconnection disputes cause network problems or slowdowns, it is quite possible that the dispute will get public attention. If the dispute is significant enough and has a negative effect on consumers, it is also quite possible with today’s social networks, Twitter and blogging sites, that some will react and a “crowd” will grow online, making it clear what their views are. Companies do care about their reputations, and public displays of frustration or concern are not likely to be ignored.

It is important to remember, though, that while the incentives to interconnect are strong, it is the ability of the negotiating parties to decide which agreements make sense that leads to market-based rates, innovation and the efficiencies they produce. As Analysys Mason noted, the rate of growth of the IP infrastructure in recent years, and the accompanying decline in prices, has been truly remarkable. That success story is due in large part to market-based prices for interconnection arrangements that give all participants the right incentives to invest and innovate.

And that’s something no one could ever say about the regulated interconnection regime that governed the circuit switched world.