In the context of network interconnection, communications policymakers have the benefit of a real-world experiment with two very different approaches to interconnection, which have existed in parallel for decades. One model is the proscriptive regulatory approach that governs traditional voice communications. The other is the IP interconnection marketplace in which commercial negotiations have created a flexible, adaptable network ecosystem that has seen unprecedented innovation and investment. In our filing, we explain the different ways these two models have evolved in the modern 21st-century communications space.
Legacy Interconnection: Arbitrage, Inefficiency, and Higher Customer Bills.
The legacy interconnection regime, left in place after the 1996 Telecom Act, involved a complex scheme of inter-carrier compensation charges and access termination charges, determined by each individual state public utility commission. The 96 Act also layered open access requirements onto local incumbent service providers, requiring them to lease access to their physical lines to retail competitors at regulated, below-market rates. The combination of these rules created incentives for arbitrage and gamesmanship in the communications industry.
Practices like traffic pumping and phantom traffic, regulated rates, and a balkanized dispute resolution system led to a system laden with large implicit and explicit subsidies that ultimately ended up on the end users’ telephone bills. Consumers footed the bill for other carriers’ network costs.
Internet Interconnection: Efficient, Flexible, Adaptable.
By contrast, the Internet’s voluntary, commercial interconnection model has been nothing short of a tremendous success. In this model, each service provider negotiates an agreement with several other providers, the terms of which vary according to the networks’ needs. Because there are multiple paths (aside from direct interconnection) available for any one provider to reach another, there are no compulsory agreements and each party is assumed to receive equitable value from an agreement to connect.
This approach has allowed for innovation and flexibility in response to changes in end users’ demands. The days of the hierarchical Internet made up of Tier 1, Tier 2 (and so on) networks are long gone. Instead, network operators have been able to quickly adapt to the new rich communications demanded by 21st-century netizens. The best example is Content Delivery Networks (CDNs), an unimaginable networking service in 1996 but which have facilitated the massive rise in streaming web video. Without the ability for content and network providers to reach new interconnection agreements, the Internet of 2014 might have still been optimized for text-based news and blogs, rather than high-definition, interactive content.
Flexibility allows providers to adapt and respond to the marketplace quickly.
While the Internet interconnection model has been unquestionably successful, there have still been occasional disputes, as there are in any competitive market with hundreds of players and thousands of agreements. Fortunately, these disputes are short-lived, and all providers have an incentive to work them out quickly and with minimal disruption to their customers.
Still, given the paramount importance of interconnection, some have called for policymakers to adopt a limited government backstop to ensure good-faith negotiations and that no consumer is cut-off from the Internet. Any such backstop should kick in only if and when there is demonstrable consumer harm. It should also be federal in nature; state-based regulation would result in myriad disputes that are resolved not by speedy technical experts, but by 50 different public utility regulators with varying ideas about what is appropriate.
The Committee has correctly recognized that the rapid changes in the communications industry warrant a serious effort to bring communications laws in line with 21st-century consumers’ needs. Flexibility, innovation, investment, and competition should underpin Congress’s approach to competition policy generally, and network interconnection specifically.