Interconnection in the Internet : The Policy Challenge

In days past, Internet Service Providers (ISPs) relied on two basic types of contracts for exchanging traffic (peering and transit) and ISP interconnection was not regulated. As we explained in (Faratin, Clark et al. 2007), the world of Internet interconnection is no longer so simple. The increased complexity poses significant challenges for policymakers who might contemplate regulating Internet interconnection, so it is perhaps lucky that calls for Internet interconnection regulation have been muted to date. That quietude was threatened in late 2010 by two events: the issuance of the FCC's Network Neutrality order and the dispute between Level 3 and Comcast over their interconnection agreements. Since we had earlier predicted that attempts to regulate the provision of broadband access services would, of necessity, raise issues for Internet interconnection (Clark, Lehr et al. 2009), we were hardly surprised. Regardless of how one views the Level3/Comcast dispute or its relationship to on-going discussions about broadband access regulation, we believe that there remains an enduring public interest in ensuring a healthy Internet interconnection market and that a better understanding of the underlying economics impacting those markets is important to frame appropriate policies. Using the Level 3/Comcast dispute to seed our discussion and building on our earlier paper, we examine the changing dynamics of Internet interconnection economics. Our analysis provides a basis for understanding why revenue neutral peering with traffic-balance requirements may no longer provide a suitable framework for ISP interconnections of the sort between content-delivery networks (e.g., Level 3) and access networks (e.g., Comcast). Interconnection agreements do not just route traffic in the Internet, they also route money. Allowing money to flow from the end-users (the ultimate source of all funding other than that provided by public subsidies) to the providers of infrastructure services to allow them to recover their capacity-related costs is necessary in order to sustain infrastructure investment and a healthy Internet ecology; however, concerns about abuses of potential market power raise valid policy concerns. We present a simple model to examine these issues, and while our analysis does not lead us to advocate constraining ISPs freedom to negotiate more complex interconnection agreements, we consider a number of policy initiatives that might prove beneficial in improving transparency and market efficiency