Title: Regulatory Issues
1Regulatory Issues Policies in Broadband
Interconnection A Korean Case
- 2003. 7. 11
- ASIAÂ PACIFIC FORUM ON TELECOMMUNICATION POLICY
AND REGULATION
Hee-Su Kim Research Fellow Fair Competition
Division KISDI hskim_at_kisdi.re.kr
2Contents
- The role of Interconnection in the Internet
- Types of Internet Interconnection arrangements
- International Trends in Internet Interconnection
- Anti-competitive conducts in Internet
interconnection (in theory) - Anti-competitive conducts and regulatory
inquiries in practice - Internet Interconnection in Korea
- Competitive Conditions of Domestic Connectivity
Market - IBPs Conducts Open to Debate
- Signs of Healthy Competition
- Overall assessment of Effective Competition
- Proposals to Regulatory Prescriptions
- References
3The role of Interconnection in the Internet
- The hallmark of the Internet is that it appears
to end users as a single network you can access
any website or any other user once you subscribe
to an ISP via whatever access method you choose. - This is because all networks in the Internet,
operated by different parties (ISPs), are
interconnected directly or indirectly. - Maintaining and improving the seamlessness of
interconnection is extremely important for
continued growth of the internet.
Source OFTEL (2001)
4Types of Internet Interconnection arrangements
- Peering Between ISPs in the same tier,
settlement-free (bill and keep). - Traffic from one another (and from one anothers
customers) accepted. - No obligation to carry traffic to third parties.
- Transit Between ISPs in different tiers,
unilateral charging (volume based). - Transit Providers (Backbone ISPs) provide
connectivity to the entire Internet.
peering
Peering
Transit
5International Trends in Internet Interconnection
- OECD (2002) and Ovum (2002)
- The price of transit services is declining.
- The increasing use of (secondary) peering
indicates that the Internet is becoming less
hierarchical. - In liberalized markets, commercial responses and
solutions in backbone markets are rapidly
developing and thriving. (e.g. to reduce costs by
peering at local IXPs) - A move away from multilateral interconnection at
Internet exchanges, and towards bilateral
interconnect at private peering points - ISPs attach increasing value to users rather than
websites. So the ISP with lots of users has
increasing negotiating power. - Internet traffic patterns are becoming less
US-centric. - The amount of multi-homing is increasing.
6International Trends in Internet Interconnection
- Implications on Regulation OECD (2002)
- Competition is increasing in Internet backbone
markets. - ? Regulation is unnecessary for the present.
- Nevertheless, regulators need to be vigilant in
ensuring a strong competitive framework. Where
there is insufficient competition, regulators
should be in a position to apply appropriate
safeguards even in internet interconnection. - Are the trends pointed by Cukier (1998) no longer
valid? - The Number of Tier-1 ISPs has shrunk due to
consolidation. - The margin between Tier-1 and Tier-2 ISPs has
grown wider. - Tier-1 ISPs have decreased the number of ISPs
they peer with. - The terms of peering are not made public by
Tier-1 ISPs. - Interconnection and peering arrangements can be
discontinued at short notice.
7Anti-competitive conducts in Internet
interconnection (in theory)
- Internet connectivity, an essential input for
Internet services, can be used for the following
market power abuses (especially by vertically
integrated IBPs). - Fixing exorbitantly high transit fees (access
price) - Price squeeze for downstream market competitors
- Refusal to interconnect/peer
- Drive out downstrean market competitors (vertical
foreclosure) - Undue discrimination Treat other ISPs as
customers while reserving to it the peer
treatment - Reduce the quality of the connectivity sold to
downstream competitors - (Cremer, Rey and Tirole (2000) called it a
targeted degradation strategy)
8Anti-competitive conducts and regulatory
inquiries in practice
- Thus far, government intervened only in
anti-competitive merger attempts. However, legal
frameworks are being proposed to make Internet
interconnection no longer exempt from ex ante
regulation, although its implementation doesnt
look imminent.
9Internet Interconnection in Korea
- There are 2 IBPs, 2 IXs and about 80 Tier-2
ISPs. - One of the IBPs is the incumbent PSTN carrier
with the largest number of broadband subscribers
and the other IBP used to be the largest data
center. - IBPs peer with each other and Tier-2 ISPs buy
transit from IBPs. - Some Tier-2 ISPs peer with one another directly
or at the public IX.
Source National Computerization Agency
10Internet Interconnection in Korea
- Internet interconnection is quite hierarchical.
- Bilateral/multilateral peering among Tier-2 ISPs
are not active - IBPs do not serve as a public Internet Exchange.
- Korea Internet Exchange (KINX), the only
commercial and public IX in Korea, is not
functioning well because IBPs do not interconnect
their. - Tier-2 ISPs purchase transit from both IBPs at
the same time to secure redundancy and better
connectivity (i.e. reduce trace routes and avoid
congestion). - End-user based ISPs tend to prevail over
data-centric ISPs. - Recently, a Tier-2 ISP with the second largest
broadband subscriber base interconnects with the
leading IBP on a (limited) peering basis for par
of the exchanged traffic. - Regional traffic need to traverse the PoIs Seoul
metropolitan areas. - A Regional IX was established just recently.
11Competitive Conditions of Domestic Connectivity
Market
- Market definition
- Demand-side substitution no substitute for
domestic Internet full connectivity - Supply-side substitution need backbones and
sufficient interconnection arrangements - Domestic Internet full connectivity is defined as
a separate market as in OFTEL (2001) - Market share of two IBPs 5743
- Entry into a simple ISP business is easy, but it
is very difficult to have full connectivity by
signing sufficiently many interconnection
arrangements (some of them need to be taken away
from the incumbents) (Its hard to break the
current coalitional equilibrium.) - Peering policies are not disclosed.
12IBPs Conducts Open to Debate
- IBPs have refused to peer with a near equal
Tier-2 ISP. - IBP A is the 1 carrier in the number of
broadband end-users and interconnecting ISPs. - This tier-2 ISP ranks the 2nd and 3rd in the
number of broadband end-users and interconnecting
ISPs, respectively. - Actual traffic exchanged is almost equal between
them. - Rationale Its not fair to provide free access
to the most valuable network with the largest
end-user ISP base. - Counter argument Peering is good even for the
IBP. Your ulterior motive is to limit/downgrade
the network value of your rivals (both in
backbone and end-user markets).
13IBPs Conducts Open to Debate
- IBPs have refused to peer with a tier-2 ISP (IDC)
- This ISP is a web hosting firm with a few
business users. ? About 90 of data traffic goes
one way from ISP to IBP. - Rationale I do not get inter-networking services
from you. - Counter argument My access to your network
increase the value of your network. Im your
business partner not your customer. - IBPs have refused to interconnect (let alone
peer) with the public IX. - As a result, all lower-tier ISPs should directly
interconnect with IBPs for connectivity (thus buy
more leased lines) in addition to
bilateral/multilateral peering at the IX. ISPs
ask for full-mesh interconnection among IBPs and
IX. - Rationale My transit customers will leave me to
become a collective peer through the IX. This is
a nonsensical denial of competition and request
for a free riding.
14IBPs Conducts Open to Debate
- Bundling of Transit Fees and Leased Lines
- If an ISP wants to buy a transit service from an
IBP, it should also rent the leased lines from
that IBP. - Rationale
- Due to the difficulties of calculating the
appropriate level of transit price, IBPs used to
adopt a simple mark-up pricing model, setting the
price of transit equal to 20 of the price of
leased lines used for interconnection. - The transit fees that are proportional to
interconnection bandwidth can represent the
benefit a requesting party gets from
interconnection as well as transit provisioning
costs. - If unbundled, due to the loss of scope/scale
economies from bundling, the price of a pure
transit service will be higher than the implicit
price in the bundle. - Counterargument
- Since the price of leased lines is basically
discriminatory (thus hard to detect) on an
individual contract basis, a dominant IBP can set
an exorbitantly high transit price. - The leveraging argument applies Market power
extension from a dominant sector to a
non-dominant sector and restrained choice of
cheaper lines.
15IBPs Conducts Open to Debate
- Limited Provision of Full Transit
- Here, full transit means accepting transit
requests from the customers of the original
transit buyers. Currently, only a selection of
tier-2 ISPs is provided with full transit. - Rationale Need to block free riding.
- Counterargument Full transit should be sold at
least to the public IX. (Currently, IBPs do not
interconnect with the IX.) IBPs refusal to do so
restrains the formation and growth of public IXs.
(Erection of entry barriers) - Raising Rivals costs with Double Bottlenecks
- In addition to having good control of Internet
connectivity, as a vertically integrated firm,
IBP A is allegedly raising the price of lease
lines on the local loop side, over which it has
market power. This also restrains the formation
and growth of vertically integrated ISPs with a
strong end-user base.
16Signs of Healthy Competition
- The two IBPs transit fees (bundled with
interconnect leased lines) seem to have moved
together, but are falling recently - After some Tier-2 ISPs filed complaints with the
regulatory authority, the two IBPs are working on
developing a standard peering policy that can be
widely accepted as fair. - A leading Tier-2 ISP recently peers partly with
the leading IBP.
17Overall assessment of Effective Competition
- Although some conducts of IBPs are less
questionable than others, these perceived abuses
actual or potential indicate that the market for
domestic Internet connectivity is not effectively
competitive and that regulatory safeguards are
needed. - However, as some positive signs of healthy
competition emerge and there is a need to
consider the dynamic nature of the Internet
market, regulatory measures need to be carefully
and cautiously designed with further monitoring
of competitive developments.
18Proposals to Regulatory Prescriptions
- Light-handed Approach
- Create a legal framework whereby government can
readily intervene whenever competitive conditions
deteriorate. - Currently, ISPs are categorized as value-added
service providers ? Internet interconnection
cannot be under the traditional interconnection
regulation. - In line with the new EU directives and the recent
moves of the ACCC of Australia. - Enhance transparency by encouraging voluntary
disclosure of transit/peering agreements/ policy. - Design a standard peering policy that can be
accepted industry-wide as fair. - ISPs satisfying a minimum criteria cannot be
denied peering. - Promote (regional) ISPs to build a public IX (on
the initiative of regional governments).
19Proposals to Regulatory Prescriptions
- Heavy-handed Approach
- An obligation to peer imposed upon all ISPs or,
alternatively, an obligation to negotiate peering
with all ISPs if a peering agreement is concluded
with any ISP. - Regulation of transit prices.
- Prohibition of vertical integration on the part
of IBPs into related activities. (Structural or
accounting Separation of IBP and retail ISP
functions) - Prohibition of exclusive dealing by a vertically
integrated IBP. - Compulsory disclosure of transit/peering
agreements/ policy. - Allow only a qualified public IX to interconnect
with the Government IX as an inducement to
peering. - Many of these policy options have been proposed
by Cukier (1998) and OECD (1999). - Obviously, whether to intervene and what options
to choose depend on how insufficient is
competition and how much is the risk of
regulatory failure.
20References
- ACCC (2003), Internet interconnection service
- Cremer, J., P. Rey and J. Tirole (2000),
Connectivity in the Commercial Internet, Journal
of Industrial Economics, 48(4). - Cukier (1998?), Peering and fearing ISP
interconnection and regulatory issues. - EC (1998), Declaring a concentration to be
compatible with the common market, Official
Journal of the European Commission. - Lucien Rapp (1999), Competing for the Internet,
Communications Strategies, no. 34 - OECD (2002), Internet traffic exchange and the
development of end-to-end international
telecommunications competition - OECD (2001), Workshop on Internet traffic
exchange - OECD (1999), Workshop on interconnection policies
and frameworks - OFTEL (2001),
- Ovum (2002), IP Interconnect.
21Thank You!