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Regulatory Issues

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Title: Regulatory Issues


1
Regulatory Issues Policies in Broadband
Interconnection A Korean Case
  • 2003. 7. 11
  • ASIA  PACIFIC FORUM ON TELECOMMUNICATION POLICY
    AND REGULATION

Hee-Su Kim Research Fellow Fair Competition
Division KISDI hskim_at_kisdi.re.kr
2
Contents
  • 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

3
The 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)
4
Types 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
5
International 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.

6
International 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.

7
Anti-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)

8
Anti-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.


9
Internet 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
10
Internet 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.

11
Competitive 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.

12
IBPs 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).

13
IBPs 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.

14
IBPs 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.

15
IBPs 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.

16
Signs 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.

17
Overall 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.

18
Proposals 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).

19
Proposals 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.

20
References
  • 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.

21
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