FCC supports freewheeling Internet backbone market : The hands-off policy won't please foreign providers

America's Network, Nov 1, 2000 by Grahame Lynch

A newly released Federal Communications Commission policy paper argues there is no need to regulate American and international Internet backbones, since antitrust law sufficiently reduces anti-competitive behavior.

"The Digital Handshake: Connecting Internet Backbones," by FCC Internet Policy Analysis Director Michael Kende, says existing competition in the Internet backbone market means no interconnection regulation is required. However, he adds, the proposed merger of Sprint and WorldCom could have upset that balance.

The report dismisses the argument that the increasing tendency of large backbone providers to refuse peering in favor of commercial transit arrangements will impede competition. For starters, the large backbone providers aren't refusing interconnection, but simply charging for it. Competition between backbones ensures that pricing remains cost-based.

"Quality may improve with transit, at least compared with peering at a Network Access Point, because a transit connection may avoid the congestion of passing through a Network Access Point to get access to a backbone," the report said. It points to at least one example of a successful network backbone start-up, SAVVIS, which was initially denied peering arrangements and relied wholly on commercial transit.

In the case of the once proposed WorldCom-Sprint merger, however, there was a real risk that the resulting entity would be in a position to dominate Internet traffic and gradually reduce the quality of interconnecting backbones.

It cites GTE's suggestion that a dominant backbone "might degrade interconnections with other backbones in order to win customers from those backbone providers.

"This could be most easily done by 'slow rolling' necessary increases in the capacity of trunks used to interconnect with other backbones. Such capacity increases are a regular necessity to keep pace with the rapid growth in demand for Internet services."

In such a scenario, customers would begin to gravitate to the dominant backbone because of its superior quality. In this context, the report says the proposed WorldCom-Sprint merger may have stifled competition. Although the report identifies some 42 major backbones, it says that just five -- Cable & Wireless, WorldCom, Sprint, AT&T and Genuity -- are so large that they don't need to pay for transit on other backbones. Its data also shows that the number of backbone providers has largely stabilized, reinforcing its preference for antitrust law over provision of a helping hand for new entrants.

However, the FCC's confidence in antitrust won't please foreign operators who claim that US ISPs profit at their expense. These concerns, most strongly articulated by Telstra, state that foreign operators must pay 100% of the costs to connect into US Internet interconnect points, even though US users are free to use these links. Telstra, along with other regional operators, claim that US Internet users get a "free ride" on their circuits. Telstra estimates that 30% of the traffic on its US circuits is generated by U.S. users accessing Australian content.

But the FCC report states that "traffic flows are not a good indicator of the relative benefits of an Internet interconnection between backbones and therefore provide a poor basis for allocating costs."

For example, if a US user accesses a Japanese Web page, who derives the most benefit? The Web site provider obviously receives a benefit.

The report states that the current situation is exaggerated by the US' first-mover advantage in Internet content and infrastructure. Increasingly, the rise of the Internet abroad will create incentives for US ISPs to establish commercial interconnection with foreign backbone providers. It cites reports that a Japanese backbone provider, Internet Initiative Japan, already generates enough traffic to peer with US providers on an equal basis.

Additionally, US providers such as Level 3 are beginning to invest in both international transmission capacity and networks in other countries. "US backbones that have invested in international transmission capacity can then exchange traffic with foreign backbones directly in the foreign country, increasing the options available to foreign backbones that not wish to pay for transmission capacity to exchange traffic with US backbones in the United States," the report states.

The overall message for Internet backbone providers? No special favors for smaller US or foreign backbone operators seeking regulated or mandated interconnect arrangements with large infrastructure owners. But the message for the dominant five is equally clear: Don't think about merging in order to set prices or establish singular dominance in the market.

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MCI/WorldCom
AT&T
Sprint
Qwest
Williams
IXC
Level 3

Source: FCC