A Very Modest Proposal

I have been silent for some weeks, at least in public, on the World Conference on International Telecommunication (WCIT) and the European Telecommunications Operators Network Association’s (ETNO) proposal for a New Internet Ecosystem. I’ve been reflecting on private comments made by a well-respected colleague who suggested that I might be contributing to the ETNO cause by regularly calling attention to it. I took the suggestion seriously, reflected on it, but ultimately determined continued silence was not my preferred approach.

My reasons to return to the topic are varied, but the determining factor was the continued push by ETNO to advocate for their proposal on a global scale. Their campaign is choreographed, well-funded, and follows traditional FUD principles that are designed to create an atmosphere conducive to the acceptance of their proposal for radical change.

Genesis of the ETNO Proposal

In 2010, AT Kearney produced a report at the behest of Deutsche Telekom, France Telecom, Telecom Italia and Telefónica – four leading members of ETNO. The report has been referenced on several occasions to support changes in the International Telecommunication Regulations (ITRs) that would significantly, and radically alter the Internet economic model. Perhaps unsurprisingly, ETNO’s members would be the primary beneficiaries of the proposed changes and they have been the most vocal proponents for such change.

The AT Kearney report argues that the Internet “risks becoming a victim of its own success” as a “fresh wave of innovation” utilizes “more capable devices and new high-bandwidth services”. In particular, free video traffic “threatens to swamp available network capacity and cause unacceptable levels of congestion for users of all services”.

Continuing the report states that by itself, technology can provide only part of the solution to this otherwise disastrous end-state of the Internet. Higher capacity networks, traffic management, compression, and caching, will ameliorate the situation but additional measures are necessary. The report suggests that a combination of the following economic changes, each benefiting the report’s sponsors, are required:

    1. Modification of Retail Pricing Schemes
    2. Traffic Dependent Charges for all Traffic
    3. Enhanced Quality Service over the Public Internet
    4. Enhanced Quality Services Based on Bi-lateral Agreements

To support its proposed changes, the AT Kearney report assumes the Internet is a two-sided market, one where content providers and end-users are brought together by infrastructure providers (carriers).

Two-sided markets are a relatively new concept in economic theory conceived at about the turn of the century to explain behavior in the software and credit card markets.  These markets are characterized by two distinct groups that provide each other with network effect benefits that are facilitated by bringing the two groups together in a single market. Wikipedia has an approachable article explaining the concept, giving easily recognizable examples of two-sided markets. It also provides examples of one-sided markets like the telephone, instant messaging, fax (document exchange), and email. Interestingly, all of these are Internet services in use today and many other one-sided services either currently exist or are likely to evolve, e.g. video chat.

Largely using data from European markets, the AT Kearney report makes the case that bandwidth is being consumed faster than it is being produced and that without some change to the Internet’s economic model, the Internet will become unusable. This is a frightening prospect, and if demonstrably true, action certainly should be taken.

It is interesting to note that this is not a novel claim with one pertinent example being a 2008 statement by Jim Cicconi, then Vice President of Legislative Affairs for AT&T: “We are going to be butting up against the physical capacity of the Internet by 2010”. Of course the Internet did not reach capacity and instead, using the current economic model, investment in Internet infrastructure proceeded at a pace sufficient to prevent the dire consequences predicted. This allowed AT Kearney to repeat the claim, just as the earlier prediction was eclipsed, repeating a cycle that no doubt will continue.

Analysis

Two-sided market models are an important new tool for economic analysis and as they mature will no doubt assist policy makers with decision making. At present, there is little research on the Internet as a two-sided market and that research is not definitive in terms of suggesting whether the current economic model can be improved. All of the research that I have reviewed employs simplified models of the Internet and all reports express caveats with their conclusions.

None of the research views the Internet simultaneously as a one-sided and two-sided market. None make the unequivocal suggestion that the current Internet economic model is unsustainable in the long-term. None suggest that the model must be changed. All suggest that additional research is warranted. For example, in Njoroge et. al., the authors spend some 25 pages to conclude “Our results suggest that net-neutrality regulation could possibly be an inapt policy to increase value in the Internet…”. They then go on to say:

While our results are suggestive, our model is obviously stylized so they need to be taken with caution. One simplifying feature of our analysis is the lack of transaction costs in the non-neutral regime. Incorporating them presents new analytical challenges but it constitutes an important area to explore, because they would reduce the revenue earned by the platforms and thus they are likely to temper (perhaps in a negative way) the investment incentives of ISPs.

ETNO would have us believe that such research is inviolate, that the current economic model is unsustainable and must be changed. Their campaign relies on the fear that the Internet will somehow collapse from congestive bandwidth failure. They enhance this fear by expressing uncertainty within the WCIT context of their ability to invest in infrastructure (while telling financial markets they will invest). And they employ others to doubt the current economic model using a regional analysis and a simplified model of a complex system to support global change.

This is a well-considered campaign and one that could dramatically change the Internet. It plays on a base human emotion, fear, to grab the listener’s attention and references reports, research, and analyses to provide a rational explanation for the listener’s fear. To further influence listeners, the campaign employs repetition and selective presentation of “facts” from reports. Omitted from these presentations is any mention of fact or statements that do not support the campaign’s objectives.

Repetition, selective presentation/omission, and loaded messages to obtain emotional rather than rational responses are well-known propaganda techniques. They are employed by marketing departments to encourage us to buy products; some useful, others not. Politicians regularly use them in an effort to get elected. Lobbyists might consider them as appropriate air cover for regulators who have an obligation to make fact-based decisions using best-available information, not just that which is conveniently and selectively supplied.

Change is Inevitable

Change can be beneficial. Change can be detrimental. Change is inevitable.

Some might argue that the Internet has caused detrimental change where others see benefit. The AT Kearney report itself mentions the huge economic and social benefits of the Internet and the desire by governments to enhance those benefits through broader adoption and continued innovation. Is a change to the Internet’s economic model required for this to occur? To date, the answer has been an unequivocal no as has been demonstrated in practice over a span of years regardless of what any theory might suggest.

ETNO would have policy makers believe that such a change is required and relies on inconclusive research to support its claim. While claiming to seek no regulatory imperative, ETNO is seeking a mandate within the ITRs, to force certain parties (operating agencies) to “negotiate commercial agreements to achieve a sustainable system of fair compensation for telecommunications services and, where appropriate, respecting the principle of sending party network pays”. As a general matter, the ITRs are themselves an international regulatory instrument and the specific text proposed by ETNO imposes a mandate on certain parties. This is regulation, pure and simple.

What is missing from the ETNO campaign, is any mention of potential negative consequences of the dramatic regulatory change they are proposing. Policy makers are being asked to rely on ETNO’s assessment, based on nascent research that is neither definitive nor conclusive, that the fundamental change being proposed will be beneficial. Others (CDT, ISOC, Forbes, CNET) have pointed out potential negative consequences of implementing ETNO’s proposal and one hopes that those charged with revising the ITRs will pay particular attention to them.

Change is Happening

Change can be beneficial, but one wonders why ETNO is arguing so strongly for this specific change, a regulatory mandate in the ITRs, given the following from their latest “Contribution”:

Quality based delivery is already in operation.

Companies such as Akamai, Level 3 and Limelight, already successfully offer quality based content delivery to Over the Top players/Content Providers. Moreover, Google has built the largest worldwide IP backbone to improve the quality of its delivery. Quality is based on Content Delivery Networks, web acceleration, caching, buffering and other techniques.

In the last year, telecoms operators have been receiving requests from Google, Akamai and other carriers looking to move their own servers from the edge of the network into domestic networks. This is needed to improve the Quality of Service (QoS) and the Quality of Experience (QoE).

Moving content closer to its use/consumption is a well-known technique to improve user experience and to reduce congestion. As noted by ETNO, Content Delivery Networks (CDNs) already offer these services and more importantly, these services have requested that “telecoms operators” provide “domestic network” access.  This is exactly what the ETNO proposal seeks to mandate, but it is happening today without mandates. One wonders then, why they are necessary.

It would seem that all that remains is for ETNO’s members to negotiate with the CDNs and to enter into contracts to provide the desired services. No modification of the ITRs are required since ETNO’s members are free to enter into commercial agreements with whomever they choose, as specified in Article 9 of the current ITRs.

ETNO has demonstrated, that the parties are at the table needing no regulatory change to entice them. If ETNO’s members can provide quality services at an affordable and competitive price, contracts could be signed on terms that are amenable to both parties, and ETNO’s members will increase their revenue. If they are unable to do so, they may need to resort to other tactics; perhaps international regulatory mandates.

A Very Modest Proposal

So my very modest proposal is this, make no change to the ITRs as suggested by ETNO. The evidence is lacking as any balanced review will show. The tools to address the (perceived) problem already exist as demonstrated by those claiming they require new tools. Reject emotionally loaded arguments. Conduct rational analyses. Favor successful practice over unproven theory. Continue to research current and new models. Embrace the Internet.

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4 Responses to A Very Modest Proposal

  1. Steve says:

    This is a thoughtful piece, but two important corrections need to be made:

    1) Two-sided markets are at least as old as newspaper advertising — both subscribers and advertisers pay newspaper publishers. It is not a new econonomic concept of the broadband age.

    2) I agree with the point that we do not need regulatory or legislative changes to the “Internet model.” However, in the US, that is exactly what we have — net neutrality regulations prevent ISP experimentation with a two-sided approach; never mind that Google does it.

    Steve

    • inetaria says:

      On point 1) Two sided markets are indeed nothing new. What is new, at least according to the literature I have read, is their formal study in economics. I am not an economist, and could easily be wrong on this but I offer the following two references as examples of my understanding of the nascent “state of the art”:

      Speaking of Marshall Van Alstyne Wikipediea states “With professor Geoffrey Parker, he contributed to the founding literature on “two-sided networks,” a refinement of network effects that explains how firms can profitably price information at zero.”

      Wikipedia may not always be accepted as authoritative so I offer another reference – In Two-side Markets: a tentative survey, Roberto Roson writes:

      There has been a recent surge of interest in two-sided markets, especially after the seminal papers by Armstrong (2004), Caillaud and Jullien (2003), and Rochet and Tirole (2003a).

      On point 2) Currently, a considerable percentage of my time is spent on the ITU and attempts to re-establish the telephone cartel the world endured for the better part of a century. I favor net neutrality, and will continue to do so until theory and practice demonstrate that better models exist.

      Thanks for your comment. I appreciate the dialog.

  2. Bill,
    thank you for this analysis. It will be helpful in the debate. Time permitting, I will review the economic literature, as I have an economics background. Keep up the good work.
    Best,
    — Peter

  3. Pingback: Trattato ITU: Qual’è la posizione del governo italiano sul “Gambardellum” di ETNO? « L'angolo di Pierani

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