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The Federal Communications Commission has left the Internet backbone market unregulated, as explained in an excellent paper by Michael Kende.
In summary, telecommunications providers are subject to common carrier regulations that ensure nondiscriminatory access to end users; together with antitrust enforcement, these regulations serve to protect against anti-competitive behavior by telecommunications providers with market power. In markets where competition can act in place of regulation as the means to protect consumers from the exercise of market power, the Commission has long chosen to abstain from imposing regulation. For this reason, providers of services that combine telecommunications with computer services are not regulated as common carriers. [Kende p 12]
DARPA built the 1st backbone: The ARPANet.
NSF built the 2nd backbone: The NSFNet.
Internet Backbones have been an issue in several proceedings before the FCC. Internet backbone policy issues include
- Market consolidation - an issue considered in the merger proceedings
- Peering and transit
- Whether dominant providers have the power to exclude smaller players from peering, forcing them into transit arrangements,
- Whether telecommunications settlement regimes should be imposed on Internet peering (this is also known as the ICAIS debate
The issue of Internet backbones has been raised in the FCC National Broadband Plan NOI. It is not directly raised in the Broadband Report.
- "How robust are broadband capabilities in backbone and feeder networks throughout the country?" NOI ¶ 17
The FCC's Universal Service Telemedicine Pilot subsidizes the cost of backbone services.
The most significant FCC proceedings to date to address backbones have been merger proceedings (See also Industry :: Backbones listing major backbones and who has been acquired by whom). After a sufficient number of proceedings, the orders began to have stock background language that read as follows:
109. The Internet is an interconnected network of packet-switched networks. End users (individuals, enterprise customers, and content providers) typically, though not always, obtain access to the Internet through Internet service providers (ISPs) using a “dial-up” modem, cable modem, DSL, wireless network, or a dedicated high-speed facility (which the companies often call “Dedicated Internet Access” (DIA)). ISPs provide access to the Internet on a local, regional, or national basis, and most have limited network facilities. In order to provide Internet service to end users, ISPs and owners of other smaller networks interconnect with Internet backbone providers (IBPs)—larger Internet backbone networks. The backbone networks operate high-capacity long-haul transmission facilities and are interconnected with each other. Typically, a representative Internet communication consists of an ISP sending data from one of its customers to the IBP that the ISP uses for backbone services. The IBP, in turn, routes the data to another backbone network, which delivers the data to the ISP serving the end user to whom the data is addressed.
110. IBPs may exchange traffic either through “peering” or “transit” arrangements. Under a peering arrangement each IBP “peer” will accept and deliver, without charge, traffic destined either for its own network or for one of its own backbone customers. Transit arrangements, by contrast, permit an ISP, small or regional IBP, or other corporate business, to reach the entire Internet using dedicated access lines linking it directly to the transit provider’s Internet backbone network. An IBP providing transit service enables the customer to send and receive traffic through the purchaser’s IBP to any other network or destination on the Internet. Frequently, IBP customers obtain transit packaged with a dedicated highspeed facility as part of a DIA service, with the transit customers paying fees for both the connection and the transit service.
111. IBPs generally can be categorized into tiers based on their size, geographic scope, and interconnections. “Tier 1” IBPs are a small group of the largest IBPs that sell transit and/or dedicated Internet access to substantial numbers of ISPs and corporate customers or other enterprise customers. These Tier 1 IBPs peer with all other Tier 1 IBPs on a settlement-free basis. Lower tier IBPs may peer with each other, but generally must purchase transit from a higher tier IBP to reach end users that are not customers of the networks of their peers.
[SBC / AT&T Merger Order 2005] [Verizon / MCI Merger para. 110-15 2005]
The FCC made the following conclusions in the individual merger proceedings:
- In the MCI Worldcom merger proceeding, MCI voluntarily divest itself of its Internet backbone, selling it to Cable and Wireless - Worldcom retained its Internet backbone services administered through its subsidiary UUNet. The FCC concluded that the divestiture of the MCI Internet backbone, which meant that the merger would not produce any increase in WCOM's Internet market share, eliminates the potential anticompetitive harms that would have resulted from the merger on the provision of Internet backbone services. [MCI/WCOM Order paras 150-156]
- The FCC agreed with MCI and Cable and Wireless that the transfer of the MCI backbone to Cable & Wireless was not a transaction that required FCC review and approval (although it was relevant to the merger of MCI and WCOM). [MCI/WCOM Order n 381]
- In response to commenters arguments that "difficulties in obtaining settlements-free peering from IBPs constitutes a substantial barrier to entry. IBPs that are unable to secure settlements-free peering agreements must use transiting arrangements, which, commenters contend, increase the costs of providing Internet services to end users and may result in poorer quality transport than that associated with peering," the FCC agreed "that peering may be a substantial barrier to entry to those firms that intend to provide Internet services. " [MCI/WCOM Order para 150]
- MCI and Cable & Wireless agree that they are prohibited from terminating their peering agreement for five years. [MCI/WCOM Order para 151]
- In 2000, the MCI Worldcom Sprint merger application was withdrawn by WCOM when the US Dept. of Justice decided that it would seek to block that merger. The Dept. of Justice stated:
WorldCom's wholly owned subsidiary, UUNET, is by far the largest Tier 1 IBP by any relevant measure and is already approaching a dominant position in the Internet backbone market. Based upon a study conducted in February 2000, UUNET's share of all Internet traffic sent to or received from the customers of the 15 largest Internet backbones in the United States was 37%, more than twice the share of Sprint, the next-largest Tier 1 IBP, which had a 16% share. These 15 backbones represent approximately 95% of all U.S. dedicated Internet access revenues. UUNET's and Sprint's 53% combined share of Internet traffic is at least five times larger than that of the next-largest IBP. The Herfindahl-Hirschman Index ("HHI"), the standard measure of market concentration (defined and explained in Appendix A), indicates that this market is highly concentrated. The HHI in terms of traffic is approximately 1850; post-merger, the HHI will rise approximately 1150 points to approximately 3000. (Note: Throughout the Complaint, market share percentages have been rounded to the nearest whole number, but HHIs have been estimated using unrounded percentages in order to accurately reflect the concentration of the various markets.)
The proposed merger threatens to destroy the competitive environment that has created a vibrant, innovative Internet by forming an entity that is larger than all other IBPs combined, and thereby has an overwhelmingly disproportionate size advantage over any other IBP. DOJ Complaint ¶¶ 32-33. More Info.
- Bell Atlantic / GTE merger (2000)
- The Bell Atlantic / GTE merger was approved by the FCC on the condition that GTE spin off its Internet backbone service which is now known as Genuity. This divestiture was required in order for Bell Atlantic to remain in compliance with Sec. 271 obligations. Bell Atlantic / GTE now do business as Verizon.
- WorldCom / Intermedia Merger 2001
- Founded in 1987, Intermedia entered the Internet market in about 1997. In addition to acquiring network services in that year, Intermedia acquired the web hosting service Digex. In 2000, WorldCom and Intermedia announced a proposed merger. On November 17, 2000, the Department of Justice appears to have filed a complaint to block the merger alleging "By adding to WorldCom's leading position in the Internet backbone market, the proposed acquisition is likely substantially to lessen competition in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18." On the same day, WorldCom and DOJ reached a settlement agreement whereby they agreed that WorldCom could keep Digex, the web hosting company, as long as it divested itself of the Intermedia assets, including the backbones services. Noting these DOJ merger conditions, the FCC approved of the merger on January 17, 2001. In January 2002, the Intermedia assets were sold to Allegiance Telecommunications (and were subsequently sold to XO).
- The 2005 Mergers: 2005 saw two major mergers of the two major telecommunications companies (AT&T and Verizon), that also involved two Tier 1 backbone networks (AT&T and MCI). These two merger proceedings proceeded relatively in parallel. Both proceedings considered the implications for the Internet backbone market. Both proceedings also involved Network Neutrality conditions. The analysis in both proceedings was almost identical (the paragraph numbering was almost the same)
- SBC / AT&T Merger 2005
- "The Commission found that the mergers are not likely to result in anticompetitive effects in the Internet backbone market. It found that the mergers are not likely to cause the Internet to tip into monopoly or duopoly, or to give the merged entities the incentive or ability to tip the market to monopoly, increase prices to supra-competitive levels, or reduce service quality." Paras. 108, 116
- The applicants committed, for a period of three years, to maintain settlement-free peering arrangements with at least as many providers of Internet backbone services as they did in combination on the Merger Closing Dates. Para. 133.
- The applicants committed for a period of two years to post their peering policies on publicly accessible websites. During this two-year period, the applicants will post any revisions to their peering policies on a timely basis as they occur. Para. 133.
- Verizon / MCI WCOM Merger 2005
- "We find that the proposed merger of Verizon and MCI is not likely to result in anticompetitive effects in the Internet backbone market. We also conclude that, while the merger may result in the loss of a potential Tier 1 backbone competitor and in significant vertical integration, the record does not support commenters’ conclusions that the merger will “tip” the backbone market to duopoly, increase transit prices to supra-competitive levels, or lower service quality." Para. 109, 120
- "While we conclude that the merger is unlikely to result in anticompetitive effects with respect to Tier 1 peering arrangements, we nonetheless find that certain commitments made by the Applicants are in the public interest. First, they commit that they will maintain at least as many settlement-free U.S. peering arrangements for Internet backbone services with domestic operating entities as they did in combination on the Merger Closing Date. Second, they will post their peering policy on a publicly accessible website, and will post any revisions on a timely basis. Because we find these commitments will serve the public interest, we accept them and adopt them as conditions of our approval of the merger." Para 134.
- AT&T / BellSouth Merger (2006): The firms made voluntary commitments that become enforceable merger conditions. In terms of Internet backbones, they pledged to "maintain at least as many discrete settlement-free peering arrangements for Internet backbone services with domestic operating entities within the United States as they did on the Merger Closing Date." The FCC clarified, however, that these "are not general statements of Commission policy and do not alter Commission precedent or bind future Commission policy or rules." Merger Order ¶ 222.
- "Internet backbone competition. Based on the record, we are persuaded that the merger is not likely to result in anticompetitive effects in the Internet backbone market. We find that the Tier 1 backbone market is not likely to tip to monopoly or duopoly, based either on market share or on other factors, such as changes in relative traffic volumes or through targeted de-peering or degraded interconnection. Rather, we expect a number of Tier 1 backbones to remain as competitive alternatives to the merged entity. We also are not persuaded that the merger will increase the Applicants’ incentive and/or ability to raise rivals’ costs. Given the level of competition we expect to remain in the Tier 1 backbone market, we are not persuaded that such actions would be viable." AT&T/BS Merger Order 2007 para 3, 129
- CenturyLink 2011: In 2011, CenturyLink (formerly CenturyTel) acquired SAVVIS and Qwest. Both of those firms were considered Tier 1 backbones. However, there was no mention on Internet backbones in the FCC decisions approving the mergers. In re Application Filed by Qwest Communications International Inc. and CenturyTel, Inc.. d/b/a CenturyLink for Consent to Transfer Control, WC Docket No. 10-110, Memorandum Opinion and Order (Mar. 18, 2011); Public Notice: Notice of Non-Streamlined Domestic Section 214 Application Granted , WC Docket 11-97 (July 12, 2011) (SAVVIS)
- Level 3 / Global Crossing 2012 (approving of merger, concluding that merger is not likely to result in tipping of Internet backbone market - and noting "there have been changes in how Internet traffic is transported")
The FCC's Network Reliability and Interoperability Council (NRIC) expanded the scope of its work with NRIC V to include packet based telecommunications. Study Group IV of NRIC V addresses interconnection and peering. In June of 2001, this study group recommended to NRIC that Internet backbones publish their peering policies. While this is merely a recommendation letter of the advisory group, it is noteworthy that the subject matter is considered properly within the scope of an FCC advisory council.
- Statement of NRIC V FG4 on Internet Peering. June 2001 ("NRIC V encourages other Internet providers, and especially the large "backbone" Internet providers that comprise the core of the modern Internet, to consider, consistent with their business practices, publication of their criteria for peering.")
- Letter from FG4 to Jim Crowe, Chair of NRIC June 21, 2001.
- Ross Callon, Scott Bradner, NRIC Focus Group IV, NRIC V Council Meeting, slide 8-9 (June 26, 2001).
See also Characteristics and Competitiveness of the Internet Backbone Market, GAO-02-16 (Oct 2001) ("We were also told that peering policies should be made public.")
See also Industry :: Backbones (noting those networks that were found to post their peering policies)
Incumbent Local Telephone Companies (Incumbent Local Exchange Service or ILECs) have also tried to raise the issue of the Internet Backbone in their arguments before the FCC. The Telecommunications Act of 1996 sets for the policy goal of introducing competition into the local telephone market. The problem was how to persuade the local telephone monopoly to give up its grip on the market. The solution created by the 1996 Act was a carrot - the ILECs were be permitted to enter the lucrative long distance telephone market only when their local markets were opened up to competition. The ILECs have argued vehemently against this restraint.
This is where the Internet backbone comes in. ILECs have argued that investment in Internet backbone bandwidth is anemic and that we are on the verge of a bandwidth crisis. They have also argued that there are vast portions of this country that have no direct access to the Internet backbone (even though the entire country now has direct two-way satellite access to the Internet and, in the rural communities, the only ones complaining about this are the ILECs, not the thousands of other ISPs out there). The ILECs argue that the restraint on entering long distance service should apply to voice service only, and not long distance data, and if they were allowed to enter long distance data, they would solve the Internet backbone problem.
In the first Sec. 706 Notice of Inquiry, the FCC asked whether there was a need for the FCC to get involved in peering issues.
What can and should the Commission do to preserve efficient peering arrangements among Internet companies, especially in the face of consolidations of large proprietary gateways? We ask for comment whether the Commission should monitor or have authority over peering arrangements to assure that the public interest is served.
[First Sec. 706 NOI, para 79] The comments filed reflected rough consensus that the FCC should let the free market work; the one dissenting voice recommending FCC action was Bell Atlantic - now Verizon.
105. In the Notice, we asked whether the Commission should monitor or exercise authority over peering -- an arrangement in which two Internet backbone providers exchange traffic that originates from an end user connected to one of the providers and terminates with an end user connected to the other provider. Commenters almost unanimously oppose Commission involvement at this time in peering and similar relations among Internet firms. Only one commenter, Bell Atlantic, suggests possible action, and that is only that we "lower barriers for new entrants, in particular currently precluded entrants." We agree with SBC that premature regulation "might impose structural impediments to the natural evolution and growth process which has made the Internet so successful." Accordingly, we will continue to refrain from action involving peering. We bear in mind that "[t]he Internet and other interactive computer services have flourished, to the benefit of all Americans, with a minimum of government regulation" and that it is the policy of the United States "to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation; . . . ."
[First Sec. 706 Report, Para. 105] The FCC found that investment in Internet backbone was vigorous. More facilities are being built and those facilities have greater capacity every day. Furthermore, the FCC found that bits-is-bits. Whether its voice or whether its data, its all bits and the ILECs don't get the carrot, access to the long distance market, until they fulfill the obligations of Section 271 and open their markets to competition.
The FCC released its second 706 Notice of Inquiry in April 2000. Even though the FCC did not place the issue of Internet backbone bandwidth on the table, the ILECs nevertheless came back with arguments about an impending bandwidth shortage in the backbone. In the summer of 2001 it has been widely discussed that there is glut of bandwidth in the backbone market with tremendous amounts of unused capacity. The FCC stated: "We conclude that there has been ample national deployment of backbone and other fiber facilities that provide backbone functionality. There is no indication that specific types of areas have inadequate access to backbone or functionally equivalent facilities."See ¶¶ 20-22, 208-09
In 2001, the Government Accounting Office released Telecommunications: Characteristics and Competitiveness of the Internet Backbone Market GAO-02-16, November 14., GAO 11/14/01 in which the GAO concluded
- No publicly available data exist to allow a precise economic evaluation of the competitiveness of the Internet backbone market. However, the industry participants we interviewed generally viewed the backbone market as competitive. Several companies that purchase backbone connectivity stated that the market has become more competitive in the last few years. In particular, they noted that the price of backbone connectivity has declined, and the ability of purchasers to negotiate other favorable contract terms has improved.
- This report makes a recommendation that the FCC periodically evaluate whether existing data collection efforts are providing needed information on the Internet backbone market and, if deemed appropriate, exercise its authority to establish a more formal data collection program.
New policy deliberations have involved network neutrality, and whether backbone networks can discriminate against particular content, applications, or companies.
Internet backbone networks acquire Internet addresses from Regional Internet Registries, and then distribute smaller blocks of addresses downstream to their customers. There are several significant issues related to backbones and addressing:
- Switching costs for down stream customers related to IP addresses
- "Several ISPs and end users with whom we spoke expressed concern about the manner in which Internet addresses are allocated. Most ISPs and other end users-except for fairly large organizations-do not directly obtain their own IP addresses, but they instead receive a block of IP addresses from a backbone provider. In particular, when an ISP obtains an Internet connection from a backbone provider, it also generally receives a block of IP addresses from among the addresses that are assigned by ARIN to that backbone provider.
This method of IP address allocation was adopted for technical efficiency reasons-that is, allocations made in this manner reduce the number of addresses that need to be maintained for traffic routing purposes. (See app. II for detailed information on IP address allocations). While the method of allocating IP addresses in large blocks enables backbone routers to operate efficiently, some of the ISPs and end users with whom we spoke also told us that it makes it difficult for smaller entities to switch backbone providers. In particular, if an ISP were to change its backbone provider, it would generally have to relinquish its block of IP addresses and get a new block of addresses from the new backbone provider. Several ISPs and end users with whom we spoke told us that changing address space can be time consuming and costly. We found that the degree of difficulty in changing address space depends on how an individual company's computer network is configured.24 Two respondents expressed concern about the loss of customers due to a change of IP addresses. A few also told us that it is not uncommon for an ISP to retain a relationship with its original backbone provider—paying for a minimal level of connectivity to that provider—in order to avoid having to go through a disruptive readdressing process. It appears, therefore, that customers' feelings of being tied to a provider may lessen the effective level of competitiveness in this market." Derived From: Potential Impacts on Communications from IPv4 Exhaustion & IPv6 Transition Robert Cannon, OSP, p. 21, December 2010 Paper: Word | Acrobat | [Cremer p 10]
- Sale / Transfer of IP Address blocks
Proceedings which raised on addressed telephony interconnection, begging questions about Internet interconnection.
In order to reform universal service and intercarrier compensation (reciprocal compensation, access charges, settlement fees), and bring universal service into the broadband era, the FCC is striving to reform the entire system of settlements and payments between carriers. The old system was built in the era of a monopoly telephone network, and included the promise of universal service through, at that time, implicit subsidies, and involved the division between state and federal jurisdiction. As the network moves from the analog telephone network to an all IP network with VoIP applications, the FCC must reform the old PSTN interconnection rules as they will now apply in an IP environment. The problem, in the IP network environment, is how to distinguish and make rules for telephony interconnection as opposed to Internet interconnection (peering and transit).
1347. Alternatively, other comments seem to anticipate that IP interconnection policies could encompass IP traffic other than voice.2451 Would it be appropriate to encompass any non-voice IP traffic or services in such a framework, and how would they be defined? We note, for example, that the Commission historically has not regulated interconnection among Internet backbone providers. If a different interconnection policy framework were adopted in this context, how would it be distinguishable? To what extent would an IP-to-IP interconnection policy framework address interconnection rights for both voice and non-voice traffic, or to what extent would providers simply have the freedom to use otherwise-available interconnection arrangements to exchange particular IP traffic or services? [Universal Service Reform FCC No. 11-161 2011]
Time Warner Cable Request for Declaratory Ruling that Competitive Local Exchange Carriers May Obtain Interconnection Under Section 251 of the Communications Act of 1934, as Amended, to Provide Wholesale Telecommunications Services to VoIP Providers. (2007)
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