Subject areas: Pricing Structure; Regulation of Online Activity, Evolution of Industry Structure; International Governance

Does a Hierarchical Internet Necessitate Multilateral Intervention?

Rob Frieden
Professor, Penn State University
105-C Carnegie Building
University Park, Pennsylvania 16802
(814) 863-7996; rmf5@psu.edu

ABSTRACT

As the Internet matures and commercializes, it has become more hierarchical particularly regarding the terms and conditions for network interconnection. The previous "democratic" Sender Keep All ("SKA") system promoted networking externalities, but also generated free rider opportunities and great potential for network congestion. The individual networks that make up the Internet remain well integrated, but a more hierarchical pricing arrangement has developed. Only the largest Internet Service Providers ("ISPs") continue to "peer" on a SKA basis, while demanding payment from smaller operators.

Predictably, smaller ISPs and some government officials object to the changed circumstances. The commercial, unregulated nature of ISP interconnection negotiations now require sizeable transfer payments where none previously existed. Much of the payment flows to Tier-1 ISPs located in North America, leading some stakeholders in other locales to object claiming that the system violates trade, antitrust and economic development policies.

This paper will explore the nature of the Internet interconnection dispute with an eye toward examining the strategies used and predicting the outcome. The strategies examination will consider whether and how stakeholders can bring the matter before multilateral forums like the International Telecommunication Union and the World Trade Organization. The outcomes forecast will consider whether the problem will abate or grow acute. This consideration involves an assessment whether Internet traffic flows and content will more substantially diverge from a North American focus and whether interconnection arrangements will become even more finely calibrated.