THE DIGITAL HANDsHAKE: CONNECTING INTERNET BACKBONES

Michael Kende*

I. INTRODUCTION a "handshake" environment. Internet backbones interconnect under two different arrangements: The Internet is not a monolithic, uniform net- peering or transit. In a peering arrangement, work; rather, it is a network of networks, owned backbones agree to exchange traffic with each and operated by different companies, including other at no cost. The backbones only exchange Internet backbone providers. Internet backbones traffic that is destined for each other's end users, deliver data traffic to and from their customers; not the end users of a third party. In a transit ar- often this traffic comes from, or travels to, cus- rangement, on the other hand, one backbone tomers of another backbone. Currently, there are pays another backbone for interconnection. In no domestic or international industry-specific reg- exchange for this payment, the transit supplier ulations that govern how Internet backbone prov- provides a connection to all end users on the In- iders interconnect to exchange traffic, unlike ternet. other network services, such as long distance voice The interconnection policies that have evolved services, for which interconnection is regulated.' in place of industry-specific regulations are ex- Rather, Internet backbone providers adopt and amined here in order to determine the impact of pursue their own interconnection policies, gov- these policies on the markets for Internet services. erned only by ordinary laws of contract and prop- In the past several years, a number of parties have erty, overseen by antitrust rules. This paper exam- questioned whether larger backbone providers ines the interconnection policies between In- are able to gain or exploit market power through ternet backbone providers that have evolved in the terms of interconnection that they offer to place of industry-specific regulations in order to smaller existing and new backbone providers. In examine the impact of these policies on the mar- the future, backbones may attempt to differenti- kets for Internet services. ate themselves by offering certain new services In order to provide end users with universal only to their own customers. As a result, the con- connectivity, Internet backbones must intercon- cern is that the Internet may "balkanize," with nect with one another to exchange traffic des- competing backbones not interconnecting to pro- tined for each others' end users. Interconnection vide all services. This paper demonstrates how, in agreements between Internet backbone providers the absence of a dominant backbone, market are reached through commercial negotiations in

* Senior Consultant, Analysys Consulting Limited, author, and do not necessarily represent the views of the [email protected]. This paper is based on the Analysys Consulting Limited, the FCC, the Chairman, any Federal Communications Commission ("FCC") Office of Commissioners or other FCC staff. Plans and Policy ("OPP") Working Paper No. 32, of the same 1 For purposes of this paper, "industry-specific regula- name. I am indebted to Jason Oxman of Covad Communica- tions" are defined to be rules, applied by an expert agency, tions for his contribution to a previous version prior to leav- that govern the behavior of companies in a particular indus- ing the Commission. I would also like to thank Robert Pep- try. These regulations supplement the antitrust laws and ordi- per, Thomas Krattenmaker, Dale Hatfield, Stagg Newman, nary common law rules that apply to all industries in the David Farber, Doug Sicker, Gerald Faulhaber, Howard She- United States. In general, industry-specific regulations cor- lanski, Donald Stockdale, Robert Cannon, Rebecca Arbogast, rect for market failures that antitrust laws and ordinary com- Jackie Ruff, Helen Domenici, Dorothy Attwood, Michelle Ca- mon law cannot resolve or prevent. In this paper, an "unreg- rey, Johanna Mikes, Jennifer Fabian, John Berresford and ulated industry" is one that is not subject to any industry-spe- Christopher Libertelli for their comments and thoughts on cific regulations. this paper. The views expressed in this paper are those of the COMMLAW CONSPECTUS [Vol. 11

forces encourage interconnection between back- ternet, end users communicate with each other, bones and thereby protect consumers from any access information from content providers, such 3 anti-competitive behavior on the part of backbone as the Wall Street Journal Interactive Edition, providers. While it is likely that market forces, in and purchase products or services from e-com- combination with antitrust and competition poli- merce vendors, such as Amazon.com. 4 End users cies, can guarantee that no dominant backbone access the Internet via ISPs such as America On- emerges, if a dominant backbone provider should line ("AOL") 5 or EarthLink, Inc. 6 Small business emerge through unforeseen circumstances, regu- and residential end users generally use modems lation may be necessary, as it has been in other to connect to their ISP over standard telephone network industries such as telephony. lines, while larger businesses and content provid- Section two of this paper examines the history ers generally have dedicated access to their ISP of Internet interconnection and describes current over leased lines. 7 ISPs are generally connected to interconnection policies between Internet back- other ISPs through Internet backbone providers bones. Section three examines several current such as UUNET and PSINet.8 Backbones own or and potential pressures on the domestic system of lease national or international high-speed fiber interconnection, showing how backbones may at- optic networks that are connected by routers, tempt to differentiate themselves from their com- which the backbones use to deliver traffic to and petitors in the future by not interconnecting at all from their ISP customers. 9 Many backbones also to exchange traffic flowing from innovative new are vertically integrated, functioning as ISPs by services. The conclusion, in Section four, shows selling Internet access directly to end users, as how competition, governed by antitrust laws and well as having ISPs as customers.' 0 competition enforcement that can prevent the Each backbone provider essentially forms its emergence of a dominant firm, can act to restrain own network that enables all its connected end the actions of larger backbones in place of any in- users and content providers to communicate with dustry-specific regulations, such as interconnec- one another.'' End users, however, are generally tion obligations. not interested in communicating just with end users and content providers connected to the same backbone provider; II. BACKGROUND rather, they want to be able to communicate with a wide variety of end A. Introduction users and content providers, regardless of the backbone provider. 12 In order to provide end Interconnection arrangements enable each In- users with such universal connectivity, backbones ternet user to communicate with every other In- must interconnect with one another to exchange ternet user.2 For simplicity, this paper focuses on traffic destined for each others' end users. 13 Inter- the interactions between four groups of Internet connection makes the Internet the "network of participants: end users, content providers, In- networks" that it is today. As a result of wide- ternet service providers ("ISPs") and Internet spread interconnection, end users currently have backbone providers ("backbones"). Using the In-

2 For further discussion of the structure of the Internet, day. New broadband access technologies, such as xDSL and see FCC, OPP Working Paper, DIGITAL TORNADO: THE IN- cable modems, increasingly are replacing traditional dial-up TERNET AND TELECOMMUNICATIONS POLICY (authored by Ke- modems, enabling residential and small business customers vin Werbach) 10-12 [hereinafter DIGITAL TORNADO]; see also to receive the same high-speed, "always-on" access to the In- JEAN-JACQUES LAFFONT & JEAN TIROLE, COMPETITION IN TELE- ternet enJoyed by dedicated access customers. COMMUNICATIONS 268-272 (2000);J. Scoi-r MARCUS, DESIGN- 8 See PRESTON GRALLA, How THE INTERNET WoRKS 5-7 INC WIDE AREA NETWORKS AND INTERNEIWORKS: A PRACTICAL (Millennium ed. 1999). GUIDE 274-289 (1999) [hereinafter MARCUS]. 9 Id. 3 See Wall Street Journal Interactive Edition, at http:// 10 INTERMEDIA COMMUNICATIONS, To PEER OR NOT TO public.wsj.com/home.html. PEER: THE INTERMEDIA BUSINESS INTERNET PERSPECTIVE, at 4 See Amazon.com, at http://www.amazon.com. http://www.intermedia.com/products/businessinternet/ 5 See America Online, at http://www.aol.com. whitepapers/bis-peering.html [hereinafter INTERMEDIA 6 See EarthLink, Inc., at http://www.eartllink.net. WHIrrE PAPER]. 7 A "leased line" is an access line rented for the exclusive I d. use of the customer; with dedicated access to an ISP, the cus- 12 1(1. tomer can be logged on to the Internet twenty-four hours a I. i . 2003] The Digital Handshake: Connecting Internet Backbones an implicit expectation of universal connectivity are indirect for systems that require both hard- 20 whenever they log on to the Internet, regardless ware and software in order to provide benefits. of which ISP they choose. ISPs are therefore in As more consumers buy hardware, more hard- the business of selling access to the entire In- ware-compatible software will be produced, mak- ternet to their end-user customers.' 4 ISPs ing this hardware more valuable to users. 21 A clas- purchase this universal access from Internet back- sic example is the compact disc system; as more bones.15 The driving force behind the need for consumers purchased compact disc players, music backbones to deliver access to the whole Internet companies increased the variety of compact discs to customers is what is known in economics litera- available, making the players more valuable to ture as network externalities. their owners.22 These network externalities are in- direct because consumers do not purchase the sys- tems to communicate directly with others, yet they B. Network Externalities benefit indirectly from the adoption decision of Network externalities arise when the value, or other consumers. utility, that a consumer derives from a product or One unique characteristic of the Internet is service increases as a function of the number of that it offers both direct and indirect network ex- other consumers of the same or compatible prod- ternalities. Users of applications such as e-mail ucts or services.16 They are called network exter- and Internet telephony derive direct network ex- nalities because they generally arise for networks ternalities from the system: the more Internet whose purpose it is to enable each user to com- users there are, the more valuable the Internet is municate with other users; as a result, by defini- for such communications. Users of applications tion, the more users there are, the more valuable such as the World Wide Web derive indirect net- the network. 17 These benefits are externalities be- work externalities from the system: the more In- cause a user, when deciding whether tojoin a net- ternet users there are, the more Web content will work (or which network to join), only takes into be developed, which makes the Internet even account the private benefits that the network will more valuable for its users. The ability to provide bring her and will not consider the fact that her direct and indirect network externalities to cus- joining this network increases the benefit of the tomers provides an almost overpowering incentive network for other users.' 8 for Internet backbones to cooperate with one an- Network externalities can be direct or indirect. other by interconnecting their networks. Network externalities are direct for networks that consumers use to communicate with one another; C. Peering and Transit the more consumers that use the network, the more valuable the network is for each con- During the early development of the Internet, sumer. 19 The phone system is a classic example of there was only one backbone, and, therefore, in- a system providing direct network externalities. terconnection between backbones was not an is- The only benefit of such a system comes from ac- sueY3 In 1986, the National Science Foundation cess to the network of users. Network externalities ("NSF") funded the NSFNET, a 56-kilobit per sec-

14 Id. 19 See generally Michael L. Katz & Carl Shapiro, Network 15 See FCC, OPP, THE FCC AND THE UNREGULATION OF Externalities, Competition, and Compatibility, 75 Am. ECoN. REV., THE INTERNET (authored by Jason Oxman) (1999) [hereinaf- 424 (1985) [hereinafter Katz & Shapiro]. ter Oxman] (discussing generally the deregulation trend of 20 See generally Jeffrey Church & Neil Gandal, Network Ef- the Internet). fects, Software Provision, and Standardization,40J. INDUS. ECON. 16 See generally Michael L. Katz & Carl Shapiro, Systems 85 (1992). Competition and Network Effects, 8 J. ECON. PERSP. 93 (1994); 21 See Oz SHY, INDUSTRIAL ORGANIZATION: THEORY AND A- Nicholas Economides, The Economics of Networks, 14 INT'L]. PLICATIONS 254 (1996). INDUS. ORG. 673 (1996) [hereinafter Economides]. 22 For an empirical description of the interplay between 17 Metcalfe's law, which states that the value of a network compact disc hardware sales and the availability of compact grows in proportion to the square of the number of users of discs, see Neil Gandal, Michael Kende, & Rafael Rob, The Dy- the network, is a specific expression of network externalities. namics of Technological Adoption in Hardware/Software Systems: See HARRY NEWTON, NEWTON's TELECOM DICTIONARY 447-48 The Case of Compact Disc Players, 31 RAND J. ECON. 43 (2000). (14th ed. 1998) [hereinafter NEWrON]; see also, Economides, 23 See DIGITAL TORNADO, supra note 2, at 13-16 (giving a supra note 16. brief history of the Internet); see also Robert H'obbes' Zakon, 18 Oxman, supra note 15, at 13. Hobbes' Internet Timetine v4.1, at http://www.isoc.org/guest/ COMMLAW CONSPECTUS [Vol. 11 ond ("Kbps") network created to enable long-dis- tance access to five supercomputer centers across the country.24 In 1987, a partnership of Merit Net- work, Inc., IBM and MCI began to manage the NSFNET, which became a T-1 network2 5 connect- ing thirteen sites in 1988.26 The issue of intercon- nection arose only when a number of commercial backbones came into being and eventually sup- 27 planted the NSFNET. At the time that commercial networks began appearing, general commercial activity on the NSFNET was prohibited by an Acceptable Use Policy,28 thereby preventing these commercial Figure 1: Peering networks from exchanging traffic with one an- The interconnection of commercial backbones other using the NSFNET as the backbone. 29 This is not subject to any industry-specific regulations. roadblock was circumvented in 1991, when a The NSF did not establish any interconnection number of commercial backbone operators in- rules at the NAPs, and interconnection between cluding PSINet, UUNET and CerfNET estab- Internet backbone providers is not currently regu- lished the Commercial Internet Exchange lated by the Federal Communications Commis- ("CIX"). 30 CIX consisted of a router, housed in sion ("FCC" or "the Commission") or any other Santa Clara, California, that was set up for the government agency. 7 Instead, the backbones are purpose of interconnecting these commercial backbones and enabling them to exchange their self-regulated through interconnection arrange- ments evolved from the informal interactions that end users' traffic.3' In 1993, the NSF decided to leave the management of the backbone entirely to characterized the Internet at the time the NSF was running the backbone. The commercial back- competing commercial backbones. 32 In order to facilitate the growth of overlapping competing bones developed a system of interconnection known as peering.3 8 Peering has a number of dis- backbones, the NSF designed a system of geo- tinctive characteristics. First, peering partners graphically dispersed Network Access Points only exchange traffic that originates with the cus- ("NAPs") similar to CIX, each consisting of a tomer of one backbone and terminates with the shared switch or local area network ("LAN") used to exchange traffic.3 3 The four original NAPs customer of the other peered backbone. In Figure 1, customers of backbones A and C can trade traf- were in San Francisco (operated by PacBell), Chi- fic as a result of a peering relationship between cago (BellCore and Ameritech), New York 3 4 the backbones, as can the customers of backbones (SprintLink) and Washington, D.C. (MFS). B and C, which also have a peering arrangement. Backbones could choose to interconnect with one As part of a peering arrangement, however, a another at any or all of these NAPs. 35 In 1995, this backbone would not act as an intermediary-it network of commercial backbones and NAPs per- 36 would accept the traffic of one peering partner manently replaced the NSFNET. zakon/internet/History/HIT.html [hereinafter Zakon]. 31 Id. 24 NATIONAL SCIENCE FOUNDATION, NIFTr 50-THE IN- 32 NATIONAL SCIENCE FOUNDATION, NSF AND THE IN- TERNET, at http://www.nsf.gov/od/Ipa/nsf50/nsfoutreach/ TERNET: AN OVERVIEW, at http://www.nsf.gov/od/lpa/news/ htm/n50_z2/pages-z3/28_pg.htmn. media/backgrl.htm [hereinafter NSF AND THE INTERNET]. 25 A T-1 network carries 1.544 megabits of data per sec- 33 Id. ond ("Mbps"). 34 MARCUS, supra note 2, at 277. 26 DIGITAL TORNADO, supra note 2, at 13. 25 Id. 27 See JANET ABBATE, INVENTING THE INTERNET 191-200 at 276. 36 Id. (1999) [hereinafter ABBATE]. 28 NATIONAL SCIENCE FOUNDATION, ACCEPTABLE USE POLI- 37 See generally Oxman, supra note 15 (discussing the CIES FOR NSFNET PROGRAM BACKBONE NETWORK SERVICES, at FCC's role in the Internet). http://www.interact. nsf.gov/cise/html.nsf/ Pages/ 38 INTERMEDIA WHITE PAPER, supra note 10 (defining 2D8273FAFF1 E362D85256683006645CF. peering as "the arrangement between two Internet service 29 Id. providers to connect their networks, so that the customers of 30 ABBATE, supra note 27, at 198. one can communicate with those of the other"). 20031 The Digital Handshake: Connecting Internet Backbones and transit this traffic to another peering part- sponse to the customer of ISP X on the East Coast. ner.39 Thus, referring back to Figure 1, backbone A final characteristic of peering is that recipients C will not accept traffic from backbone A destined of traffic only promise to undertake "best efforts" for backbone B. The second distinctive character- when terminating traffic, rather than guarantee- istic of peering is that peering partners exchange ing any level of performance in delivering packets 43 traffic on a settlements-free basis. 40 The only costs received from peering partners. that backbones incur to peer are that each part- ner pays for its own equipment and the transmis- sion capacity needed for the two peers to meet at each peering point.

Figure 3: Network Access Point

The original system of peering has evolved over time. Initially, most exchange of traffic under Figure 2: Hot-Potato Routing peering arrangements took place at the NAPs, as it was efficient for each backbone to interconnect Additional characteristics of peering relate to with as many backbones as possible at the same the routing of information from one backbone to location, as shown in the example in Figure 3.44 another. Peering partners generally meet in a The rapid growth in Internet traffic soon caused 41 number of geographically dispersed locations. the NAPs to become congested, however, which In order to decide where to pass traffic from one led to delayed and dropped packets. 4 5 For in- backbone to another in a consistent and fair man- stance, Intermedia Business Solutions asserts that ner, they have adopted what is known as "hot-po- at one point packet loss at the Washington, D.C. tato routing," whereby a backbone will pass traffic NAP reached up to 20 percent. 46 As a result, a to another backbone at the earliest point of ex- number of new NAPs have appeared to reduce change. 4 2 As an example, in Figure 2, backbones the amount of traffic flowing through the original A and B are interconnected on the West and East NAPs. For example, MFS, now owned by Coasts. When a customer of ISP X on the East WorldCom, operates a number of NAPs known as Coast requests a web page from a site connected Metropolitan Area Exchanges ("MAEs"), includ- to ISP Y on the West Coast, backbone A passes ing one of the original NAPs, the Washington, this request to backbone B on the East Coast, and D.C. NAP known as MAE-East, as well as MAE- backbone B carries this request to the West Coast. West in San Jose and other MAEs in Los Angeles, 47 Likewise, the responding web page is routed from Dallas and Chicago. backbone B to backbone A on the West Coast, Another result of the increased congestion at and backbone A is responsible for carrying the re- the NAPs has been that many backbones began to

39 See, e.g., INTERMEDIA WHITE PAPER, supra note 10, at 45 A packet is "the unit of data that is routed between an http://www.intermedia.com (providing a definition of peer- origin and a destination on the Internet." Whatis.com, at ing). http://whatis.techtarget.com/definition/0,289893,sid9- 40 This is similar to bill-and-keep or sender-keeps-all ar- gci2l2736,00.html (last modified Jul. 31, 2001). rangements. See infra note 60. 46 INTERMEDIA WHITE PAPER, supra note 10. 41 INTERMEDIA WHITE PAPER, supra note 10. 47 See WORLOCOM, INTEROPERABILITy, at http://www. 42 See MARcus, supra note 2, at 283-285. worldcom.com/govt/federal_solutions/resource-guide/re- 43 See DIGITAL ToRNADo, supra note 2, at 17-18. dacted-contract/vol ltech/section2/2_1 -17.pdf. 44 MARcus, supra note 2, at 280-282. COMMLAW CONSPECTUS [Vol. 11

that as NAPs begin to switch to Asynchronous Transfer Mode ("ATM") 5 and other advanced switch technologies, the NAPs will be able to pro- vide higher quality services and may regain their former attraction as efficient meeting points for peering partners. 54 Unless specified, discussions of peeing below refer to both public and private peering. Because each bilateral peering arrangement only allows backbones to exchange traffic des- tined for each others' customers, backbones need a significant number of peering arrangements Figure 4: Private Peering in order to gain access to the full Internet. UUNET, interconnect directly with one another.48 This sys- for instance, claims to "peer with 75 other ISPs 55 tem has come to be known as private peering, as globally." As discussed below, there are few opposed to the public peering that takes place at backbones that rely solely on private or public the NAPs. In Figure 4, backbones A and B have peering to meet their interconnection needs. The established a private peering connection through alternative to peering is a transit arrangement be- which they bypass the NAP when exchanging traf- tween backbones, in which one backbone pays an- fic for each other - they both only use the NAP other backbone to deliver traffic between its cus- when exchanging traffic with backbone C 49 This tomers and the customers of other backbones. system developed partly in response to congestion Transit and peering are differentiated in two at the NAPs, yet it may often be more cost-effec- main ways. First, in a transit arrangement, one 5 o tive for the backbones. For instance, if back- backbone pays another backbone for intercon- bones were to interconnect only at the NAPs, traf- nection and therefore becomes a wholesale cus- fic that originated and terminated in the same city tomer of the other backbone. 56 Second, unlike in but on different backbones would have to travel a peering relationship, with transit, the backbone to a NAP in a different city or even a different selling the transit services will route traffic from 5 country for exchange. ' With private peering, in the transit customer to its peering partners. 57 In contrast, the traffic can be exchanged within the Figure 5, backbone A is a transit customer of back- same city, thereby alleviating the strain on the bone C; thus, the customers of backbone A have NAPs. At one point it was estimated that 80 per- access both to the customers of backbone C as cent of Internet traffic was exchanged via private well as to the customers of all peering partners of 52 peering. There are recent indications, however, backbone C, such as backbone B. If backbone A

48 See MARCUS, supra note 2, at 280-282. vival Guide, at http://www.intweek.com (Dec. 7, 1998). 49 Private peering may take place in the same physical 5-1 ATM is a "high bandwidth, low-delay, connection ori- location as the NAP. If two carriers wishing to peer privately ented, packet-like switching and multiplexing technique." already have transport going to a NAP, they may simply by- NEAI'ON, supra note 17, at 67-69. pass the NAP's switches and interconnect directly at the same 54 See MARCUS, supra note 2, at 278. Marcus states that "in location. INTERMEDIA WIITE PAPER, supra note 10. 1998, MCI WorldCom upgraded its MAE facilities ...to offer 50 For instance, Intermedia states that its "dual peering modern ATM switches as a high-capacity alternative to the policy," combining open public peering with private peering, FDDI/gigaswitch architecture." Id. See also Letter from Attor- "will create a win-win solution for everyone and a better man- neys for MCI WorldCom and Sprint to Magalie Roman Salas, agement approach to the Internet." INTERMEDIA WHiVE PA- Secretary, FCC, Attach. at 20-21 (Jan. 14, 2000) (filed in Ap- PER, supra note 10. plication for Consent to the Transfer of Control of Licenses 51 For example, prior to the establishment of a NAP in from Sprint Corporation to MCI WorldCom, Inc., CC-Docket Rome backbones often exchanged domestic Italian Internet 99-333) [hereinafter MCI WorldCom Sprint Ex Parte) ("In traffic in the United States. Sam Paltridge, Internet Traffic Ex- short, the deployment of ATM switches has expanded the ca- change: Developments and Policy, 22-23, at http://oecd.org/ pability of NAPs to handle the demand for public peering by pdf/M000014000?M000014288.pdf (Apr. 1, 1998) (This doc- increasing the number of ports as well as the capacity availa- ument was prepared for the Organisation for Economic Co- ble at NAPs."). operation and Development's Committee for Information, 55 MCI WorldCom Sprint Ex Pale, supra note 35, Attach. Computer and Communications Policy.). at 20, n.48. 52 Michael Gaddis, Chief Technical Officer of SAVVIS 56 See generally, MARCUS, supra note 2. Communications, gave this estimate. Randy Barrett, ISP Sur- 57 Id. 2003] The Digital Handshake: Connecting Internet Backbones

miliar, traditional telephony interconnection ar- rangements. The practice of peering is similar to the practice of bill-and-keep or sender-keeps-all arrangements in telephony.60 Transit arrange- ments between Internet backbones are somewhat similar to resale arrangements between, for in- stance, long distance carriers; the Internet back- bone providing transit service acts as the whole- saler, and the backbone buying transit acts as the reseller of Internet backbone services. There are 4. Request notable differences in the way Internet and te- -- Response - lephony arrangements are regulated. The inter- Figure 5: Transit connection between Internet backbones is not governed by industry-specific regulations, 6' while and backbone C were peering partners, as in Fig- the interconnection of traditional telephone car- ure 1, backbone C would not accept traffic from riers is currently regulated both domestically and backbone A that was destined for backbone B. internationally. 62 Furthermore, unlike telephony, Many backbones have adopted a hybrid ap- there is no difference between domestic and in- proach to interconnection, peering with a num- ternational Internet interconnection arrange- ber of backbones and paying for transit from one ments; backbones treat each other the same re- or more backbones in order to have access to the gardless of the country of origin or location of 63 backbone of the transit supplier as well as the customer base. peering partners of the transit supplier.58 Those There is no accepted convention that governs few large backbones that interconnect solely by when two backbones will or should decide to peer peering, and do not need to purchase transit with one another, nor is it an easy matter to devise from any other backbones, will be referred to one. The term "peer" suggests equality, 64 and one here as top-tier backbones. Because of the non-dis- convention could be that backbones of equal size closure agreements that cover interconnection would peer. However, there are many measures of between backbones, it is difficult to state with ac- backbone size, such as geographic spread, capac- curacy the number of top-tier backbones. Accord- ity, traffic volume or number of customers. It is ing to one industry participant, there are five: unlikely that two backbones will be similar along Cable & Wireless, WorldCom, Sprint, AT&T and many or all dimensions. One may have fewer, but Genuity (formerly GTE Internetworking).59 larger, customers than the other, another may It is useful to compare Internet interconnection reach into Europe or Asia, and so forth. The ques- arrangements of peering and transit with more fa-

58 Economides, supra note 16. carrier on which the traffic originates pays the other carrier 59 MARcus, supra note 2, at 280. Marcus is the Chief to terminate the traffic. If traffic flow between the two net- Technology Officer of Genuity. Genuity was formerly GTE works is balanced, the net settlement that each pays is zero, Internetworking. In order to comply with Section 271 of the and therefore a bill-and-keep arrangement may be preferred Telecommunications Act of 1996, and thereby obtain Com- because the networks do not have to incur costs to measure mission approval to merge with Bell Atlantic, GTE agreed to and track traffic or to develop billing systems. As an example, sell most of its equity in Genuity to the public through an the Telecommunications Act of 1996 allows for incumbent initial public offering. Press Release, GTE, Bell Atlantic and local exchange carriers to exchange traffic with competitors GTE Chairmen Praise FCC Merger Approval (June 16, 2000). using a bill-and-keep arrangement. 47 U.S.C. §252 In addition, according to Marcus, "somewhere between six (d) (2)(B)(i) (2000). See also infra note 184. and perhaps thirty other ISPs could also be viewed as back- 61 See infra Section II. D. bone ISPs." Marcus states that "the ability to reach all In- 62 See generally Communications Act of 1934, as amended ternet destinations without the need for a transit relation- by the Telecommunications Act of 1996, 47 U.S.C. §251 ship ... is a strong indicator that an ISP should be viewed as (2000). a backbone ISP." MARcus, supra note 2, at 279. This is similar 63 See, e.g., infra Section 1I. C. to the definition used in this paper of a top-tier backbone. 64 The definition of peer is "one that is of the same or 60 In a bill-and-keep or sender-keeps-all arrangement, equal standing (as in law, rank, quality, age, ability) with an- each carrier bills its own customers for the origination of traf- other: EQUAL." WEBSTER'S THIRD NEW INTERNATIONAL Dic- fic and does not pay the other carrier for terminating this TIONARY 1665 (1986). traffic. In a settlement arrangement, on the other hand, the COMMLAW CONSPECTUS [Vol. 11 tion then becomes, how the backbones weigh one panies was a beneficial government interven- variable against another. Given the complexity of tion. 68 In addition, given the economies of scale 69 such judgments, it may be best to use a definition inherent in the construction of the telecommuni- of equality proposed by one industry partici- cations network, natural monopoly regulation was pant-that companies will peer when they per- necessary to ensure reasonable price and quality ceive equal benefit from peering based on their levels. 70 Second, it is important to understand why own subjective terms, rather than any objective certain services are not regulated as common car- terms. 65 In sum, peering agreements are the re- rier services. Soon after their introduction, the sult of commercial negotiations; each backbone FCC determined that the computer-based services bases its decisions on whether, how and where to market would remain competitive, and therefore peer by weighing the benefits and costs of enter- should not be regulated, so long as an essential ing into a particular interconnection agreement input to such services - telecommunications capa- with another backbone. Currently, there are no bility - was available to providers of such services industry-specific regulations governing intercon- on a nondiscriminatory basis. 71 Thus it was not nection that Internet backbone providers must necessary to impose common carrier regulations weigh as part of the costs in their decision to peer. on the users of those telecommunications services as well as the providers. 72 The following is a brief overview of relevant domestic telecommunica- D. The Backbone as an Unregulated Service 73 tions regulations. The Federal Communications Commission maintains a policy to "focus on sustaining compet- 1. Common CarrierRegulation itive communications markets and protecting the public interest where markets fail to do so."66 As The traditional rationale for regulating network an example of this policy, for many years the FCC industries, such as telecommunications, was the has recognized a categorical distinction between almost overwhelming economies of scale in the regulated telecommunications services and unreg- provision of such services.74 Economic theory and ulated computer-based services.6 7 To understand practice suggests that a natural monopolist is why Internet backbone services are, and should likely to arise in such industries; this is considered continue to be, treated as unregulated computer- efficient to the extent that duplicative facilities are based services, it is important to highlight two ba- not installed. 75 However, without competitors, a sic policies. First, it is important to understand the natural monopoly can harm consumers in a vari- basis for the regulation of network industries. For ety of ways, which fall generally into three catego- the telecommunications network, like the railroad ries: (1) the monopolist can directly raise retail and the telegraph before it, to grow into a healthy prices and/or reduce retail service quality; (2) the and vibrant universally available network, striking monopolist can leverage market power into re- a "common carrier" bargain with telephone com- lated markets that would otherwise be competi-

65 Geoff Huston, Interconnection, Peering and Settlements, 3- 73 See also GERALD R. BROCK, TELECOMMUNICATIONS POE- 4, at http://www.telstra.net/gih/peerdocs/peer.html (Jan. ICY FOR THE INFORMATION AGE: FROM MONOPOLY TO COMPETI- 1999); see also MARcus, supra note 2, at 279 ("Over time, it TION (1994) [hereinafter BROCK]; INGO VOGELSANG & came to be recognized that peers need not be similar in size; BRIDGER M. MITCHELL, TELECOMMUNICATIONS COMPETITION: rather, what was important was that there be comparable THE LAST TEN MILES (1997) [hereinafter VOGELSANG & value in the traffic exchanged."). MITCHELL]. 66 FEDERAL COMMUNICATIONS COMMISSION, A NEW FCC 74 Economies of scale arise when the cost per unit of pro- FOR THE 21ST CENTURY, Draft Strategic Plan, 3 (August 1999), viding service decreases as output increases. ROBERT S. http://www.fcc.gov/21st-century (Aug. 1999). PINDYCK & DANIEL L. RUBINFELD, MICROECONOMIcs 223 (4th 67 See, e.g. Oxman, supra note 15. ed. 1995) [hereinafter PINDYCK & RUBINFELD]. In wireline te- 68 Id. lephony, it was felt that the cost of having one company serve 69 See infra note 74. a particular area was historically much lower than having two 70 Economides, supra note 16, at 11. or more companies with partial or full overbuilds of each 71 Oxman, supra note 15, at 9. others' networks. VOGELSANG & MITCHELL, supra note 73, at 72 Id. at 9 (stating, "[t] hus, data processing services were 51-55. Lately, new technologies have altered the traditional 'unregulated' from the outset, permitting the data industry cost structures in a number of network industries such as te- to develop innovative services exempt from the numerous lephony, which enabled the pro-competitive, deregulatory common carrier requirements of Title II of the Communica- provisions of the Telecommunications Act of 1996. tions Act"). 75 See PINDYCK & RUBINFELD, supra note 74, at 352-358. 2003] The Digital Handshake: Connecting Internet Backbones tive; 76 and (3) the monopolist can deny access to wide telecommunications network while ensuring its network and thus bar entry into its core mar- affordable access to all users. 7 7 kets. Government involvement in the nascent tele- Governments worldwide traditionally chose to phone market began at the turn of the 20th cen- operate or regulate natural monopolies in order tury. Even before the passage of the Communica- to benefit from the efficiencies inherent in having tions Act in 1934, the Supreme Court ruled that a single provider, while not incurring the corre- telegraph companies had a duty - arising out of sponding harms that the natural monopolies the common law - to serve all customers in a non- 8 2 could inflict on consumers.78 In the United States, discriminatory manner as a common carrier. In certain telecommunications providers have been addition, thirty-four states determined that man- subject to natural monopoly regulation;79 this dating interconnection obligations was the best meant a government grant of monopoly (the mo- way to resolve disputes that had arisen between nopoly granted to local telephone companies, for 1894 and 1906 between the Bell System, the larg- example, was lifted by Congress in 1996), along est telephone company at the time, and smaller 8 3 with rate and service quality regulation. In addi- independent telephone companies. It was not tion, all telecommunications providers, even until 1910 that the Mann-Elkins Act extended the those not subject to natural monopoly regulation, jurisdiction of the Interstate Commerce Commis- 8 4 are regulated as common carriers, as described sion to include telephone companies. In 1913, below. It should be noted that the goals of regula- in response to a threatened antitrust case, AT&T tion are similar to those of antitrust policy-both entered into an agreement, known as the Kings- seek to protect consumers from firms with market bury Commitment, to interconnect with indepen- power. Indeed, in the United States, federal anti- dent local telephone companies for long distance 85 trust actions have had at least as great an impact calls. In 1934, Congress established the Federal 80 Communications Commission to regulate tele- on telecommunications as federal regulations. 86 Broadly speaking, in the United States, regulatory communications common carriers. approaches have been used to control firms' ac- Today, pursuant to the Communications Act, as tions while taking the market structure as given; amended, communications common carriers antitrust policy has been used to control firms' ac- must offer service on demand to the public at tions by acting on the market structure itself, such large without unreasonable discrimination; in ex- as by reviewing mergers that would increase mar- change, there is protection from certain types of ket concentration, inducing a divestiture aimed at liability. 87 Common carriers with market power reducing concentration or preventing firms from are subject to additional regulations that restrict taking actions that cripple market mechanisms.8' rates and govern service quality levels.88 In order For the public, the combinational use of both ap- to prevent common carriers with market power proaches benefited the construction of a nation- from leveraging this market power into related

76 For instance, local wireline services are necessary in- Order, 14 FCC Rcd. 14712, paras. 46-54 (1999). The Commis- puts in the provision of wireless and long distance services; a sion also shares concurrent antitrust jurisdiction with the De- carrier with market power over local services could leverage partment of Justice ("DOJ") under the Clayton Act to review this market power into these related markets. mergers between common carriers. Id. at para. 53. 77 Economides, supra note 16, at 11-13. 82 See Western Union Tel. Co. v. Call Publishing Co., 181 78 Id. U.S. 92, 99-104 (1901). 83 Zakon, supra note 23. 79 Id. 84 Mann-Elkins Act, Pub. L. No. 61-218, 36 Stat. 539 80 VOGELSANG & MITCHELL, supra note 73, at 63-64. 81 In telecommunications, the FCC, the federal agency (1910). 85 See VOGELSANG & MITCHELL, supra note 73, at 64. charged with regulating interstate communications by wire 86 The Communications Act of 1934, the FCC's enabling and radio, has authority pursuant to the Communications Act of 1934 to determine whether transactions involving the statute, created the Commission "for the purpose of regulat- transfer of certain licenses or authorizations serve the public ing interstate and foreign commerce in communication by interest. See In re Applications of Ameritech Corp., Trans- wire and radio." 47 U.S.C. §151 (2000). The Communica- feror, and SBC Communications Inc., Transferee, For Con- tions Act defines a common carrier as "any person engaged sent to Transfer Control of Corporations Holding Commis- as a common carrier for hire." 47 U.S.C. §153(h) (2000). 87 v. FCC, 124 F.3d 1302 (D.C. sion Licenses and Lines Pursuant to Sections 214 and 310(d) Richman Bros. Records of the Communications Act and Parts 5, 22, 24, 25, 63, 90, 95 1997). and 101 of the Commission's Rules, Memorandum Opinion and 88 Id. COMMLAW CONSPECTUS [V/ol. 11 competitive markets, including long distance and by a variety of means. 95 These requirements are the manufacture of consumer premise equipment crucial to the development of a competitive tele- ("CPE"), there has been a wide range of regula- communications network, and the Federal Com- tions, including outright divestiture and prohibi- munications Commission rules implementing tion on entering these related markets.8 9 As com- these requirements will be relaxed as competition petition is introduced into formerly monopolized renders them unnecessary.96 telecommunications markets such as local teleph- In summary, telecommunications providers are ony, regulation is nevertheless required in order subject to common carrier regulations that ensure to encourage the incumbent monopolist to open nondiscriminatory access to end users. Together its network fully to potential entrants. with antitrust enforcement, these regulations also Over the years, technological advances have al- serve to protect against anti-competitive behavior tered the cost structure upon which natural mo- by telecommunications providers with market nopoly regulation rested.90 The regulatory re- power. In markets where competition can act in sponse in the United States has been to relax reg- place of regulation as the means to protect con- ulation in markets where competition has elimi- sumers from the exercise of market power, the nated the need for regulation, while protecting Commission has long chosen to abstain from im- these markets from firms with market power in re- posing regulation. For this reason, providers of lated segments of the industry.9' As an example, services that combine telecommunications with after upstarts such as MCI demonstrated that computer services are not regulated as common competition was possible in the provision of long carriers. distance services, an antitrust case brought by the Department of Justice ("DOJ") culminated in the 2. Basic versus Enhanced Services breakup of the Bell System into AT&T, providing long distance services in a competitive market, For more than thirty years, the Commission has and the seven Regional Bell Operating Compa- sought to avoid imposing unnecessary common nies ("RBOCs"), providing local services in exclu- carrier regulation on providers of computer ser- sive regions. 92 The RBOCs were prohibited from vices that rely on the nation's telecommunications entering long distance markets in order to pre- infrastructure for transmission of those services vent discrimination towards unaffiliated long dis- but do not themselves provide telecommunica- tance carriers that led to the breakup of the Bell tions services to the public. The absence of mar- System in the first place. 93 Recently, as competi- ket power in the computer services industry led tion became possible in local markets, Congress the Commission to conclude that imposing com- passed the Telecommunications Act of 1996 mon carrier regulation was unnecessary and ("1996 Act"), 94 requiring incumbent Local Ex- might discourage innovation and distort the nas- change Carriers ("LECs"), such as the RBOCs and cent data marketplace. 97 The Commission instead GTE, to open their local markets to competition focused on ensuring that the providers of the un-

89 VOGELSANG & MITCHELL, supra note 73, at 61-62. 131 (D.D.C. 1982). 90 For instance, microwave technology made it possible 94 Pub. L. No. 104-104, 110 Stat. 56 (1996). for MCI to compete with AT&T in long distance. See BROCK, 95 The 1996 Act provides for three types of competition: supra note 73, at 111-115. facilities-based competition, competition using network ele- 91 See, e.g., In re Policy and Rules Concerning Rates for ments unbundled (leased) from the incumbent at cost-based Competitive Common Carrier Services and Facilities Authori- rates and competition reselling the incumbent's service. See zations Therefore, First Report and Order, 85 F.C.C.2d 1, para. 47 U.S.C. §251 (2000). To ensure that the customers of the 54 (1980) ("Application of current regulatory procedures to competitors remain plugged into the network, section 251 of non-dominant carriers imposes unnecessary and counter- the 1996 Act requires that incumbent LECs offer nondiscrim- productive regulatory constraints upon a marketplace that inatory interconnection terms and conditions to competitors. can satisfy consumer demand efficiently without government See 47 U.S.C. §251 (2000). Absent such a requirement, in- intervention."). See also In re Motion of AT&T Corp. to be cumbents would be able to deny competitors access to their Reclassified as a Non-dominant Carrier, Order, 11 FCC Rcd. monopoly networks. 3271 (1995) (determining that AT&T should be declared 96 Upon a showing that local markets are open to compe- non-dominant). 92 United States v. American Tel. & Tel. Co., 552 F. tition, the RBOCs are granted authority to enter the market Supp. 131 (D.D.C. 1982). See also, VOGELSANG & MITCHELL, for long distance services, pursuant to section 271 of the 1996 supra note 73, at 67-69; BROCK, supra note 73, at Ch. 9. Act. 47 U.S.C. §271 (2000). 93 United States v. American Tel. & Tel. Co, 552 F. Supp. 97 See generally Oxman, supra note 15. 20031 The Digital Handshake: Connecting Internet Backbones derlying telecommunications services made these mon carriers to grant nondiscriminatory access to services available on a non-discriminatory basis their networks to enhanced service providers. 0 3 and did not themselves leverage their market Mandating such nondiscrimination, the Commis- power into the provision of these complementary sion concluded, was necessary because the com- computer services. 08 As a result, the competitive puter-based service industry "cannot survive, enhanced services market was able to flourish much less develop further, except through reli- without onerous regulations impeding its growth. ance upon and use of communications facilities 10 4 In 1966, the Commission opened the Computer and services."' Inquiry proceeding that explored the regulatory In order to facilitate the implementation of its and policy issues raised by the nascent interde- computer services policy, the Commission created pendence of computer and communication tech- the categories of "basic" and "enhanced" ser- nologies. 99 In announcing the inquiry, the Com- vices. 0 5 The basic services category denotes com- mission foreshadowed the incredible attributes of mon carrier services subject to Tide II of the Com- computer networks that would make the Internet munications Act. 10 6 The enhanced services cate- such a valuable tool. gory denotes those services offered over common The modern day electronic computer is capa- carrier transmission facilities used in interstate ble of being programmed to furnish a wide variety communications, which employ computer of services, including the processing of all kinds of processing applications that act on the format, data and the gathering, storage forwarding and content, code, protocol or similar aspects of the retrieval of information - technical, statistical, subscriber's transmitted information; provide the medical, cultural, among numerous other classes. subscriber additional, different or restructured in- With its huge capacity and versatility, the com- formation; or involve subscriber interaction with 10 7 puter is capable of providing its services to a mul- stored information. tiplicity of users at locations remote from the Thus, a basic service is a communications path- computer. Effective use of the computer is, there- way, like a telephone line, while an enhanced ser- fore, becoming increasingly dependent upon vice is a computer-enhanced offering that oper- communication common carrier facilities and ser- ates via that communications pathway. Present vices by which the computers and the user are day examples of unregulated enhanced services given instantaneous access to each other. 10° include voicemail services, gateway services, elec- In the early 1970s, the Commission determined tronic publishing and Internet services. In these that there were "no natural or economic barriers markets, competition between firms rather than to free entry into the market for [computer] ser- any industry-specific regulations ensures that con- vices." 0 1 The Commission therefore decided that sumers enjoy low prices and increased growth in the policies and objectives of the Communica- innovative services on the Internet. tions Act would best be served by allowing com- puter services to operate in an environment free E. Growth of the Internet Industry from industry-specific regulation.10 2 In addition, the Commission devised rules that require com- In the past five years, the Internet has exper-

98 Id. para. 7 (1971). 99 Id. at 8. 105 The 1996 Act introduced new provisions referring to 100 In re Regulatory and Policy Problems Presented by "telecommunications service" and "information service." For the Interdependence of Computer and Communication Ser- definitions of these services, see 47 U.S.C. §§153(46), 153(20) vices and Facilities, Notice of Inquiry, 7 F.C.C.2d 11, para. 1 (2000), respectively. The Commission has concluded that (1966). these definitions correspond to the categories of basic and 101 In re Regulatory and Policy Problems Presented by enhanced services, respectively. For a general discussion, see the Interdependence of Computer and Communication Ser- In re Federal-State Joint Board on Universal Service, Report to vices and Facilities, Tentative Decision, 28 F.C.C.2d 291, para. Congress, 13 FCC Rcd. 11501 (1998). 18 (1970). 106 Basic services are defined as a common carrier offer- 102 Oxman, supra note 15, at 9. ing of a pure "transmission capacity for the movement of in- 103 In re MTS and WATS Market Share, Memorandum formation." In re Amendment of Section 64.702 of the Com- Opinion and Order,97 F.C.C.2d 682, 711-722 (1985). mission's Rules and Regulations (Second Computer In- 104 In re Regulatory and Policy Problems Presented by quiry), Final Decision, 77 F.C.C.2d 384, para. 5 (1980) [herein- the Interdependence of Computer and Communication Ser- after Second Computer Inquiry]. vices and Facilities, Final Decision and Order, 28 F.C.C.2d 267, 107 47 C.F.R. §64.702(a) (2001). COMMIRAW CONSPECTUS [Vol. 11 ienced unprecedented growth rates.'1 8 The mar- NAPs known as MAEs, including one of the origi- 1 ket for Internet backbone services has grown nal NAPs, MAE East. 5 According to the Depart- since privatization in 1995 into a market with a ment of Justice, UUNET is now "by far the largest multitude of competing providers.") 9 According provider of Internet backbone services in the to Boardwatch magazine, the number of Internet world, whether measured by traffic or reve- backbone providers rose steadily in the late 90's nues."'1 6 In 1997, GTE Internetworking, since to reach forty-two national backbones by 1999.'1o renamed Genuity, purchased BBN, the developer Boardwatch defines a national backbone to be one of a precursor to the modern day Internet, and "maintaining a hub city in at least five different was then spun off as a separate public corpora- states, spanning both coasts, and peering at the tion." 7 AT&T's role in the backbone market has major NAPs."'1 1' The list of national backbones in- grown with its purchases of CERFnet, another cludes the top-tier backbones that only peer with early backbone, along with IBM's Global Network other backbones, as well as other smaller national business." 18 Cable & Wireless entered the ranks of backbones that peer with some backbones and the largest backbones when it purchased MCI's purchase transit from others. Due to the non-dis- Internet backbone, which was divested during the closure agreements covering contracts between MCI WorldCom merger proceeding. 19 Finally, backbones, it is impossible to know the exact PSINet, an early backbone that has remained in- breakdown between the number of top-tier back- dependent, also remains among the list of the bones and other national backbones, although larger backbones, although PSINet recently filed 2 1 1 there are suggestions that there are five top-tier for Chapter 11 Bankruptcy protection.' 12 backbones. The increase in the number of backbones has The list of national backbones includes a num- been facilitated by the recent dramatic increases ber of backbones that pre-date the privatization of in the availability of fiber optic capacity. Not only the Internet, as well as a number of newer players have the fiber networks owned by the incumbent that have entered partly on the strength of their carriers-AT&T, Sprint and MCI WorldCom-all new fiber facilities.'" Many of the older back- grown in recent years, a more significant increase bones have been swept into the merger wave that in capacity comes from four entrants-Qwest, transformed the general communications indus- Broadwing (formerly IXC), Williams and Level try and, combined with their merger partners, re- 3-that have built or are building nationwide fi- main among the largest backbones. WorldCom ber optic networks.121 Not only are these four now owns UUNET and ANS Communications, companies themselves national Internet back- two of the earliest backbones, along with GridNet, bones, but also a number of other backbones Unicom-Pipex, InNet, NL Net and Metrix Inter- have in turn bought or leased capacity from them. link.114 WorldCom also owns MFS, which runs the For instance, PSINet purchased sixteen fibers cov-

108 Larry Press, The State of the Internet: Crowth and Caps, at I I Boardwatch Magazine Directory of Internet Service Provid- http://www.isoc.org/isoc/conferences/inet/O0/cdproceed- ers, 27 (9th ed. 1997). ings/8e/8e_4htm Uune 30, 2000). 112 See infra at note 59. 109 The analysis contained in this paper is based solely 1 13 See Boardwatch Magazine's Directory of Internet Service on publicly available information. As in most markets, infor- Providers (llth ed. 1999)(providing a complete list and mation about Internet backbone prices and costs is proprie- description of national backbone providers). tary. In addition, information about the nature of relation- 114 See Complaint at 6, US v. WorldCom, Inc. and Sprint ships between Internet backbone providers is protected by Corp. (D.D.C. 2000) [hereinafter DOJ WorldCom Sprint non-disclosure agreements. The effects of these non-disclo- Complaint]. sure agreements on this analysis are described below. 115 WORLDCOM, INC., 1996 ANNUAL REPORT 28 (1997). 110 In 1999, Boardwatch actually listed forty-three national 116 Id. at 4-5. backbones; however, for purposes of this paper we count as 117 See infra at note 59. one backbone the two backbones listed as owned by MCI WorldCom-Advanced Networks and UUNET. In addition, '11 AT&T Business, "Twenty-first Century iVetworking," at Boardwatch does not include in its list five other national http://www.ipservices.att.com/realstories/databriefs/fea- backbones, Williams Communications, Bell Canada/Bell ttires/30_21c.cfin. Nexxia, Network Two, ITC DeltaCom and RoadRunner, be- '19 See infra note 131. cause these backbones would not release their prices. For 120 PSINet Files for Chapter 11, REUTERS NEWSWIRE,June 1, consistency with Boardwatch's previous lists, these backbones 2001. are not accounted for here. Boardwatch Magazine's Directory of 121 IXC Communications merged with Cincinnati Bell to Internet Service Providers, 5 (11 th ed. 1999). become Broadwing Inc. 2003] The Digital Handshake: Connecting Internet Backbones ering 14,000 miles from the former IXC Commu- cussed below, that the entire system of intercon- nications. 122 The development of dense wave- nection between backbones is at risk due to the length division multiplexing ("DWDM") technol- actions of several larger backbones. At least one ogies, which divide each strand of fiber into multi- industry observer argued that the emerging sys- ple channels, is further increasing the availability tem of private peering enables the larger back- of fiber capacity by multiplying the capacity of ex- bones to act in an anti-competitive manner by ex- isting and new networks.' 23 Entry into the back- cluding smaller backbones from private peering 12 7 bone market is facilitated by this increasing availa- arrangements and then raising prices. Univer- bility of fiber capacity from a growing number of sal connectivity is the norm today, but as new real- providers. time services begin to be offered over the In- The growth in private Internet backbones has ternet, there are fears that backbones may choose coincided with the introduction of the World to differentiate themselves by not interconnecting Wide Web, which has popularized the Internet for for purposes of offering these new services. How- millions of consumers. The result is a virtuous cy- ever, there is hardly any possible market failure in cle that is typical of industries characterized by the Internet backbone market that could not be network externalities. In this case, users, drawn to governed adequately by existing antitrust laws. the Internet by applications such as the World Wide Web, encourage the creation of more Web A. Internet Backbone Market Power Issues content, which in turn encourages additional users to log on to the Internet.124 New users, and 1. Background new providers of content, require Internet access, encouraging the creation of more ISPs, which in Internet backbone providers face conflicting in- turn encourages the entry of more Internet back- centives. On one hand, they have an incentive to bone providers and fiber providers to transport cooperate with one another in order to provide the additional data. These ISPs compete to attract their customers with access to the full range of In- new users and content providers in a continuation ternet users and content. On the other hand, of the virtuous cycle that has led to the unprece- these same backbones have an incentive to com- dented growth level that characterizes the In- pete with one another for both retail and whole- ternet. sale customers. The need for backbone A to inter- In recognition of the role of regulatory absten- connect with backbone B in order to provide its tion in the development of the Internet, the 1996 customers access to backbone B's customers cre- Act states "[t]he Internet ... [has] flourished, to ates what might be termed a competitive network ex- the benefit of all Americans, with a minimum of ternality; this interconnection also enables back- government regulation."'125 Yet, the commercial bone B to provide its customers access to back- backbone market is relatively young, and industry bone A s customers. As long as A and B are of ap- observers are questioning whether the govern- proximately equal size, there is a strong incentive ment can, or should, maintain a fully hands-off for them to cooperate with one another in spite of approach to backbone providers. 126 Competition, competitive network externalities; if either unilat- hand-in-hand with antitrust laws and competition erally stops interconnecting, it has no guarantees enforcement, will act to restrain any anti-competi- that it will benefit from such an action. This situa- tive actions in place of industry-specific regula- tion seems to characterize the early days of the tions. commercial Internet, when a number of back- bones were relatively similar in size and readily agreed to peer with one another. Recently, how- III. INTERCONNECTION ISSUES ever, there have been allegations that as certain There have been a number of allegations, dis- backbones grew they began to engage in uncoop-

122 With Series of Deals, PSINet seeks to become 'Super Carrier, competitive free market that presently exists for the In- COMMUNICATIONs DAILY, Oct. 20, 1999. ternet." Id.at (b)(2). 123 NEWrON, supra note 17, at 247. 126 See infra Section III. A. 1. 124 See infra Section II. B. 127 Jack Rickard, Yet Another Unique Moment in Time. Peer- 125 47 U.S.C. §230 (a)(4) (2000). Furthermore, "[it] is ing Redux - Back to the Future and the Essentials of a Competitive the policy of the United States to preserve the vibrant and Internet, Editor's Notes, BOARDWATCH MAGAZINE, May 1998. COMMLAW CONSPECTUS [Vol. 11 erative, if not anti-competitive, practices. 12 Notwithstanding Exodus' views, a backbone's In early 1997, UUNET, followed by several refusal to peer with another backbone may not be other large backbones, attempted to end peering anti-competitive. Anti-competitive is defined to with a number of smaller backbones and instead mean the ability of a firm (or firms) to maintain charge them for transit. 12 9 In another example, prices profitably above the level that would other- GTE Internetworking, since renamed Genuity, an- wise result from a competitive market. The search nounced that it would no longer privately peer for anti-competitive actions focuses on actions with Exodus Communications, as did PSINet that harm consumers, but do not necessarily harm more recently. 13 When WorldCom, which had competitors, for actions that harm competitors purchased UUNET and several other backbones, may not in fact harm consumers. 36 For instance, announced a merger agreement with MCI, there a merger may increase the efficiency of a firm and was concern that the combined backbone would result in lower retail prices. While this may harm become the dominant backbone with the ability competitors, if many rivals remain in the market to exercise market power against smaller competi- the merger is not anti-competitive, because lower tors in a variety of ways.'"' In particular, merger prices benefit consumers. If a market failure is opponents argued that the merged firm would re- found to lead to anti-competitive actions on the fuse to peer with smaller backbones. 132 These part of one or more Internet backbone providers, concerns were echoed in the recent MCI a determination must then be made whether anti- WorldCom/Sprint merger proceeding.133 During trust laws would provide a sufficient remedy or if this proceeding, Level 3 argued that Sprint was re- industry-specific regulation is required. fusing to peer with it, a refusal that "cannot be The effect of a backbone's refusal to peer with explained by competitive market forces."' Like- another backbone depends on the degree of com- wise, when Exodus was refused peering by PSINet, petition in the backbone market. In a competitive Adam Wegner, General Counsel for Exodus market, a backbone may refuse to peer with a stated that "[Exodus] view[s] [PSINet's] action as smaller rival for legitimate, rather than anti-com- 1 35 anti-competitive." petitive, reasons. 137 Nevertheless, backbones that

128 For instance, Level 3's Chairman, James Crowe, 18109-18115, paras. 151-156. The Federal Communications claimed that MCI and WorldCom's refusal to peer with Level Commission did conclude, however, that "peering is likely to 3 constituted "monopolistic behavior." Joan Engebretson, remain an issue that warrants monitoring." Id. at 18115, para. Level 3: Whiner or Visionary, TELEPHONV MAGAZINE, May 25, 155. 1998, at 7 [hereinafter Engebretson]; see also John J. Keller, 1:_32 For instance, Level 3 argued that both MCI and Level 3 Assails the WorldCom-MCl Deal, WALL ST. J., May 20, WorldCom were refusing to peer with Level 3 and that the 1998, at B1O. merger would increase the merger partners' incentives to dis- 129 Because interconnection agreements are generally criminate against rivals seeking to interconnect. See Letter confidential due to the widespread use of non-disclosure from Terrence J. Ferguson, Senior Vice President and Gen- agreements, it is not commonly known whether this attempt eral Counsel, Level 3 Communications, to Magalie Roman was successful. See Engebretson, supra note 128, at 7.. Salas, Secretary, FCC, Attach. (May 29, 1998) (filed in In re 11o Kate Gerwig, Service Providers Still in PeeringDither, IN- Application of WorldCom, Inc. and MCI Communications TERNETWEEK, Aug. 27, 1998, at http://www.internetwk.com/ Corporation for Transfer of Control of MCI Communica- news0898/news082798-2.htm [hereinafter Gerwig]; Martin tions Corporation to WorldCom, Inc.) [hereinafter Level 3 Kady II, Peer Pressure:Dissolution of PSINet, Exodus Network-Shar- May 29, 1998 Ex Parte]. ing Agreement May be Sign of Things to Come, WASH. Bus.J.,June 13" DOJ WorldCom Sprint Complaint, supra note 114, at 2, 2000, at 1 [hereinafter Kady]. 14-21. 131 See In re Application of WorldCom, Inc. and MCI 134 Reply Comments of Level 3 Communications to the Communications Corporation for Transfer of Control of Application for Consent to the Transfer of Control of Li- MCI Communications Corporation to WorldCom, Inc., Mem- censes from Sprint Corporation to MCI WorldCom, Inc. in Opinion and Order, 13 FCC Rcd. 18025, 18103-18115, orandum CC-Docket No. 99-333, at 11 (March 20, 2000). paras. 142-156 (1998) [hereinafter MCI/WorldCom Order]. 135 Kady, supra note 130, at 3. In order to satisfy antitrust concerns regarding increased 1-6 See, e.g.,Continental T.V., Inc. v. GTE Sylvania Inc., concentration in the Internet backbone market, MCI sold its Internet assets to Cable & Wireless. See Press Release, Euro- 433 U.S. 36, 59 (1977). pean Commission, Commission Clears WorldCom and MCI 137 Here we focus on reasons to deny peering that have Merger Subject to Conditions (July 8, 1998) [hereinafter Eu- their roots in economic considerations. Peering may also be ropean Commission MCI WorldCom Press Release]; Press denied for technical reasons, as a peer could be exposed to Release, Department of Justice, Justice Department Clears significant harms resulting from errors on the part of peer- WorldCom/MCI Merger After MCI Agrees to Sell its Internet ing partners. A backbone with little technical competence Business (July 15, 1998) [hereinafter DQ MCI WorldCom may find willing peering partners scarce for technical reasons Press Release]; MCI/WorldCom Order, 13 FCC Rcd at alone. 2003] The Digital Handshake: Connecting Internet Backbones

have been denied peering can enter the back- bone market, because competition among the larger top-tier backbones gives them an incentive to provide transit arrangements to smaller back- bones in place of peering. If, on the other hand, there was a dominant backbone, the dominant backbone might be able to disadvantage actual or potential rivals in an anti-competitive manner by, for instance, not peering or not providing transit to smaller backbones. . .Request

-- - Response 2. Analysis Figure 6: Example of Free Riding a. Competitive Backbone Market that peering would enable the other backbone to An important determinant of the competitive- free ride on its infrastructure investments. Figure ness of any market is whether new firms can enter 6 illustrates this situation. In the figure, backbone the market and smaller firms can expand, thereby B, a national backbone, has a presence on both constraining any potential exercise of market coasts. Backbone A, in contrast, is a regional back- power by the existing larger firms.' 3 8 In order to bone with a presence only on the East Coast. If enter or expand, Internet backbones need to in- the two backbones peered on the East Coast, terconnect with existing backbones in order to when a customer of backbone A requests a web enable their customers to exchange traffic with page from a customer of backbone B whose server the customers of existing firms, and they need ac- is on the West Coast, then backbone B would cess to fiber capacity to carry this traffic.' 3 9 Much carry the request from the East Coast to the West of the current debate focuses on the effects of one Coast and also carry the response back to the East backbone refusing to peer with another back- Coast. The national backbone may thus refuse to bone. Nevertheless, in a competitive backbone peer on the grounds that it would otherwise bear market, there may be a number of legitimate rea- the expense for a national infrastructure from sons, as discussed below, for one backbone to re- which the regional carrier could then benefit at fuse to peer with another backbone. Therefore, no cost. As a result of such considerations, a num- such a refusal may not constitute a barrier to en- ber of backbones require that peering partners be tering the backbone market. As long as transit ar- willing and able to interconnect at a number of rangements are available on a competitive basis, geographically diverse locations. 140 This consider- smaller backbones can enter and ensure that the ation seems to have motivated UUNET's decision backbone market remains competitive. One reason a backbone may refuse to peer is

138 UNITED STATES DEPARTMENT OF JUSTICE & FEDERAL inafter WORLDCOM PEERING POLICY]. Sprint's Bi-Lateral Peer- TRADE COMMISSION, HORIZONTAL MERGER GUIDELINES, at ing Policy contains a similar provision, stating that peering http://www.usdoj.gov/atr/public/guidelines/horiz-book/ partners must be able to support peering arrangements "at 4 hmgl.html (Apr. 8, 1997). geographically diverse domestic U.S. locations." Letter from 139 As described above, fiber capacity is readily available, Michael G. Jones, Counsel, Sprint, to Magalie R. Salas, Secre- and thus this Section will focus on the ability of smaller In- tary, FCC, Attach., (April 13, 2000) filed in Application for ternet backbones to interconnect with larger ones. Consent to the Transfer of Control of Licenses from Sprint 140 For instance, UUNET's North American Peering Pol- Corporation to MCI WorldCom, Inc. [hereinafter Sprint icy states, among other things, that "[t]he Requester [of Peering Policy]. Finally, Genuity recently published its In- peering] shall operate [certain] facilities in at least 50% of ternet Interconnect Guidelines. Press Release, Genuity, the geographic region in which the WorldCom Internet Net- Genuity Announces Public Posting of Interconnect Guide- work with which it desires to interconnect operates such facil- lines, (Sept. 8, 2000). One of the criteria for public peering ities" and that "in the United States, at a minimum, the Re- with Genuity is a presence at three or more Shared Intercon- quester must have the ability to meet WorldCom's Internet nection Points (NAPs) where Genuity has a presence, two of Network at an East Coast location, a West Coast location, and which must be MAE-East and MAE-West. GENUITY, INTERNET at least two Midwest locations." WORLDCOM, WORLDCOM Pot, INTERCONNECTION GUIDELINES FOR GENUITY, at http://www. ICY FOR SETrLEMENT-FREE INTERCONNECTION WITH INTERNET genuity.com/infrastructure/interconnection.htm [hereinaf- NETWORKS, at http://www.uu.net/peering (Jan. 2001) [here- ter GENUITY INTERCONNECTION GUIDELINES]. COMMLAW CONSPECTUS [Vol. 11 to change its peering policy in 1997.14 1 itive market, these refusals may not have any anti- Another reason for refusal results from the competitive intent or effect; indeed, such refusals "hot-potato routing" that characterizes peering ar- may in fact have a pro-competitive result. A rangements, which may also lead to actual or per- smaller backbone, denied peering on the grounds ceived free-riding, as a result of the specialized of free-riding, may then have an incentive to in- backbones providing service mainly to one type of vest in infrastructure and compete for a varied customer, such as content providers. This situa- mix of new customers in order to qualify for peer- tion can be illustrated by referring back to Figure ing - resulting in an increased number of compet- 2. Suppose that ISP Y, a customer of backbone B, ing national backbone providers. As discussed be- provides service mainly to content providers, low, this is only possible if the denied smaller while ISP X, a customer of backbone A, provides backbone is able to enter the market with a transit service mainly to end users. Given hot-potato rout- relationship. ing, when an end user customer of ISP X requests A more ambiguous example of free-riding content that is hosted by ISP Y, backbone B will arises when a backbone is refused peering be- carry the request from the East Coast to the West cause it has a small customer base. There are indi- Coast, while backbone A would carry the re- cations that a backbone may refuse to peer with a quested content back from the West Coast. As a smaller backbone based on the amount of traffic rule, content such as Web pages involve more bits generated by the smaller backbone. For instance, of data than the corresponding requests for the the published peering policies of UUNET, Sprint content. Therefore, backbones such as A that and Genuity all contain a requirement that a carry the Web pages would transport more traffic peering candidate be able to exchange a certain than would backbones such as B that carry the re- minimum amount of data at the beginning of the quests for these Web pages. Backbones may thus peering relationship. 144 An MCI spokesperson was refuse to peer with backbones hosting a high pro- quoted as saying that, for this reason, Level 3 was portion of content providers on the grounds that denied peering by MCI.1 45 One justification given they are bearing the expense for more capacity by the larger backbones is that it is difficult and than the backbone that is actually hosting the costly to allocate necessary resources to potential content that utilizes this capacity. 42 This consid- peers with low current volumes that may or may eration may have motivated GTE Internetworking not grow rapidly in the future. Nevertheless, this (now Genuity) and PSINet to refuse to peer with requirement may place backbones with low Exodus, a company that provides network services volumes in a Catch-22 situation; without a large 3 to content providers.14 number of customers generating traffic volume, it The preceding paragraphs show that, in order is not possible to negotiate peering arrangements to prevent free-riding, a large backbone may re- with the large backbones; yet without peering, it fuse to peer with a smaller backbone. In a compet- may be difficult to gain the large number of cus-

141 At the time, the president and CEO of UUNET, John one of the criteria for traffic exchange with Genuity is, "[flor Sidgmore, argued that "a few years ago all ISPs were gener- domestic ISPs, roughly balanced traffic." GENUITY INTERCON- ally the same size and used each other's infrastructures to a NECrION GUmELINES, supra note 140. Similarly, Bob Leahy, more or less equal extent... that situation no longer exists Vice President of Marketing for PSINet, stated of Exodus that and consequently there are many cases where peering is not "[w]e were tired of carrying their load. They are a pure host- appropriate." Press Release, UUNET, UUNET Details Peer- ing play. What makes them meritorious to get free peering?" ing Strategy, at http://www.us.uu.net/press/1997/peering. Kady, supra note 130. shtml (May 12, 1997) [hereinafter UUNET May 12, 1997 144 WorldCom expects that "the aggregate amount of Press Release]. traffic exchanged in each direction over all interconnection 142 UUNET, for one, argues that companies that provide links between the Requester and the WorldCom Internet "web server farm" services and request peering with UUNET Network... shall equal or exceed 150 Mbps of traffic [in the are "seeking to use UUNET's network for free, after UUNET United States]." WORLDCOM PEERING POLICY, supra note 140. has spent hundreds of millions of dollars to create its infra- Sprint's peering policy has a provision that the "average structure." Id. monthly traffic exchange between Sprint and the peering 143 John Curran, then Chief Technical Officer of GTE network must be justifiable." Sprint Peering Policy, supra Internetworking, was quoted as saying that the traffic ex- note 140. One of the criteria for traffic exchange with change with Exodus was "'wildly asymmetrical,"' and that as Genuity is a "minimum Internet traffic exchange of I Mbps a result Exodus was getting a free ride from GTE In- with Autonomous System 1." GENUrrv INTERCONNECTION ternetworking. Gerwig, supra note 130. Genuity now specifi- GUIDELINES, supra note 140. cally states in itsInternet Interconnection Guidelines that 145 Engebretson, supra note 128. 2003] The Digital Handshake: Connecting Internet Backbones tomers necessary to generate the traffic volume to profitable to ue a price squeeze to disadvantage qualify for peering. In order to determine smaller rivals. whether the latter statement is valid, one must ex- As a transit customer, it may be possible for a amine the implications for smaller backbones of smaller backbone provider to grow and later qual- not being able to peer with larger backbones. ify to peer with backbones that initially refused It is important to differentiate between larger peering, including the transit supplier. Although backbones refusing to interconnect with smaller a smaller backbone may prefer peering rather backbones, versus the larger backbones only re- then being a paying transit customer either for fusing to peer with smaller backbones. Instead of quality or cost reasons, in a competitive market, a peering with the smaller backbones, the larger smaller backbone that only interconnects via a backbones may offer them a transit arrange- transit arrangement might not be at a competitive ment.146 For instance, if backbone A is refused disadvantage. peering by backbone B, then backbone A could Because transit does not involve the same ser- use a transit arrangement in order for its custom- vice as peering, refusing peering in favor of transit ers to have access to backbone B's customers. is not simply a means of charging for a service Backbone A could take transit directly from back- that is otherwise provided free of charge. In a bone B, or it could become a transit customer of a transit relationship, one backbone must pay an- third backbone C that is interconnected with other for access to the Internet. For instance, at backbone B, as in Figure 5. the time that UUNET changed its peering policy Having denied peering to smaller backbones, in 1997, it announced that wholesale connectivity one might question whether the larger top-tier started at $2,000 per month for a T-1 connection 47 backbones providing transit would refuse to ei- and $6,000 for a fractional T-3 connection. ther provide transit to smaller backbones or sim- Transit customers receive benefits in return for ply increase the cost of transit in order to squeeze these payments. When backbones pay for transit out the smaller rivals. There are two reasons that they benefit from the infrastructure investments this would be unlikely in a competitive backbone of national or global backbones without having to market. The first reason is unique to the Internet. make or utilize their own investments. In addi- In negotiating peering, one important bargaining tion, as noted above, transit gives a backbone ac- chip is the number of customers to which a back- cess to the entire Internet, not just to the custom- bone provides access; this includes the number of ers of the peering partner. In order to provide transit customers. Therefore, backbones will com- transit customers with access to the entire In- pete with each other to win transit customers to ternet, the transit provider must either maintain use as leverage when negotiating peering relation- peering arrangements with a number of other ships with other backbones. The second reason is backbones or must pay for transit from yet an- traditional. The large backbones will compete for other backbone. In other words, a backbone pro- the transit business of smaller backbones in order viding transit services is providing access to a to increase their revenues, which will keep transit greater array of end users and content than it prices down. In a growing market like the In- would as a peer, thereby incurring correspond- ternet market, in particular, one would not expect ingly higher costs that are recuperated in the it to be profitable for a competitive backbone to transit payments. In a competitive backbone mar- raise prices and thereby restrict sales and growth ket, transit prices should reflect costs and should in sales. Therefore, in a competitive backbone not put entering backbones at a competitive dis- market, no backbone provider is likely to find it advantage.

146 See, e.g., Rob Frieden, Without PublicPeer: The Potential Terrence J. Ferguson, Senior Vice President and General Regulatory and Universal Service Consequences of Internet Balkani- Counsel, Level 3 Communications, to Michelle Carey, Com- zation, 3 VA.J.L. & TECH., 1522, para. 16 (1998) [hereinafter mon Carrier Bureau, FCC (August 7, 1998) (filed in Applica- Frieden]. tion of WorldCom, Inc. and MCI Communications Corpora- 147 UUNET May 12, 1997 Press Release, supra note 141. tion for Transfer of Control of MCI Communications Corpo- A T-1 connection is a digital transmission link with a capacity ration to WorldCom, Inc. [hereinafter Level 3 Aug. 7, 1998 of 1.544 Mbps. A fractional T-3 connection is a portion of a Ex Parte]. T-3 (44.7364 Mbps) digital transmission link. Letter from COMMLAW CONSPECTUS [Vol. 11

In terms of the quality of transit, Level 3 has act to constrain the actions of larger incumbent suggested that, as a transit customer of another backbones, keeping prices at competitive levels. backbone, it would depend on the supplying backbone for delivery of IP traffic, at the very least 1 48 b. Backbone Market with a Dominant Firm placing Level 3 at a marketing disadvantage. This view was affirmed in the DOJ Complaint in If, on the other hand, a single backbone were the MCI WorldCom/Sprint merger proceed- dominant, it would be able to harm the public in- ing.149 Nevertheless, at least one backbone, SAV- terest by engaging in a number of anti-competi- VIS, initially relied only on transit connections tive actions. As discussed above, it appears un- and not peering and was very competitive in terms likely that a firm may organically grow to become of quality.' 50 Quality may improve with transit, at dominant. Instead, the route to such dominance least compared with public peering at a NAP, be- would likely be achieved by consolidation be- cause a transit connection may avoid the conges- tween backbone providers or by achieving market tion of passing through a NAP to get access to a power over a key bottleneck input, such as trans- backbone. According to an executive at Digex, a mission facilities. The issue of consolidation was at Web-hosting company that used to own its own the heart of the debate surrounding WorldCom's backbone, "[w]ith free peering, the level of ser- acquisition of MCI and, later, MCI WorldCom's vice is not as good. It costs more [to pay for ac- acquisition of Sprint.1 5 2 A number of potential cess], but the quality of service is better."'151 In anti-competitive harms were raised by commenta- sum, there is evidence that paying for transit does tors in the MCI/WorldCom merger proceeding not put a transit customer at an insurmountable and identified in the Commission's MCI/ disadvantage from a quality point of view. WorldCom Order.' 5 3 In conclusion, the presence of a large number A dominant backbone could harm the public of top-tier backbones can prevent any anti-com- interest in a number of ways. First, by definition, a petitive actions. In a competitive backbone mar- dominant firm has the unilateral ability to profita- ket, no large backbone would unilaterally end bly raise and sustain retail prices above competi- peering with another, as it has no guarantee that tive levels. In addition, a dominant backbone it would benefit from such an action. Further- would have both the ability and the incentive to more, there would be no insurmountable barrier stop cooperating with smaller backbones. Failure to entry or growth of smaller backbones. Larger to cooperate could take a number of forms, in- top-tier backbones would continue to compete to cluding refusing to interconnect at all, executing provide transit services to smaller backbones. a price squeeze, or degrading the quality of inter- These smaller backbones would be able to resell connection by not upgrading the capacity of con- these services to their own customers and would nections with smaller backbones. not seem to face any barrier to acquiring either A dominant backbone could also abuse market the infrastructure or customer base that could en- power by refusing to interconnect with smaller able them eventually to join the ranks of the backbones. The network externalities literature larger backbones and qualify for peering. Actual, has shown that, in general, a larger network has as well as potential, entry by new backbones would less of an incentive to become compatible or in-

148 Level 3 May 29, 1998 Ex Parte, supra note 132, at 4. divested its Internet business to Cable & Wireless. See infra 149 DOJ WorldCom Sprint Complaint, supra note 114, at note 131. Later, because of the backbone consolidation, as 13. well as other concerns, both the European Commission and 150 Doug Mohney, SAVVIS Shifts Gears and Ownership, the Department of Justice acted to block the MCI BOARDWATCH, at http://boardwatch.internet.on/mag/99/ WorldCom/Sprint merger. See Press Release, Department of apr/bwm66.html (Apr. 1999). In 1997, SAVVIS Internet was Justice,Justice Department Sues to Block WorldCom's Acqui- rated the highest quality backbone provider by Keynote Sys- sition of Sprint (June 27, 2000); Press Release, European tems. Jack Rickard, Editor's Notes, BOARMWATCH MAGAZINE Commission, Commission Prohibits Merger Between MCI (May 1998). At the time, SAVVIS created private NAPs, WorldCom and Sprint Uune 28, 2000) [hereinafter Euro- bought transit from the largest backbones and did not peer pean Commission WorldCom Sprint Press Release]. at all, though Rickard notes that this is expensive. 153 MCI/WorldCom Order, 13 FCC Rcd. paras. 149-150. 151 Kady, supra note 130, at 3 (quoting Bobby Patrick, Similar issues were raised by the Department ofJustice in the Vice President of Strategy at Digex). course of the MCI WorldCom Sprint proceeding. See DOJ 152 The issue of backbone consolidation during the WorldCom Sprint Complaint, supra note 114, at n.165. MCI/WorldCom merger proceeding was resolved when MCI 2003] The Digital Handshake: Connecting Internet Backbones terconnect with a smaller network, as customers bone can raise downstream prices and increase of the smaller network have more to gain from profits. being able to communicate with customers of the A dominant backbone also might engage in larger network than vice versa. 15 4 In the context non-price discrimination against rival backbones of the Internet, if a dominant backbone refused by degrading interconnections with rivals in order to interconnect with a smaller one, the customers to win their customers. 15 9 This could most easily of the smaller backbone would have an incentive be done by "slow rolling" necessary increases in to switch to the larger network in order to enjoy the capacity of the trunks used to interconnect the network externalities associated with the with other backbones. Such capacity increases are larger backbone's customer base. Although cus- a regular necessity to keep pace with the rapid tomers of the dominant backbone would also lose growth in demand for Internet services. Under access to the smaller network's customer base, this scheme, a backbone, A, may degrade a con- they are unlikely to respond by switching to the nection with a smaller backbone, B. As B's cus- smaller network. As a result, the smaller backbone tomers begin to feel the effects of this degrada- would be positioned poorly to compete for cus- tion when communicating with customers of tomers, reinforcing the dominance of the largest backbone A, they may switch to backbone A in or- backbone. It is noteworthy that the advantage of der to improve connections with customers of dominant networks also characterizes local te- backbone A. It should be noted that, with two-way lephony, where incumbent LECs must be com- interconnections, the customers of backbone A pelled by statute to interconnect with smaller would also be affected by this degradation when 1 55 competitive LECs. they attempt to communicate with the customers A dominant backbone could also exercise mar- of backbone B. For this reason, A must be signifi- ket power by executing a price squeeze on those cantly larger than B so that its customers are rela- smaller backbones with which it interconnects. In tively less adversely affected than the customers of a price squeeze situation, a vertically integrated B are and do not themselves switch. 160 In order to firm with market power over an essential up- limit further the effects of non-price discrimina- stream input raises the price of this input to rivals tion on its own customers, backbone A would en- competing in downstream retail markets.156 The gage in what it called "serial degradation" and tar- increased cost of this essential input forces down- get only one smaller backbone at a time. 16 1 stream rivals to raise their retail prices. 57 The ver- Thus, if a backbone were to become dominant, tically integrated firm is then in a position to un- it could act in an anti-competitive fashion. Such a dercut the downstream rivals in retail markets and backbone market would share many characteris- thereby increase market share and profits. 158 In tics with other network industries that tradition- the backbone example, interconnection is the es- ally warranted regulation, and it might then be in sential input that smaller backbones must have the public interest to apply similar regulations to from the dominant backbone in order to compete the backbone market. However, at this time, as with the dominant backbone to sell backbone ser- long as there are a number of competing top-tier vices to ISPs or directly to end users. Dominant backbone providers, entry by smaller backbones backbones can refuse to peer with smaller back- into the market is possible. In that case, there bones and also raise the price of transit services would be no need for any change in the current charged to those same backbones. This will unregulated status of the Internet. Although com- weaken existing rivals and also prevent the entry petition between backbone providers is unregu- of new backbones. As a result, the dominant back- lated, consumers nevertheless benefit from the

154 Katz & Shapiro, supra note 19; Jacques Cremer et al., 159 See Cremer et al., supra note 154. These authors ad- Connectivity in the Commercial Internet (May 1999) (mime- vised GTE on the non-price discrimination issue during the ographed material) [hereinafter Cremer et al.]. MCI WorldCom proceeding and formalized their analysis in 155 See 47 U.S.C. §251 (2000). that paper. 156 Martin K. Perry, Vertical Integration: Determinants and 160 GTE and its experts note that in a situation in which Effects, in HANDBOOK OF INDUSTRIAL ORGANIZATION 193 (Rich- there is no dominant backbone, there would be no incentive ard Schmalensee & Robert Willig, eds., 1992). for any backbone to attempt a serial degradation strategy in 157 Id. order to become dominant. See id. at Section 6. 158 Id. 161 See Cremer et al., supra note 154. COMMLAW CONSPECTUS [Vol. 11 same protections afforded consumers of all prod- lic interest standard, could prevent an increase in ucts and services. Existing antitrust policies, as ap- the concentration of the backbone market that 16 6 plied in the MCI/WorldCom and MCI could threaten consumer welfare. WorldCom/Sprint merger proceedings by the De- In the MCI/WorldCom merger proceeding, partment of Justice and the European Commis- MCI divested its Internet business to Cable & sion, along with the Federal Communication Wireless in order to eliminate any overlap be- Commission's application of the public interest tween MCI and WorldCom in the Internet back- standard in the MCI/WorldCom case, can pre- bone market and thereby satisfied concerns ex- vent the emergence of a dominant backbone in pressed by the Department of Justice and the Eu- 162 an otherwise competitive market. ropean Union. 167 Parties argued at the time, how- ever, that the degree to which MCI's Internet bus- iness was integrated with its other business units 3. Consumer Protection in the Backbone Market might complicate such a divestiture, in compari- This paper has already discussed the underpin- son with the divestiture of a stand-alone business 68 nings of the industry-specific regulation of net- unit such as WorldCom's UUNET backbone.' work industries. When the underlying cost struc- All relevant agencies approved the transaction ture of an industry does not support competition, based on their conclusion that the terms of the it may be in the public interest to regulate the divestiture contract adequately addressed any po- prices and services offered by the resulting natu- tential complications arising from the divestiture ral monopoly. Where competition is possible, reg- of an integrated unit such as MCI's Internet busi- ulation may be relaxed or eliminated to the ex- ness. 169 Since the divestiture, however, Cable & tent that market forces can govern prices and ser- Wireless filed suit against MCI, claiming that MCI vices in place of regulations. Even where competi- breached the divestiture contract by not transfer- tion is possible, however, it is not guaranteed. As a ring its complete Internet business; 70 according result, antitrust laws have been enacted to protect to Mike McTighe, Chief Executive Officer of consumers from anti-competitive behavior by a Global Operations for Cable & Wireless, "MCI firm (or firms) that seeks to acquire or exploit WorldCom's material breaches of the [divesti- market power.'163 The antitrust laws apply to the ture] Undertakings threaten to impair Cable & Internet backbone as they do to every other prod- Wireless's competitiveness."1 71 This suit, which uct and service market, and indeed they already was settled, shows that the details of a divestiture have been invoked in the cases of the MCI/ may be important. 72 A complete divestiture of a WorldCom and MCI WorldCom/Sprint merg- business unit by one of the merging firms may ers. 164 Many of the above arguments about the po- mean that the market share of the merged entity tential actions of a dominant backbone were does not change as a result of the merger. How- raised during these merger proceedings. 165 These ever, the competitive landscape may nevertheless proceedings showed that the combined efforts of change if the divested unit is harmed as a result of the European Commission and the Department the divestiture and, therefore, poses less of a com- 1 7 3 of Justice, enforcing relevant antitrust statutes, as petitive constraint to the merged firm. well as the Commission itself, upholding the pub- In addition to this horizontal concentration in

162 See MCI/WorldCom Order, 13 FCC Rcd. paras. 8-14. note 131. 163 See STEPHEN MARTIN, INDUSTRIAL ECONOMICS: Eco- 170 Hearing on Telecommunication Mergers Before the Senate NOMIC ANALYSIS AND PUBLIC POLICY 45-50 (2nd ed. 1994). Committee on Commerce, Science and Transportation, 106th 164 See DOJ MCI WorldCom Press Release, supra note Cong. (1999) (statement of Mike McTighe, Chief Executive 131. Officer, Global Operations, Cable & Wireless) [hereinafter 165 See, e.g., DOJ WorldCom Sprint Complaint, supra McTighe testimony]; see also Denise Pappalardo, Did Cable & note 114, at 9-21. Wireless Get the Shaft?, NETWORK WORLD, April 5,1999 [herein- 166 See infra at note 81. after Pappalardo]. 167 See infra at note 131. 171 See McTighe testimony, supra note 170. 168 See C&W Seen Urging EU to be Tough on MCI, Sprint 172 Press Release, Cable & Wireless, MCI WorldCom and Buy, REUTERS ENGLISH NEWS SERVICE, Nov. 29, 1999; see also Cable & Wireless Reach Agreement over Internet Dispute MCI/WorldCom Order, 13 FCC Rcd. paras. 151-56. (Mar. 1, 2000) ("MCI WorldCom has agreed to pay Cable & 169 MCI/WorldCom Order, 13 FCC Rcd. Paras. 151-156.; Wireless $200 million in full and final settlement of the dis- See also European Union MCI/WorldCom Press Release, putes."). supra note 131; DOJ MCI WorldCom Press Release, supra 173 In the recent MCI WorldCom/Sprint merger pro- 2003] The Digital Handshake: Connecting Internet Backbones the backbone market, vertical integration could economic risks that are different than those faced also lead to market power. Backbones may verti- by consumers of other non-network products and cally integrate upstream into the market for the services. Internet markets are subject to the same telecommunications inputs that underlie the ser- antitrust regulations that act to govern other in- vices that backbones provide. Indeed, many back- dustries in the event that competition is no longer bones, such as WorldCom and Sprint, are already able to provide customers with just and reasona- vertically integrated, owning their own fiber optic ble prices and quality levels. networks. 1 74 Because telecommunications trans- The sections above show how, in a competitive port capacity is readily available today from a wide environment without a dominant firm, intercon- variety of providers, including the vertically inte- nection, either by transit or peering, will be availa- grated backbones themselves, vertical integration ble to existing and new backbones. While consoli- itself is unlikely to create a barrier to entry. As dation is the most obvious means for a backbone with mergers of backbones, antitrust laws and to become dominant, as discussed above, there merger policy should prevent undue consolida- are other means by which a backbone could grow tion of the telecommunications transport market to become dominant. For example, one way is for that could lead the remaining telecommunica- a provider to leverage market power over last-mile tions providers to engage in anti-competitive ac- access to end users into market power in the back- tions in the downstream Internet backbone mar- bone market - an important issue that is best left ket. In addition, existing common carrier regula- to an analysis of the market for last-mile access. In tions prevent vertically integrated telecommunica- another scenario, a new or existing backbone tions carriers from refusing to provide any neces- could develop a proprietary technology that sary upstream telecommunications services makes it either more efficient or more attractive 175 sought by competing backbone providers. to end-user customers. If this technology is a new There also may be concern about downstream service, for example, the backbone may choose relationships between backbones and the Internet not to interconnect with other backbones for the Service Providers for whom backbone services are provision of this new service. As customers switch a vital input. In addition to vertical integration, to this backbone in order to benefit from the new backbone providers could enter into exclusive service, the backbone may grow to become domi- dealing arrangements with ISPs, such that the nant. backbone provider would provide only one ISP If a dominant backbone provider were to with its services. Likewise, backbones that already emerge, this backbone provider could engage in a are vertically integrated with ISPs could choose variety of anti-competitive actions, as described not to provide backbone services to unaffiliated above, that would ultimately harm consumers. In ISPs. In the growing Internet market such an ex- this case, industry-specific regulation of the domi- clusionary arrangement is unlikely, however, be- nant backbone provider may be in the public in- cause backbones have incentives to increase the terest. Other network industries such as telephony number of customers that they have as bargaining also have warranted industry-specific regulation, chips in peering negotiations. 176 In addition, and the resulting regulations may provide a tem- given the availability of telecommunications in- plate for the regulations that could be imposed puts and transit arrangements, the possibilities of on a dominant backbone provider. Such regula- entry into either the ISP market or the backbone tions could include, for instance, interconnection market could not be foreclosed by such a vertical obligations that would govern the peering and arrangement. transit relationships offered by the dominant Thus, the lack of industry-specific regulation of backbone provider. Any regulation of the In- Internet backbones does not expose consumers to ternet backbone market would represent a signifi- ceeding, the European Commission found the merging par- count the issues raised by Cable & Wireless after its purchase ties' proposal to divest Sprint's Internet business insufficient, of MCI's Internet assets. Id. concluding that the divested business would not "become a 174 See FCC, CCB, FIBER DEPLOYMENT UPDATE END OF strong, viable competitor to prevent the merged WorldCom/ YEAR 1998 14 (staff report authored by Jonathan M. Kraus- Sprint from dominating Internet backbone." European Com- haar) (1999). mission WorldCom Sprint Press Release, supra note 152. The 175 47 U.S.C. §202 (2000). European Commission noted that it explicitly took into ac- 176 See infra at Section III.A.2.a. COMMLAW CONSPECTUS [Vol. 11 cant shift in the unregulated status quo under vices to communicate with consumers of another which the Internet industry has grown at unprece- backbone. There are strong market forces that dented rates and, therefore, would require a cor- would lead firms to interconnect in order to ex- responding significant shift in the competitiveness change traffic originating from these new services. of the market. If such interconnection does not materialize, pro- ponents of any industry-specific interconnection regulation should nevertheless show why the lack B. Internet Balkanization Issues of such interconnection justifies regulatory inter- Although it is unlikely that any backbone will vention. become dominant and act anti-competitively, The decision to interconnect for the provision some would argue that today's environment of of QoS services would appear to be relatively simi- universal connectivity among backbones may be lar to the one that backbones currently make unstable in the long run. Internet backbones may when deciding whether to peer with one another. attempt to differentiate themselves from each The backbones each calculate whether the bene- other by offering certain new or existing services fits of interconnecting with one or more other only to their own customers in order to raise retail backbones would outweigh the costs. The benefits prices and help attract new customers. As a result, of interconnecting to exchange traffic flow from the Internet may "balkanize," with competing increasing the network of customers with whom backbones not interconnecting to provide all ser- one can communicate helps attract new users and vices. 177 This may resemble the early days of te- encourages usage from existing users. The cost lephony, when all local companies were not inter- comes from a competitive network externality, as connected. 178 defined above; one backbone's decision to inter- The dynamic nature of the Internet means that connect with another backbone makes the other today's market structure and relationships likely backbone more attractive to customers. The wide- will change. New services are continually being spread interconnection available today in the made available over the Internet. Many of these form of either peering or transit agreements indi- services, including Internet telephony and video- cates that currently the benefits of interconnec- conferencing, are real-time applications that are tion outweigh any costs. sensitive to any delays in transmission. 179 As a re- There is, however, a difference between current sult, quality of service ("QoS") is becoming a criti- interconnection arrangements and new intercon- cal issue for backbones and ISPs. Two backbones nection arrangements for the exchange of QoS establish high-quality interconnections over which traffic. The Internet services that interconnection they could guarantee QoS levels to their custom- enables today, such as e-mail and Web access, al- ers wishing to communicate in real-time with cus- ready are universally available, and no one back- tomers of the other backbone,'8 0 based on the ec- bone or ISP could differentiate itself based on its onomics behind a decision to interconnect to unique provision of these services. Universal con- guarantee QoS, while assuming that any technical nectivity, however, is a legacy of the cooperative barriers to such interconnection could be over- spirit that characterized the Internet in its early come. 181 Backbones face a number of private eco- days. In the commercial spirit that pervades the nomic considerations in making such intercon- Internet today, backbones and ISPs may view the nection decisions. Any private decision by one or new services that rely on QoS as a means to differ- more backbones not to interconnect to guarantee entiate themselves from their competitors. A firm QoS levels for new services may also have public that introduces these new services may be less will- consequences, however, as consumers of one ing to share the ability to provide these services backbone may not be able to use these new ser- with competitors, as such sharing may reduce the

177 See Frieden, supra note 146. Professor Frieden raises 18 See also Michael Kende & Douglas C. Sicker, Slice and issues similar to the ones dealt with in this paper, with a focus Dice: The Fragmentation of the Internet (2000) (unpub- on the effects of such balkanization on universal access to the lished manuscript). Internet, notably in rural areas. 181 See FCC, THE INTERNET INTERCONNECTION CONUN- 178 See infra note 185. DRUM (working paper authored by Douglas C. Slicker, Joshua 179 See, e.g., THE NEW McGRAw-HILL TELECOM FACTBOOK Mindel & Cameron Cooper) (2000). 266 (Joseph A. Pecar & David A. Garbin, eds., 2nd ed. 2000). 20031 The Digital Handshake: Connecting Internet Backbones ability of the firm to charge a premium to its own tion and would be unlikely to provide satisfactory customers. For instance, UUNET announced a quality. Of course, similar problems exist today Service Level Agreement ("SLA") that guarantees, with the current peering system, as described among other things, the delivery speed (latency) above, leading to the current congestion, but of customers' traffic on its own network.'8 2 Be- given the high data volume characterizing such cause this guarantee does not extend to traffic services, the problem may be worsened. In order that leaves UUNET's network, this encourages to provide the proper economic incentives to be 8 3 customers to keep traffic on-net.1 able to guarantee to customers that they can de- Even if backbones agree in principle to inter- liver QoS traffic across networks, backbones may connect in order to be able to offer new services have to implement a traffic-sensitive settlement 8 4 that require QoS guarantees, they may face practi- system for such traffic.' cal difficulties in reaching a final interconnection If backbones are unable to overcome the eco- agreement. Aside from disagreements over the nomic, administrative and technical hurdles to in- terms of interconnection, it is possible that the terconnect to exchange traffic flowing from new backbones or their ISP customers must support services requiring QoS, then the Internet faces compatible versions of a particular new service in the risk of balkanization. Backbones only would order to be able to exchange traffic that provide certain new services for use among their originates with one backbone's end user and ter- own customers. The result would be that network minates with another backbone's end user. Before externalities, once taken for granted, would sud- committing to a particular standard for this ser- denly play a major role for consumers of Internet vice, backbones may wish to wait for an industry- services. In the current environment of universal wide standard to emerge. This presents a coordi- connectivity, consumers who simply want to send nation problem that may be difficult to resolve- and receive e-mail and surf on the Web can in particular, if any firms have developed their choose any retail provider without worrying about own proprietary standards that they wish to see the choices of other consumers or content provid- adopted as the industry-wide standard. In this situ- ers. If the Internet balkanizes over the offering of ation, in spite of the fact that backbones would be new services, consumers would need to be aware willing to interconnect to exchange QoS traffic, of the choices of those with whom they wish to the end result may be the same as if they were not communicate when making their own choice of willing to interconnect - end users would not be Internet provider. For instance, a consumer who able to communicate across backbones using cer- wishes to view real-time streaming video may need tain services. to be sure that the provider is connected to the Another potential issue relating to interconnec- same backbone to ensure high quality viewing. tion for QoS services is that it may exacerbate cur- Likewise, a business that wishes to use the In- rent congestion, and therefore it may be difficult ternet for videoconferencing must make sure that to guarantee QoS across backbones. Assuming all relevant branches, customers and suppliers are that interconnection for QoS traffic is imple- connected to the same backbone. Thus, any bal- mented under the current settlement-free peer- kanization of the Internet would result in a classic ing system, backbones will not be paid to termi- example of network externalities; the specific nate QoS traffic. As a result, receiving backbones backbone choice of each consumer would influ- will have little or no economic incentive to in- ence the choices of other consumers. crease capacity to terminate this traffic. QoS traf- As a result of any balkanization of the Internet fic that traverses networks may thus face conges- with respect to the provision of new services, cus-

182 See UUNET.com, at http://wwwl.worldcom.com/ for the Internet would enable backbones to recoup the costs uunet/. associated with terminating QoS traffic that originated on 183 Id. other backbones, giving backbones the proper incentive to 184 Settlements are payments from a carrier that invest in the capacity necessary to guarantee the timely deliv- originates traffic to another carrier for terminating this traf- ery of this traffic. See, e.g., Maria Farnon & Scott Huddle, Set- fic. See Henry Ergas & Paul Paterson, InternationalTelecommu- tlement Systems for the Internet, in COORDINATING THE INTERNET nications Settlement Arrangements; An UnsustainableInheritance?, 377-403 (Brian Kahin & James H. Keller eds., 1997). How- TELECOMM. POL'Y, Feb. 1991, at 29. A form of settlement ex- ever, the technical and administrative costs of implementing ists in international telephony today. Id. A settlement system such a system on the Internet are formidable. Id. COMMLAW CONSPECTUS [Vol. 11 tomers wishing to communicate with a wide vari- with corresponding direct network externalities. ety of others may end up subscribing to compet- In all of these cases, the market set the adopted ing backbones, unless customers can coordinate standards or ensured that various companies' on the choice of one backbone. This would raise products were compatible with one another with- the specter of the early days of telephony, when out any government intervention. competing telephone companies refused to inter- The marketplace has been quite successful at connect, resulting in many businesses and even choosing standards that allow the products and some homes owning more than one telephone, services of different companies to be compatible corresponding to multiple local telephone com- with one another. Often, this is accomplished by a pany subscriptions.1 85 As with the telephone sys- standards battle, such as the one waged between tem before it, any Internet balkanization may lead Betamax and VHS for the videocassette recorder to calls for some form of interconnection regula- standard.' In other cases, one firm may create tion for backbones. Such regulations are unlikely an adapter that enables its products to be compat- to be necessary. ible with the products of another firm.18 9 Another It is important to reiterate that network indus- factor leading to compatibility is that firms in nas- tries such as telephony, water and electricity have cent industries have an incentive to cooperate on historically been regulated based on their cost setting common standards that will enable the in- structure to prevent a natural monopoly from ex- dustry to grow so that later they can compete with ploiting customers. Such network industries are one another over larger slices of the growing 190 not generally regulated solely to provide custom- pie. ers the demand-side network externalities de- In some cases, notably the personal computer scribed above. 186 To impose interconnection reg- market, more than one standard emerges, at least ulations on Internet backbone providers in order in part in response to consumer demand, as Ap- to increase the benefits from network externali- ple is widely seen as meeting the demands of a ties for new services would represent a break from niche market, while the IBM (Intel/Windows) regulatory tradition. standard meets the more general needs of the There are many examples of products like the mass market.'19 It is worth noting here that it has Internet that provide both direct and indirect net- been Internet protocols and applications, such as work externalities that are not subject to industry- Web browsers and the Java language, that have 1 7 specific regulations. 1 For instance, almost every served to meet the demands of users of IBM and consumer electronics product consists of a hard- Apple's respective platforms to interact seamlessly ware/software system with indirect network exter- with one another. 9 2 A final example of a stan- nalities. The usefulness of compact disc players, dard emerging as a result of marketplace forces is personal computers, web browsers and videocas- the Internet itself. The protocols at the heart of sette recorders depends to a great degree, if not the Internet, TCP/IP, only relatively recently be- totally, on the availability of compatible came the dominant standard for networking, at "software." The greater the number of users of the expense of a number of proprietary and non- the relevant "hardware," the more software will be proprietary standards including SNA, DecNet and available. Likewise, fax machines and e-mail in- X.25.19, volve direct communications between end users Although the marketplace is remarkably suc-

185 As an example of this phenomenon, in 1910, Louis- 188 SeeJAMES LARDNER, FAS'r FORWARD: HOLLYWOOD, HE ville, Kentucky was served by two local telephone compa- JAPANESE, AND VCR WARS (1987) [hereinafter LARDNER]. nies-the Bell-licensed Cumberland Telephone and the in- 189 See Oz SiiY, THE ECONOMICS OF NETIWORK INDUSTRIES dependent Home Telephone Company. See MILTON L. MUEL- 17-18 (2001) [hereinafter SHY]. LER, JR., UNIVERSAL SERVICE: COMPETITION, INTERCONNEcTION, 191) See ADAM M. BRANDENBURGER & BARRY .. NALEBUFF, AND MONOPOLY IN THE MAKING OF THE AMERICAN TELEPH4ONE CO-OPETITION (1996). SYSTEM 82 (1997). More than 75% of the large businesses and 9% of homes in Louisville subscribed to both services. Id. I!" See Si-IY, supra note 189, at 28. 186 For instance, the 1913 Kingsbury Commitment, in 192 See infra note 193. which AT&T agreed to interconnect with independent local 19-1 Transmission Control Protocol ("TCP") and Internet firms to provide long distance services, was made in response Protocol ("IP") together form a "networking protocol that to a threatened antitrust suit, rather than calls to enable uni- provides communication across interconnected networks, be- versal access for customers. See infra note 85. tween computers with diverse hardware architectures and va- 187 See infra Section I.D. 1. rious operating systems." NEWTON, supra note 17, at 708. 20031 The Digital Handshake: Connecting Internet Backbones cessful at generating compatible standards, it services to grow. If firms limit offerings of new would be a mistake to conclude that this process is QoS services to their own customers, other mar- costless for consumers or firms. Purchasers of ketplace solutions are available that may ensure Sony's Betamax VCRs found it impossible to rent that consumers can remain connected to the full or buy movies after the VHS standard won the Internet. For instance, if two backbones are una- standards battle, while Sony was forced to con- ble to coordinate an interconnection agreement cede and begin selling its competitors' stan- enabling interconnection for QoS services, con- dard.194 The government could theoretically have sumers may simply interconnect to more than one chosen a standard, thereby avoiding these costs. backbone, a practice known as multihoming, or Nevertheless, in the United States, consumers and turn to firms such as InterNAP that connect with firms rarely, if ever, call for government interven- all major backbones, enabling their customers to tion in these cases. communicate directly with the customers of all The marketplace is the preferred means for set- major backbones without themselves multihom- ting compatible standards in most industries and ing. Marketplace demands and market-driven in- for most products for a variety of reasons. First, an novations may alleviate the costs of any Internet open marketplace for standards leads to healthy balkanization, if not preventing it altogether, in competition for the rewards of owning a standard, more efficient ways than would the imposition of and often "second-mover" standards are able to any interconnection regulations on the Internet. overcome an industry leader by embodying their In summary, if one or more backbones choose standards in better products or more creative not to interconnect with other backbones for the marketing of these products. 95 Second, as de- provision of new services in the future, this is scribed above, innovators such as Apple Com- likely to be a temporary phase. This phase would puter may target new products at niche markets, end as a result of market forces that would induce with consumers benefiting from the resulting vari- backbones to interconnect, while at the same ety. Such variety and innovation may not occur if time, compelling pioneering providers to step a standard is chosen by non-market means. There- into the breach to provide interconnection ser- fore, while the marketplace may increase short- vices for end users. Nevertheless, during this run costs involved with adopting new standards, phase there may be calls to implement some form the long-run marketplace benefits of competition of interconnection regulation. Such intervention and innovation are likely to more than make up would be relatively unique, as there is little prece- for any short-run costs. dent for the regulation of networks such as the The marketplace should provide solutions to Internet where there are low entry barriers on the many, if not all, of the challenges that arise in the cost side. In addition, regulatory intervention 19 6 provision of current and new Internet services. would be a notable shift in United States policy. Consumers, with expectations of universal con- As a result, any calls to intervene in the Internet nectivity and basic compatibility, are likely to de- market would require a correspondingly high bur- mand that backbones essentially set standards for den of proof. the provision of QoS services by agreeing to inter- Some are calling for regulatory intervention in connect to provide these services. Backbones, in the interactions between backbones because (1) turn, may see that it is in their interest to inter- the lack of interconnection would lead to market connect in order to enable the market for QoS power, with adverse effects on consumers; 19 7 and

194 See LARDNER, supra note 188. 197 It is often argued that in markets with network exter- 195 For instance, VHS was able to overcome the Betamax nalities, lack of interconnection or compatibility will lead to lead to become the industry standard by providing longer re- "tipping," as consumers quickly converge on one standard in cording times, among other things. Indeed, some attribute order to enjoy the benefits of being compatible with the larg- the initial advantage of VHS in the United States to the deci- est possible installed base of the product. According to Stan sion by its manufacturer to make tapes long enough to re- J. Liebowitz and Stephen E. Margolis, "tipping occurs when a cord a full American football game. product subject to increasing returns [network externalities] 196 The 1996 Act states that it is the policy of the United generates sufficient momentum in market share that its dom- States to "preserve the vibrant and competitive free market ination of the market becomes inevitable." STAN J. LIEBOWITZ that presently exists for interactive computer services, unfet- & STEPHEN E. MARGOLIS, WINNERS, LOSERS & MICROSOvr: tered by Federal or State regulation." 47 U.S.C. §230 (b) (2) COMPETITION AND ANTITRUST IN HIGH TECHNOLOGY 138 (2000). (1999). After studying a number of software markets in COMMLAW CONSPECTUS [Vol. 11

(2) regardless of whether market power develops, IV. CONCLUSION interconnection between Internet backbones, en- abling seamless communication between all In- In the past several years, a number of Internet ternet users, is in the public interest. However, an backbones have questioned whether the commer- antitrust approach, rather than an ongoing regu- cial interconnection negotiations between back- latory approach, is the appropriate solution to bone providers can yield fair outcomes for all par- protect consumers from any potential adverse ef- ties. In addition, backbones may attempt in the fu- fects of market power. In addition, the benefits ture to differentiate themselves from their com- and the costs of mandating interconnection and petitors by not interconnecting to provide certain their balancing have not been shown. The bene- new services. As a result, there may increasingly be fits stem from the network externalities that back- calls to impose interconnection obligations on In- bones will be able to deliver to end user custom- ternet backbone providers. Outcomes of a com- ers; the costs of mandated interconnection could petitive Internet backbone market can differ from include a lowered incentive to innovate in provid- the network industries characterized by market ing new services, less variety of new services, and power that historically warranted interconnection any regulatory costs incurred by firms and the reg- regulations. In addition, antitrust and competi- ulatory agency. Finally, the realities of mandated tion protections can prevent any anti-competitive interconnection have not been addressed-who consolidation among Internet backbone provid- determines the terms of interconnection, the ers. In sum, any traditional telecommunications principles governing these terms of interconnec- regulation of Internet backbone interconnection tion and how these terms should be enforced. is made unnecessary by a competitive backbone Given the complicated nature of interactions be- market, a conclusion that is consistent with sec- 9 8 tween backbones, intervention may be complex; tion 230 of the 1996 Act.' however, as described above, it is likely to be un- necessary as long as competition governs the in- teractions between backbones. which Microsoft participates, the authors conclude that there 198 See infra note 125. is no evidence of tipping in these markets. Id. at 228-229.