Who Owns the Eyeballs? Backbone Interconnection As a Network Neutrality Issue Jonas from Soelberg

Who Owns the Eyeballs? Backbone interconnection as a network neutrality issue Jonas From Soelberg

Name: Jonas From Soelberg CPR: - Date: August 1, 2011 Course: Master’s thesis Advisor: James Perry Pages: 80,0 Taps: 181.999 Table of Contents

1 Introduction ...... 4 1.1 Methodology ...... 6

2 Understanding the Internet ...... 9 2.1 The History of the Internet ...... 9 2.1.1 The Internet protocol ...... 9 2.1.2 The privatization of the Internet ...... 11 2.2 The Architecture of the Internet ...... 12 2.2.1 A simple Internet model ...... 12 2.2.2 The e2e principle and deep-packet inspection ...... 14 2.2.3 Modern challenges to e2e ...... 15

3 Understanding Network Neutrality ...... 18 3.1 Understanding the Concept ...... 18 3.1.1 The history of Internet’s neutrality ...... 18 3.1.2 Users, content providers and ISPs ...... 21 3.2 Network Neutrality and the ISPs ...... 22 3.2.1 Telecommunication revenues are under pressure ...... 22 3.2.2 Telecoms want to use DPI to increase Internet profits ...... 26 3.3 Regulatory Regimes ...... 29 3.3.1 EU regulation ...... 29 3.3.2 US regulation ...... 30 3.3.3 Level 3, Comcast and network neutrality regimes ...... 32

4 Understanding the Backbone ...... 33 4.1 The History of the Backbone ...... 33 4.1.1 The government operated backbone ...... 33 4.1.2 The privatization of the backbone ...... 34 4.1.3 The commercial backbone ...... 35 4.2 Traditional Network Interconnection ...... 37 4.2.1 Transit ...... 37 4.2.2 Settlement free peering ...... 38 4.2.3 Routing regimes – hot potato or cold potato ...... 42 4.3 Complications to the Traditional System ...... 43 4.3.1 Recent developments ...... 43 4.3.2 Paid peering ...... 44 4.3.3 Value flow or access control? ...... 46

5 Neutrality Among Content or Between Networks ...... 49 5.1.1 Comparing the actors ...... 49 5.1.2 The fundamentals ...... 50 5.1.3 The regulation ...... 52

6 Level 3 vs. Comcast ...... 54 6.1.1 The background ...... 54 6.1.2 How the dispute developed ...... 55 6.1.3 The financial consequences of the proposals ...... 58

7 Network Neutrality and Peering dispute ...... 62 7.1.1 Network neutrality in Level 3 vs. Comcast ...... 62 7.1.2 Level 3 vs. Comcast as a peering dispute ...... 63

8 Owning the Eyeballs ...... 65 8.1.1 Prices and scarcity rents ...... 65 8.1.2 Market positions ...... 66 8.1.3 Comcast wants to charge scarcity rents ...... 68

9 Conclusion ...... 70

10 Bibliography ...... 72

Abstrakt ...... 79

List of Figures Figure 2-1 – Packet switching ...... 10 Figure 2-2 – Circuit switching ...... 11 Figure 2-3 – A simple understanding of the Internet ...... 13 Figure 3-1 – Different network levels ...... 19 Figure 3-2 – Growth in international calling ...... 24 Figure 3-3 – Forecast of US telecoms services ...... 25 Figure 4-1 – The government owned Internet backbone ...... 34 Figure 4-2 – The NSF’s proposal for alterations to the NSFNET ...... 35 Figure 4-3 – The architecture of the private backbone ...... 36 Figure 4-4 – Advertising cones of prefixes in peering relations ...... 39 Figure 4-5 – Peering and transit interconnection in the backbone ...... 41 Figure 5-1 – Involved actors ...... 50 Figure 5-2 – Forecast of Global Consumer Internet Traffic ...... 51 Figure 6-1 – The delivery of Netflix content to Comcast eyeballs ...... 54

List of Tables Table 3-1 – Approximate price per megabyte of various services ______23 Table 6-1 – Financial payoff matrix ______60

1 Introduction In terms of economic analysis the Internet is surely a unique composition. On one hand it is pure infrastructure, i.e. about getting some substance (data packets) from point A to point B. However, the speed and capacity of the Internet have meant that it is able to project itself as so much more than just the transfer of data to its users. Today, the Internet can provide a range of services so massive that it would not make sense to start listing them. In the end, though, these services are all dependent on the Internet’s ability to transfer data packets from point A to point B; and it is also this transfer of data across the Internet that is at the heart of discussions about network neutrality and backbone interconnection. Network neutrality and backbone interconnection have until this thesis only been addressed as two distinct issues. The aim here is in part to understand the degree to which these issues are actually intertwined with one another.

The Internet is in essence an interconnected network of computer networks. Recently, sufficient connectivity between some of the Internet’s most significant networks in the United States (US) was in jeopardy as a result of a disagreement over the terms of interconnection between the networks. The two network operators were the large backbone provider, Level 3, and the commercial broadband provider, Comcast. Upcoming changes to the traffic patterns between the two networks led Comcast to require a recurring fee from Level 3 in order to secure sufficient interconnection between the two networks. Level 3 accepted Comcast’s requirement, but went public with their frustrations over the issue and requested the Federal Communications Commission (FCC) to intervene on their behalf in order to protect the open character of the Internet (sometimes referred to as network neutrality). Comcast answered the public outcry by contesting the notion that the interconnection had anything to do with network neutrality. Instead Comcast argued that the disagreement was just a traditional backbone interconnection (peering) dispute. Here it will also be the aim to understand the degree to which the two companies are correct in their assessments of the disputes characteristics, i.e. whether it is about network neutrality or just peering.

These issues are not simple. In fact they are so complicated that some of the involved parties might sometimes take a step that on its face will seem irrational. During the negotiations last year Level 3 proposed to use their large backbone network to take over some of the routing responsibility that would affect Comcast’s costs. It was these costs

4 that the Comcast first allegedly sought to get compensated for by requiring a fee from Level 3. Because Comcast leases fiber capacity from Level 3’s backbone to use for its own intercity network, it is safe to assume that Comcast’s routing costs are somewhat higher than Level 3’s, and (as it will be explained below) Comcast’s recurring fee would likely not exceed the potential savings that Level 3’s proposal would provide to Comcast. Even so, Comcast turned down the offer, and instead insisted on taking on the responsibility of routing the traffic itself, even though that would increase the company’s costs significantly. The last part of this thesis will address this particular peculiarity.

The research question for this thesis will therefore be threefold:

A. To what extent can modern backbone interconnection disagreements be characterized as part of the network neutrality debate?

B. Should the dispute between Level 3 and Comcast be considered a network neutrality issue or is it rather a traditional peering dispute?

C. Why does Comcast insist on the costly solution of routing data traffic from Level 3 on its own network, when Level 3 is offering to deliver the traffic deep within Comcast’s network and close to the end-users for free?

In order to answer these questions, this thesis will first introduce the various important aspects of this debate. Chapter 2 will briefly explain the logic of data transfer on the Internet and move on to more recent developments that have challenged this logic. Chapter 3 will then introduce the concept of network neutrality and explain how recent developments have led some Internet service providers (ISPs) to challenge the Internet’s neutrality. Finally, chapter 3 the will address the relevant regulations in the European Union (EU) as well as the US. Next, chapter 4 will go into the details of how backbone networks interconnect. First, by describing how the backbone was originally privatized. Then the chapter will introduce the traditional forms of interconnection arrangements, and ultimately move on to explain how, recently, newer alternatives have challenged the traditional regime and why that might be. Then, chapter 5 will compare the discussions about network neutrality to modern backbone interconnection disagreements in order to show how much the issues are actually alike. Chapter 5 thus mainly answers research question A.

Then chapter 6 will present an introduction to the details of the dispute between Level 3 and Comcast, which encompasses all the aspects of the structural issue that have been

5 outlined in the earlier chapters of the thesis. Chapter 7 will then analyze the degree to which the dispute should be considered part of the network neutrality debate or whether it is just a traditional peering dispute. Chapter 7 hence mainly answers research question B.

Finally, chapter 8 will assess the merits of the peculiarity embedded in Comcast’s decision to decline Level 3’s proposal during the negotiations in December 2010. It will be argued that Comcast acted as it did in order to assert its control over the scarcity of access to its eyeballs (i.e. its customers). In the long run this control will provide much more pecuniary gain to the company than a reduction in its short term routing costs. While the FCC is willing to protect network neutrality by limiting the ISPs’ ability to prioritize data within their networks, the FCC has not signaled a willingness to limit indirect prioritization at the borders of an ISP’s network – e.g. through the requirement of a fee for sufficient direct interconnection (paid peering). Comcast will find paid peering to be a very sufficient substitute for direct prioritization. Chapter 8 explains why and is thereby mainly answering research question C.

1.1 Methodology This thesis represents the first academic attempt at assessing the issue of network interconnection in the Internet’s backbone as part of the broader debate about network neutrality. So far, the issue of network neutrality has primarily been assessed in an economic context in order to determine the effect of potential regulation on societal welfare1. Authors like Economides and Tåg (2009) and Musacchio, Schwartz and Walrand (2009) use neoclassical economic analysis to assess whether network neutrality regulation will benefit society or not. Both studies use a so-called two-sided market model for analyzing the appropriate level of state intervention regarding ISPs potentially charging content providers for access to their customers. The two-sided market model is used to analyze situations where a platform provider acts as an intermediary between two groups of customers, i.e. – in the case of network neutrality – ISPs provide a platform for users and content providers to interconnect. However, the use of two-sided models and a research perspective like neoclassical economics in general limits the ability of scholars to observe the significance of analytical elements like discourse. Because neoclassical analysis is viewing everything from a market perspective, it has to assume that whatever is analyzed is actually organized according to market principles. The two-

1 Florian Schuett (2010) provides an excellent review of this growing body of literature.

6 sided model is a good example of this problem. The model assumes market structures on both sides of the platform. The platform might be legally force to charge nothing for the provision of interconnection services on one side of the market; however, the analysis still applies the same structures. The consequence of regulating network neutrality is just to set a variable equal to 0 (Economides & Tåg, 2009, p. 15; Musacchio, Schwartz, & Walrand, 2009, p. 31), instead of no longer viewing the relationship as an actual market. If the main argument in a dispute is whether to denote the relationship between two companies as a buyer-seller market relationship or not and in turn to understand the significance of the discursive difference, then neoclassical economics falls short. It has to observe the relationship as a simple market; because that is the only thing it is able to explain.

In this thesis the discursive difference is important. Not to explain the impact on societal welfare, but rather to understand the actions and discursive arguments of certain agents. This cannot be understood with neoclassical analysis, because it employs a positivist ontology, according to which the objects of analysis exist independently of our knowledge of it (Grix, 2004, p. 80). This assumption does not allow actors to be aware of the discursive and constitutive impact of their own actions. In order to understand why actors like Comcast are doing what they are doing, however, it is essential to understand that just the opposite is in fact the case: They know exactly what they are doing discursively, and what they hope will be the constitutive outcome of their actions.

This thesis is based on an inductive study primarily using empirical and qualitative research. In order to fully understand the dynamics of the issues of network neutrality as well as backbone interconnection, it is necessary to investigate these issues from a bottom up perspective so as to understand the technical settings that both issues are structurally placed within. The empirical research for the different parts of the thesis is done in two distinct ways that represent the information available for the different areas of research.

Both the general issue of the Internet and network neutrality as well as the dynamics of traditional and modern backbone interconnection is researched through academic writings on the subjects. Network neutrality as an issue has been debated since the late 1990s with Lemley and Lessig (1999) as the initiators. Since then a growing body of academic research has described the issue in depth and it is this work that the outline of the network neutrality debate and its dynamics in chapter 3 is based on. Backbone

7 interconnection (and especially the more modern aspects of the issue) is less vigorously studied in academic research. Even so, scholars like Faratin, Clark, Gilmore, Bauer, Berger, & Lehr 007) have done an excellent job in outlining the structural dynamics of backbone interconnection including the more modern aspects of the field. In contrast to this thesis, however, they have not positioned the issue within the broader debate about network neutrality.

The most challenging issue to study in this thesis, however, has been the case between Level 3 and Comcast. Negotiations between interconnecting network operators are handled in secrecy and their contracts are not publicly available. The details of the case that are reflected in this thesis are those that the companies have disclosed in their official statements as well as those that have appeared in the press and elsewhere. For the purpose of this thesis, however, the dispute is merely used as an empirical case in a broader conceptual analysis. Therefore detailed information beyond what has been presented in the press and elsewhere will not be necessary in order to conduct the appropriate conceptual analysis.

2 Understanding the Internet In order to fully grasp the current disputes about issues like net neutrality, it is important to understand – at least to some degree – the historical, technological and structural setup in which the involved actors are operating. This chapter will first briefly summarize the history of the Internet and then move to explain the architectural setup of the Internet.

2.1 The History of the Internet This section will shortly outline the history of the Internet, the Internet protocol (IP) and its academic and military origin. It is important to understand those aspects, because they help to explain what purposes the technological setup of the Internet was meant to serve, and, in turn, why its original setup is not serving the interests of commercial ISPs today.

2.1.1 The Internet protocol Various visionaries (some of whom worked in the US Department of Defense) originally conceived the idea of the Internet in the 1960s. They wanted to create a “network of networks” that would allow any user on a particular network to reach users on any other network (Licklider & Taylor, 1968). At the time Licklider and Taylor projected the establishment of an interconnected network of network it was primarily academic institutions that transferred intellectual resources over internal networks. These networks communicated through the already established telephone lines; however, as networks were established mainly within discrete organizations, they were not accessible to the general public (Licklider & Taylor, 1968, p. 28). The most important technical barrier at the time was how to make different networks function logically as only one network.

The solution to this challenge – so-called packet switching – is still the most central technological innovation behind the Internet even today. When data travels across a network (or network of networks like the Internet) it is divided into small packets of data. Every data packet is then added a header tag that possesses some metadata about its destination (its IP address) and instructions to the recipient computer on how to reassemble the packets into the full original data. It is this metadata that allows different hubs along the route of the data packets to forward them in the right direction until they reach their destination. Figure 2-1 illustrates how different packets comprising parts of the same data can follow different routes to the same destination. This logical network works because every client that is connected (be it a network, computer or router)

9 communicates via the same language, i.e. the Internet Protocol (IP) standard (Nuttney & Eastwood, 2011, p. 17).

Figure 2-1 – Packet switching

The communicative design of the Internet with the use of packet switching and IP addresses is unique compared to other communicative technologies. Traditional telephony for instance uses so-called circuit switching, which establishes an unbroken line of connection from point A to point B all the way through the telephone network during a call. This line of connection is then reserved for the entire length of the ongoing phone call. Circuit switching thus invites network congestion more easily, because the number of connections that can be established at the same time is limited compared with a technology like packet switching. Figure 2-2 illustrates the logic of circuit switching.

Figure 2-2 – Circuit switching

With the IP standard no entire line of connection has to be established in order to send data from point A to point B. Data packets will simply travel independent of each other across the Internet following the route that networks along the way will deem most efficient, i.e. the Internet’s ‘best-effort’ principle. This principle and the fact that data packets travel independently of each other make the Internet less vulnerable to congestion and much more efficient than regular telephony. But the difference between telephony and the Internet does not just amount to switching technology. Pricing structures are also significantly different. In both telephony and the Internet the customers pay some sort of initiation fee – either per call and/or per second with telephony and as a flat-rate subscription or per megabyte with the Internet. However, if the telephone call is terminated on another network different from its origin (as it is the case with long-distance calls), then the caller must also pay a so-called “termination fee” to the terminating network provider (Lee & Wu, 2009, p. 62). So far no major Internet Service Provider (ISP) has been charging termination fees for Internet communication. Internet users only pay their ISP to access and/or for the amount of data exchanged, and pricing is thus not differentiated according to the distance of the communication, as it is the case with regular telephony.

2.1.2 The privatization of the Internet The US government played a significant role in the development of the technological architecture behind the early Internet. Until the early 1990s the Internet in the US was

11 very closed, and commercial use of it was prohibited (Nuttney & Eastwood, 2011, p. 20). The approach of the US government was contrasted by significant developments in Europe, where CERN (the pan-European research organization for particle research) had established what came to be known as the World Wide Web (WWW), i.e. a service to present content freely on the Internet (Nuttney & Eastwood, 2011, p. 18). CERN started publishing on the WWW in 1991 and others followed suit quickly thereafter.

By 1992 commercial online services became available in the US, and by 1995 all pretenses of a ban on commercial uses were abandoned, when the US government ended its sponsorship of the original so-called backbone network of the Internet. Until that time the US government had controlled the biggest and most important network that other networks typically depended on for interconnection, thereby the term “backbone”. By 1995, however, the Internet fully relied on a commercial backbone provided by private companies like AOL, Prodigy and CompuServe (Nuttney & Eastwood, 2011, p. 20). The networks of these original private Internet providers were still significantly controlled. Since that time, however, the Internet has experienced explosive growth, and the old centrally controlled networks have either collapsed or been radically altered and absorbed by the open Internet (Economides, 2009).

2.2 The Architecture of the Internet This section will serve to introduce an architectural understanding of the Internet. In turn, this outline is supplemented by structural and technological developments in recent years that have altered the way the Internet is used and managed significantly. These alterations have spurred calls for a new regulatory regime called ‘network neutrality’.

2.2.1 A simple Internet model It is important to distinguish between different types of Internet connection services. The vast majority of users, individuals as well as businesses, connect to the Internet through commercial ISPs (Economides, 2005, p. 375). Perhaps therefore, ISPs are often considered to be the only important network service providers with regards to the Internet. For instance, most discussions of net neutrality are limiting the technological dimensions of the debate to a simple abstract world, in which users connect to ISPs that in turn provide a connection to the rest of the Internet represented by a cloudy, abstract and undefined entity just referred to as the backbone (Schuett, 2010, p. 3). Figure 2-3 illustrates this simple understanding of the Internet.

Figure 2-3 – A simple understanding of the Internet

While this model of the Internet is simplified, it is sufficient to understand the traditional aspects of the net neutrality debate: User A is a so-called “content provider”, like Netflix, who is delivering a service, like video streaming, to user B. Both users connect to the Internet through a commercial ISP, which means that infrastructure-wise the video streaming is data packets travelling from user A and the first ISP’s network to the second ISP’s network and user B. Both users are paying their respective ISP to access the Internet (and in effect each other), and the flow of data is dependent on transfer through the networks of both ISPs. However, user A (the content provider) has no pecuniary relationship with ISP 2, even though its business is dependent on delivery through ISP 2’s network. As stated, no ISPs have, so far, have started charging content providers (directly) for access (or even prioritized access) to their subscribers, like it is the case with termination fees in regular telephony communication. The logic, up to now, has been that users paid their respective ISP for access (both upstream and downstream) to the metaphorical cloud, i.e. the ISPs have the responsibility to make sure that the entire Internet is accessible to its costumers2 (Economides, 2007, p. 2). Of course, the backbone is not one entity and many ISPs connect to different backbone providers in order to ensure satisfactory interconnection to various parts of the Internet, which means, in turn, that the simple model of the Internet above is obsolete for understanding the interconnection conflicts between different ISPs. For the discussion of such issues (as in chapter 4) more complex models of the Internet are needed. That said, however, the

2 What comprises the ”entire” Internet might vary between legal jurisdictions in so far as local authorities can ask ISPs to censure parts of the Internet. This practice is widespread in countries like China, but in Denmark as well ISPs have been ordered to restrict access to sites like http://thepiratebay.org/.

13 simple model above still holds significant explanatory value at the “ends” of an interconnection between the two users.

2.2.2 The e2e principle and deep-packet inspection One of the most important design principles that have characterized the Internet technologically has been the so-called “End-to-End” principle. It has been latent in the network design since the 1970s, but was first explicitly articulated as a principle in 1981 by Jerome Saltzer, David Reed and David Clark. The “e2e” argument is organizing the placement of different functions within a network. It states that the intelligence of a network interconnection is located at the “ends” of that interconnection, where users put information and applications onto the network (Saltzer, Reed, & Clark, 1981). This means that the communications protocols (the protocols that operate the interconnection, and thus the “pipes” that information flows through) should be as simple and general as possible (Lemley & Lessig, 2000, p. 6). This e2e principle, where the pipes are unintelligent (or dumb), has been the standard of the Internet until recently.

Technologically, e2e makes sense, because unintelligent communication protocols can easily be manipulated by applications at the ends to serve whatever purpose the applications might desire. Therefore the same network can serve different purposes for different applications at the same time. This specific feature of the e2e principle has some important social aspects as well. Unintelligent networks serving only the applications at its ends maximize the number of entities that are able to compete for the use of the network (Lemley & Lessig, 2000, p. 7). As networks only amount to “dumb pipes” according to the e2e principle, nobody in the middle of a connection is able to control or block the flow of data. In turn, such openness maximizes innovation among applications at the edges of the network and hence also the variety of ways in which the network can be used. Furthermore competition will not be distorted by a small number of agents that are able to alter the communication patterns of others in order to serve their own pecuniary interests. Lemley and Lessig put it thusly:

As there is no single strategic actor who can tilt the competitive environment (the network) in favor of itself, or no hierarchical entity that can favor some applications over others, an e2e network creates a maximally competitive environment for innovation, which by design assures competitors that they will not confront strategic network behavior. (Lemley & Lessig, 2000, p. 7)

Referring to figure 2-3 the e2e principle would ensure that the connection between user A and user B is served unintelligently with the network’s so-called “best-effort” regardless

14 of the content or even the direction of the data flow. The e2e principle serving data indiscriminately with its best effort is regarded as the direct ancestor to the more recently proposed principle of network neutrality (Wu, b, 2007). The reason why another principle is deemed necessary is that e2e has been undermined in recent years by increasingly intelligent and thus middle-controlled networks.

While e2e was originally established as the standard of the Internet, it is today significantly challenged by new network management innovations and technologies. As stated, when data packets are sent from one user to another they are ascribed a so-called header tag. Part of this header is information about the destination of the packet. This is the only information that hubs (computers, routers, networks, etc.) along the route of the data will need in order to switch it forward (Bendrath & Mueller, 2010, pp. 3-4). Under an e2e regime the header is the only part of the packet that is inspected by the hubs in order to correctly forward it. However, now different technologies are enabling hubs to inspect entire data packets. The term deep-packet inspection (DPI) refers to actions by any network equipment that is not at the end of communication involving non-header packet content. Whenever network intermediaries inspect the non-header content (use DPI) they are acting intelligently and in conflict with the e2e principle (Bendrath, 2009, p. 13). While DPI is in conflict with e2e, it has been deemed necessary in order to combat recent developments relating to the Internet.

2.2.3 Modern challenges to e2e For the technicians and academics that originally created the protocols at the heart of the Internet, DPI would not be necessary. In fact it would have been a drag that only limited the use of the network by undermining the benefits of the e2e principle. However, as the Internet moved out of the technical, academic domain and became increasingly commercialized and exposed to a wider audience, things changed. As more and more people got connected to the Internet, new requirements emerged for how it functioned. Marjory Blumenthal and David Clark (2001) have named five problematic new developments that have pushed the Internet away from e2e:

1. The behavior of unfamiliar end-points is increasingly more likely to be harmful. The new online world is untrustworthy and filled with undesirable forms of interaction, like spam, viruses etc. (Blumenthal & Clark, 2001, p. 72).

2. New applications that perform data heavy tasks, like video streaming, are in need of more sophisticated Internet services than the “best-effort” that is embodied in

the e2e principle. In order to address this problem content providers can host their content at various locations so as to assure short distances to its customers3. Thus new demanding applications depend on a two-stage delivery (core as well as the local servers are needed), and they are therefore breaking down the e2e argument (Blumenthal & Clark, 2001, pp. 72-73).

3. ISPs seem to have decided that the enhanced delivery services needed to serve demanding applications are to be provided within the bounds of the ISPs themselves as a competitive differentiator. This is done, rather than increasing the general capacity of the network and thereby supporting the performance of best- effort e2e delivery. As a result ISPs will have increased incentives to invest in the development of such services, and hence the performance of “regular” best-effort e2e delivery will deteriorate comparably (Blumenthal & Clark, 2001, p. 73).

4. It has become increasingly visible that third parties demand to interpose themselves between communicating end-points, irrespective of what the end- points might desire. ISPs implement network policies and oversight, and government agents interpose for reasons like taxation oversight, law enforcement and public safety (Blumenthal & Clark, 2001, pp. 73-74).

5. Lastly, the transformation of the Internet from an academic/military professional network to a commercial mass-user network has meant that the average user is increasingly less sophisticated. With less sophisticated users it is more likely that the end-points will be incorrectly configured, which in turn means that end-points will be more inclined to delegate the configuration. Two unsophisticated users wanting to communicate, for instance, will be entirely reliant on third party configuration (Blumenthal & Clark, 2001, p. 74).

The developments that follow or are part of the success of the Internet are at the same time altering its foundation. Firewalls and traffic filters using DPI are implemented in order to protect unsophisticated users from an increasingly untrustworthy online world. DPI is used for network control and implemented at the ISP level, and advanced content delivery services are implemented at intermediate servers thereby also breaking down the e2e principle. Each of these developments is making the networks more intelligent and thereby also less dumb. While the connotations of this description might sound

3 This is what is called a content delivery network (CDN). Such services are discussed in further detail in section 4.3.1.

16 positive, the reality is less clear. A more intelligent network is necessarily less neutral towards the traffic, and as Lemley and Lessig argued, it is the open and neutral nature of the Internet, which supports its high level of innovation.

If we concentrate on those of the challenges to neutrality, listed above, that are driven at least in part by business interest, those challenges can roughly be grouped into two different categories: Neutrality is challenged (1) by agents (like ISPs or governments) that whish to manipulate and/or oversee traffic patterns between users, and (2) by new business models that spur alterations in content delivery patterns. The nature of the latter challenge will be covered in detail in chapter 3, however, for now, we stick with the former, which is at the heart of most discussions about network neutrality.

3 Understanding Network Neutrality This chapter will – on the basis of the technological understanding developed in the first chapter of this thesis – explain the concept of network neutrality. Level 3 has claimed that the dispute between it and Comcast is about network neutrality (Level 3, a, 2010). In order to appropriately validate this claim it is necessary to understand the important aspects of the concept as well as the current regulatory regimes regarding the issue.

3.1 Understanding the Concept This section will serve as an introduction to the brief history of the concept of network neutrality as well as the differences between alternative interpretations of the concept and its relation to the e2e principle.

3.1.1 The history of Internet’s neutrality Based on the developments outlined above and the increased pressure on the founding e2e principle of the early Internet, the neutral character of the network of networks has diminished. Arguments for instituting regulation to protect the neutrality of the Internet go back more than ten years. In the late 1990s, following the merger of AT&T and the cable operator MediaOne as well as the merger of AOL and Time Warner, some lawyers began to publicly worry about the future of the Internet (Marsden, 2010, p. 5). In response to the FCC’s considerations on the AT&T/MediaOne merger, Lemley and Lessig expressed serious doubts about the network management practices that might result from such a merger (Lemley & Lessig, 1999). They urged the FCC to regulate Internet connectivity and in particular to instate a regime in which ISPs were forced to comply with the e2e principle (Lemley & Lessig, 1999, p. 5). The FCC did not comply, and for good reasons. E2e as a technical principle might not be well suited for regulatory purposes.

David Clark (one of the original authors that articulated the e2e principle) co-wrote a 2001 article on more recent developments regarding e2e. It was acknowledged that even though e2e had been at the center of much of the innovation with regards to the Internet, a strict interpretation of the principle might not always be the most efficient solution considering the Internet’s broadened user-base:

(...) when a user is communicating with a site that is presumed harmless, there are always risks of malicious behavior. The classic end-to-end arguments would say that each end-node is responsible for protecting itself from attacks by others (…), but this may not be viewed as sufficient control in today’s complex network. (Blumenthal & Clark, 2001, p. 79).

Because e2e is a technical principle, it is also less flexible, which makes it less desirable as a regulatory principle (e.g. with regards to combatting spam and other harmful behavior). Instead of the ‘one-size-fits-all’ e2e approach a regime was needed that defended the spirit of e2e, but in a more flexible manner (Marsden, 2010, p. 12). It was as an answer to this requirement that Tim Wu (2003) first presented the concept called ‘network neutrality’. According to Wu this concept would address some of the deficiencies in the e2e principle. Wu explained along the line of Lemley and Lessig that a network that treated applications equally was desirable (Wu, 2003, pp. 145-147), and that ISPs had implemented several price-discrimination practices distorting the neutrality of the network. He argued, however, that a total ban on network-discrimination would be counterproductive (Wu, 2003, p. 170). Therefore, he introduced a distinction between two different levels of networks. With reference to practices in other industries (Wu, 2003, pp. 172-173), he argued that we should distinguish between two different networks that ISPs are both members of. ISPs own and operate their own local networks comprising themselves as well as their customers. However, they are also members of the ‘inter-network’ together with many other ISPs (Wu, 2003, p. 169). This distinction is illustrated in figure 3-1.

Figure 3-1 – Different network levels

According to Wu and his principle of network neutrality ISPs should be able to manage their own local networks and institute mechanisms to price-differentiate on the basis of bandwidth and hence the burden individual users are representing for the network. Network neutrality would not, however, allow ISPs to discriminate at the inter-network

19 level, i.e. on the basis of IP-addresses and other inter-network information, unless the data discriminated against was provably harmful (Wu, 2003, p. 172). Wu emphasized that ISPs should be allowed to discriminate quantitatively on the basis of data usage, i.e. bandwidth, however, they should not be allowed to discriminate qualitatively on the basis of application type, IP addresses etc.:

Selling different tiers of service (low, medium, and high bandwidth) does not favor or discriminate against particular application types. In the presence of a means for differentiating among customers in a way that does not distort the process of competitive innovation, we should view discrimination on the basis of application with suspicion. (Wu, a, 2003, pp. 155-156)

Wu’s 2003 proposal amounts to an Internet regime in which ISPs are not allowed to discriminate between inter-network traffic on the basis of its qualitative characteristics – other than characteristics that would be harmful to the network. It is what is sometimes referred to as a non-discrimination rule (Schuett, 2010).

In 2009 Wu co-wrote an article (Lee & Wu, 2009) in which he revisited the subject and altered his view slightly. In order to address increased congestion problems and the need to improve Internet services Lee and Wu argued that more efficient networks were needed. Networks would function more effectively if they were able to discriminate on the basis of certain characteristics:

If hypothetically a network could recognize and prioritize packets more sensitive to delay, like video packets, over packets that are insensitive, like email, the network would in theory function better. (…) in our view, [such practices] may be palatable as long as payment is not demanded from content providers by Internet service providers as a requirement for service (Lee & Wu, 2009, p. 73) This more recent approach to network neutrality is primarily aimed at protecting the non-existence of termination fees, i.e. fees paid in order to access the ISPs users. The existence of a de facto ban on termination fees (the zero-price rule) is, of course, also comprised in Wu’s original non-discrimination proposal. If ISPs are not allowed to discriminate in the inter-network, they can certainly not require fees in order to terminate inter-network traffic. The zero-price rule does not, however, state that ISPs are not allowed to prioritize traffic for whatever purpose as long as the prioritization does not amount to outright blockage. It has been argued that content providers ought to contribute to investments in network development. Instrumentally this would be through ISPs installing mechanisms according to which content providers would pay for the

20 amount of data traffic their services put on the networks. Lee and Wu saw such mechanisms as, possibly, playing a significant role in the solution to the forecasted congestion problems:

One proposal that has been raised (…) would be to create a tiered structure for consumer ISP traffic: (…) allow individual Internet service providers to create a “preferred” service for traffic, or a “fast-lane,” for a fee that does not depend on the identity of the content provider. (...) we do not feel as though a zero-pricing rule should prohibit this particular implementation (…). (Lee & Wu, 2009, p. 73)

Even though Lee and Wu stress the neutrality in the proposal (the fee is independent of the content provider), it is significantly different from a non-discrimination rule. “Net neutrality, when interpreted as a non-discrimination rule, prevents ISPs from prioritizing certain traffic” (Schuett, 2010, p. 5). According to the non-discrimination understanding of the network neutrality ISPs can only price-differentiate according to bandwidth usage. The non-discrimination approach resembles the old e2e principle more than the zero- price rule, however, it allows for network management regarding harmful data traffic, which is not possible according to old-fashion e2e arguments.

The distinction between network neutrality as a zero-price rule or as a non- discrimination rule will be important when we consider the proposed regime-changes by ISPs later in this chapter.

3.1.2 Users, content providers and ISPs Figure 2-3 established the most basic understanding of the interconnection of users provided by the Internet. Communication is intermediated between different groups of agents, i.e. users and content providers4. For the purpose of this thesis the term “content” is understood loosely as per Lee and Wu, i.e. referring to all types of different media, applications, retailers and online services in general (Lee & Wu, 2009, p. 62). Content providers deliver services to their customers via the Internet, and importantly in particular through the customer’s ISP. This happens without the ISP being compensated by the content provider; the logic being that the ISP is already compensated through the users’ subscription plans. Thus users and content providers only pay to access the Internet, not for other users to access their content. Two important changes have in particular altered this situation. (1) The invention of DPI has meant that ISPs are now able to distinguish between data on the basis of factors like its content and its origin rather

4 Users might also act as content providers. However, for this discussion it is only important to distinguish between the two different roles that agents might undertake.

21 than just its destination as per its header tag. On one hand this enables ISPs to filter out harmful and criminal data traffic, which of course is not particularly problematic. However, DPI can also be used more strategically by the ISPs in ways that are less honorable. For instance, during an industrial dispute in 2005 the Canadian ISP Telus blocked its customers’ access to the website of its workers’ trade union (Mac Síthigh, 2011, p. 5). If allowed to by law, ISPs are able to utilize DPI much more aggressively in the pursuit of profits than what we have seen so far. (2) ISPs are increasingly more likely to take advantage of the strategic possibilities provided by DPI, because changes in consumer behavior and adjustments in pricing structures are pressurizing their revenue streams. With DPI ISPs are able to interpose themselves between users and content providers as gatekeepers to their costumers. Their networks cannot be avoided when delivering content, which is why they might look to DPI as a replacement of traditional revenues.

3.2 Network Neutrality and the ISPs This section will serve as an introduction to recent developments in the business of delivering Internet access services. It will firstly look at some structural changes facing ISPs and telecommunications companies in particular. Afterwards the ISPs’ proposed alterations to the current Internet regime are outlined along with some of their consequences.

3.2.1 Telecommunication revenues are under pressure Today, the major commercial ISPs are either telecommunication companies, like AT&T, who provide Internet access through their wireline or wireless networks, or they are cable TV operators, like Comcast, providing Internet services through their cable network. Lately, ISPs in general and telecommunication companies in particular have seen increased pressure on their revenues. Telecommunication services are provided in different forms and even more importantly at different prices. Table 3-1 summarizes an approximation of related revenues from different telecommunication services.

Table 3-1 – Approximate price per megabyte of various services

Service Revenue per MB

Wireless texting $1.000,00 Wireless voice $1,00 Wireline voice $0,10 Residential Internet $0,01 Backbone Internet $0,0001

Source: (Odlyzko, 2009, p. 43)

Telecommunication companies earn quite different sums of money for moving the same amount of data around depending on the technology. We see from table 3-1 that wireless communication in general is generating the most revenue respective to the amount of data, with wireless texting being by far the most revenue generating form of communication. While wireline voice (regular telephony) is generating less revenue per MB than wireless communication it is still generating significantly more revenue than Internet communication (be it what regular users pay their ISPs or what small ISPs pay bigger ISPs for backbone interconnection). We see that the more traditional forms of communication that telecommunication companies provide generate significantly more revenue per MB than Internet communication. This would not necessarily be a problem for the telecommunications industry if an increase in Internet communication did not affect the use of more traditional services. However, modern Internet services like voice and video calling using voice over Internet protocol (VoIP) are steadily replacing its more traditional alternatives. One of the most prominent providers of VoIP services – Skype – has seen the number of user accounts increase from 74,7 million in 2005 to 663 million in 20095. This development has in particular hurt growth in international long-distance traditional telephony. International calling has generally been characterized by impressive growth rates of about 15 percent for the last couple of decades. However, as shown in figure 3-2, these tremendous growth rates started to decline by the middle of the last decade.

5 For more historical data on Skype usage see http://en.wikipedia.org/wiki/Skype

Figure 3-2 – Growth in international calling

Source: (TeleGeography, 2011)

Today, growth in carrier driven international calling is only about 5 percent, which compared to earlier years and with an ever-increasing world population taken into consideration is a significant problem for traditional telecommunications companies. From figure 3-2 we also see that international voice communication has not seen particularly declining growth rates. If just the communication provided by Skype (which is only one among many VoIP providers) is added to the carrier driven communication, growth is back at about 15 percent. Furthermore, it is important to remember that declining growth in the international and long-distance markets, are hurting telecommunications revenues particularly hard, because revenue is lost both for the originating provider and the terminating provider, cf. the use of termination fees in regular telephony (see section 2.1).

Another traditional and revenue generating form of communication that is suffering from IP-based competition, is wireless texting. The Dutch telecommunications company, KPN, recently used DPI to document that 85 percent of their customers using an Android based smartphone had downloaded the application called WhatsApp, which allows user to send text messages over the Internet and only pay for the data traffic at a significantly lower rate (see table 3-1). According to KPN, the use of WhatsApp has resulted in a decline in text message revenues of 13 percent from Q1 2010 to Q1 2011, whereas revenues had increased by 8 percent the year before (O'Brien, 2011).

Declining international calling growth rates and text message revenues might be more acceptable for telecommunication companies if other services and technologies characterized by high levels of revenue generation had a promising outlook. Referring to table 3-1 such services are wireless communication and to some degree also traditional wireline communication. Figure 3-3 shows, however, that the latter has generally seen a declining number of users (in the US) during the last couple of years, which is expected by industry experts to decline even further in the future.

Figure 3-3 – Forecast of US telecoms services

120

Mobile Phone 100 Subscribers

80 Internet Users 60

Telephone Lines 40

Usersper 100 Inhabitants 20 Broadband Subscribers 0 2008 2009 2010 2011 2012 2013 2014 2015

Source: (BMI, 2011, pp. 16-19)

The number of US mobile phone subscribers has increased significantly in the most recent past, and today there are about 100 subscribers per 100 inhabitants in the US. Considering that these subscribers generate the most revenues per MB this is positive for telecommunications companies. However, the projections in figure 3-3 show stagnation and ultimately a small decline in the growth of US mobile phone subscribers per inhabitants in the coming years. According to these projections the only service telecommunication companies provide that will see growth in the number of users is Internet services and broadband in particular. This outlook, of course, will amount to a significant pressure on the revenue streams of telecommunication companies in of it self. However, the pressure is intensified even further by recent price developments regarding Internet services. The OECD has been monitoring the prices of Internet subscriptions in the member countries. In their Communications Outlook for 2009 they reported that the OECD average compound annual growth rate (CAGR) for the price of a DSL/fiber Internet subscription was -13,6 from 2005 to 2008 (OECD, 2009, p. 300). Telecommunications

25 companies across the OECD thus lowered their Internet prices significantly in the recent past. The other major group of ISPs in the OECD – cable operators - also lowered their prices significantly. The OECD average CAGR for cable Internet subscriptions between 2005 and 2008 was -14,7 (OECD, 2009, p. 301).

In sum, ISPs in general and telecommunications companies in particular are up against alterations in consumer behavior and pricing structures that together will amount to significant pressure on their current revenue streams. Therefore ISPs are inclined to seek to increase the revenues generated by Internet services in order to combat these structural developments, and DPI provides a technological possibility to do so.

3.2.2 Telecoms want to use DPI to increase Internet profits Under the e2e regime the ISP’s networks were only able to read the destination of incoming data packets and switch them forward to their users. Lawrence Lessig used the image of a ‘daydreaming postal worker’ that simply moved packets and leaved the interpretation up to the applications to describe the technological role of ISPs under the e2e regime (Lessig, 2006, p. 44). As stated important changes has brought significant alterations to this regime in the recent past. Today ISPs are far from daydreaming while forwarding data packets, and the development of DPI has enabled them to play a much active role in the process of delivering data. Bendrath and Mueller point out that in the era of DPI a more correct metaphor would possibly be a postal worker that…

[1] Opens all packets and letters; [2] Reads the content; [3] Checks it against databases of illegal material and when finding a match sends a copy to the police authorities; [4] Destroys letters with prohibited or immoral content; [5] Sends packages for its own mail-order services to a very fast delivery truck, while the ones from competitors go to a slow, cheap sub-contractor. (Bendrath & Mueller, 2010, p. 9)

Importantly, DPI enables ISPs to possibly do all of these things without delaying or damaging the flow of data significantly. For this thesis the most important aspect of DPI is the fifth – the ability to prioritize data according to ISP’s business interests. ISPs can potentially use DPI to give to content providers that are willing to pay for it prioritized access to its costumers and thereby only provide relatively downgraded access for content that does not serve the ISP’s interests. Even though this sort of discrimination has not taken affect yet ISPs are not shy about the fact that they want to establish such an Internet regime in the near future. The first ISP executive to publicly affirm such intentions was the then CEO of AT&T, Edward Whitacre. In a 2005 interview with BusinessWeek he stated:

How [are content providers] going to get to customers? Through a broadband pipe (...). Now what they would like to do is use my pipes free, but I ain't going to let them do that (…). So there's going to have to be some mechanism for these people who use these pipes to pay for the portion they’re using. (Whitacre, 2005) Whitacre’s statement about his pipes became famous in the net neutrality debate (van der Berg, 2008), and now he is often referred to as Ed ‘They're my pipes!’ Whitacre (Anderson, 2006; Anderson, a, 2010). What Whitacre calls ‘his pipes’ is the AT&T network that connects AT&T costumers to the backbone as per figure 2-3. The connection between the ISP and the costumer is also called ‘the last mile’, because it is the last part of the interconnection between content provider and user. The last mile is managed and controlled by the ISP, which enables the ISP to ultimately prioritize the traffic to its customers. As stated, this sort of control is less problematic, when used to block harmful or unlawful data. What Whitacre is talking about, however, is altering the Internet, as we know it significantly. So far the dominating regime has been that users pay ISPs to access the Internet, either as a flatrate subscription or as a per MB subscription. In the quote above Whitacre implies that content providers also ought pay for their users’ Internet connection; even though the ISP’s costumers are already paying for their Internet access, and the content providers is paying their ISPs for access, Whitacre finds that somehow the ISP’s network is being used for free. Since Ed Whitacre made his famous statement, ISPs have generally kept quite about their desire for a regime change. That is, of course, until earlier this year, when the ISPs’ aspirations publicly resurfaced in Europe.

In Norway the partially government-owned ISP, Telenor, announced on January 25, 2011 that they intended to end the current Internet regime in which users only pay for their own subscription. Telenor explained that sometime in 2011 new mechanisms would be in place according to which content providers would pay the ISP to guarantee good quality deliverance of their content to the ISP’s customers (Eriksen & Tjersland, 2011). Content providers that did not whish to enter into such agreements with Telenor would then get to use the regular ‘best effort’ capacity. Telenor did not announce any detailed pricing scheme, however, they pointed out that nobody would be excluded from delivering content via Telenor’s network (Eriksen & Tjersland, 2011). Therefore the announced regime is not an introduction of termination fees (as per regular telephony), but it is effectively instituting a quality of service differentiation between those who are willing and able to pay and those who are not. According to the Norwegian Consumer Council this means that users who are not willing or able to pay “will be stuck in Telenor’s second

27 grade network” (Kaldestad, 2011). What Telenor has proposed is exactly the kind of regime Lee and Wu (2009) foresaw and approved according to their zero-price rule, in which a “fast lane” for prioritized traffic is created in order to optimize the Internet’s overall quality of service. Telenor argues that their proposed regime is not in conflict with network neutrality, which is not entirely incorrect, as it would be permissible under a zero-price network neutrality regime. It would, however, not be allowed under a non- discrimination network neutrality regime.

Not even two weeks after the Telenor announcement in Norway, the major French ISP, France Telecom, announced that they were exploring the idea of introducing termination fees for content providers. In an interview with the Wall Street Journal, Pierre Louette, a senior executive at France Telecom said explicitly that the ISP were looking at abolishing both the non-discrimination rule and the zero-price rule (WSJ, 2011). Louette pointed out that telecommunications companies were pushed to lower termination rates in regular telephony, and that they were looking for ways to make up the losses:

We feel we could have some data termination rates, not huge ones, but something at least that would make up for the decrease of the traditional termination rates (…). (Louette in WSJ, 2011)

Whereas the Telenor proposal only was in conflict with the strongest network neutrality principle, the France Telecom idea is also in conflict with the more lenient zero-price rule.

In late April another France Telecom manager, Elie Girard, along with the chairman of the Spanish ISP Telefónica, César Alierta, told the Financial Times that a regime change was underway (Parker, 2011). According to Financial Times a group of five of the most important European ISPs (Deutsche Telekom, France Telecom, Telecom Italia, Telfónica and Vodafone) came together in October 2010 and wrote a private letter to the EU Commissioner responsible for the issue, Neelie Kroes. The five ISPs allegedly encouraged Kroes to support a regime change, and in return the ISPs would increase their network developments spending so as to meet the EU’s target of increasing broadband speeds (Parker, 2011). According to the article the five broadband operators sought to establish a system like the one Telenor envisioned in Norway, i.e. the installment of a fast lane available for content providers that are willing and able to pay for a guarantied quality of service (Parker, 2011). If that is the solution they are aiming for, and France Telecom has dropped its previous idea of instituting termination fees, then it seems as if a consensus has been established on the side of European ISPs, according to which the regime change

28 needed is an installment of a two-track, fast lane vs. best-effort style Internet. This might politically and strategically be a more sound approach, since opponents of such a regime are fewer than those who are opposed to an installment of data termination fees. This is because a “fast lane” scenario is not necessarily in conflict with what neutrality advocates like Lee and Wu (2009) call network neutrality.

3.3 Regulatory Regimes This section will serve to introduce the attitude of EU and US regulators towards the issue of network neutrality, as well as the range of current regulation on the subject on both sides of the Atlantic. Importantly, this section will reflect on the current regulation bearing in mind the different understandings of the concept of network neutrality as well as the possibilities for implementation of the European ISP’s proposals for changes to the current Internet regime. Lastly, this section reflects briefly on the implications for network neutrality in the dispute between Level 3 and Comcast.

3.3.1 EU regulation Generally, EU authorities have had a lenient attitude towards network neutrality. In a 2008 speech, the then responsible commissioner, Viviane Reding, explained that the EU was reluctant to intervene and that preferably consumers would regulate the implementation of data prioritization:

The Commission's vision of an open and competitive digital market does allow for traffic prioritization (…). In the end, it will be up to the consumers to decide to change to a provider that offers them what they would like (Reding, 2008).

Current EU regulation requires ISPs to spell out their traffic management practices in the fine print of their contracts, which according to the EU means that costumers will be able to make informed decisions about the choice of ISP (EU, 2009). Traffic management or prioritization is not frowned upon by EU regulators, so long as such practices do not amount to outright or de facto blockage.

Other than requiring ISPs to be somewhat upfront about their network management practices, the EU has not taken any concrete steps towards preserving the neutrality of the Internet. In its most recent publication on the subject from April 2011, the Commission stuck to its previous line of reasoning defending the use of traffic management:

Traffic management is considered necessary to ensure the smooth flow of traffic, particularly at times when networks become congested. (…) [The use of traffic

management] for the purposes of addressing congestion and security issues [is] entirely legitimate and not contrary to the principles of net neutrality. (…) ISPs should be allowed to determine their own business models and commercial arrangements (…). (EU, 2011, p. 7) This way of interpreting network neutrality is in line with the advocates for a zero-price rule. Under a non-discrimination network neutrality regime traffic management for the purpose of creating a more efficient network is problematic, because it prioritizes data traffic on the basis of its character and application type, i.e. for instance VoIP would be preferred over email. Even though the Commissions reasoning is in line with the zero- price arguments, the Commission has not proposed any concrete steps towards protecting against termination fees. In fact, even though ISPs like France Telecom has proposed an end to the zero-price rule, thereby altering the innovative possibilities of the Internet significantly, the Commission “does not have evidence to conclude that these concerns are justified at this stage” (EU, 2011, p. 6).

3.3.2 US regulation In the US federal authorities have taken considerably more significant steps to protect network neutrality. In a September 2009 speech the chairman of the FCC, Julius Genachowski, spoke more explicitly in support of the analysis arguing that the success of the Internet is crucially linked to its open and neutral character – arguments promoted by researchers like Lemley and Lessig (2000) – than it has ever been the case from his European colleague:

The Internet’s creators didn’t want the network architecture – or any single entity – to pick winners and losers. Because it might pick the wrong ones. Instead, the Internet’s open architecture pushes decision-making and intelligence to the edge of the network – to end users (…). [The] Internet is (…) allowing anyone to contribute and to innovate without permission. (Genachowski, 2009)

In 2009 Genachowski proposed a new regulatory framework instituting both a transparency principle mirroring the European initiative, but also a non-discrimination principle prohibiting ISPs from discriminating against certain content or applications (Genachowski, 2009). In December 2010 the FCC adopted new rules based on Genachowski’s original proposals. Two principles had become three new rules: The transparency principle got translated directly into a concrete regulatory rule (FCC, 2010, p. 33). The proposed non-discrimination principle, however, got split into two separate rules: a so-called no-blocking rule and a ‘no unreasonable discrimination’ rule. These two new rules embody some important alterations from the chairman’s originally proposed

30 principles: (1) Both the prohibition of blocking and the barring of unreasonable discrimination are limited to fixed/wireline broadband connections and notably do not apply to wireless connections, whereas Genachowski in 2009 was very explicit in stating that his proposed principles applied “to the Internet however accessed” (Genachowski, 2009). (2) The idea of reasonable discrimination was not prevalent in the FCC’s originally proposed rulemaking, which is an alteration that the FCC also acknowledged directly in their adopted regulations (FCC, 2010, p. 43). According to the FCC, outright prohibiting discrimination is problematic, because it might limit the ability to differentiate between users that consume different amounts of data and bandwidth (FCC, 2010, p. 41). Discrimination on the basis of bandwidth differentiation happens at the local network level and is application-agnostic, which is why Tim Wu, would agree that such differentiation could be considered reasonable (see section 3.1.1). While the EU is open for differentiation on the basis of application types, the FCC is worried that such practices effectively, will pick winners and losers (FCC, 2010, p. 45), which is inconsistent with the founding principles of the Internet (Genachowski, 2009).

Regarding the proposed alterations to the current regime by European ISPs the FCCs adopted rules (although somewhat watered down) are quite clear, and significantly more aggressive than what has come out of its European counterpart. The non-blocking rule effectively institutes a ban on termination fees as per the zero-price rule, at least with regards to fixed broadband connections (FCC, 2010, pp. 39-40). The ban on unreasonable discrimination goes even further. Even though it is not quite as strict as the original proposal, it will probably serve the non-discrimination understanding of network neutrality just as well, if not better. As explained above, the non-discrimination interpretation of network neutrality applies mainly to the inter-network level (see section 3.1.1). When applied legally, the distinction between discrimination at different network levels becomes problematic, which is also why the FCC introduced the concept of unreasonable discrimination. Even though a ban on only unreasonable discrimination is not as strict as a ban on all inter-network level discrimination, it is somewhat close, except from the fact that it only applies to fixed broadband connections. Regarding the establishment of fast lane services offered to content providers, the FCC’s order is still skeptical though not categorically prohibiting it:

(…) as a general matter, it is unlikely that pay for priority [the establishment of fast lane services] would satisfy the “no unreasonable discrimination” standard. (FCC, 2010, p. 43)

Although “unlikely” is not “impossible”, the FCC’s adopted rules signals a strong commitment to protecting the neutral character of the Internet against the ISPs using traffic prioritization to increase profits. A commitment that is nonexistent in EU’s communication on the subject.

3.3.3 Level 3, Comcast and network neutrality regimes As explained above, most of the debate about network disputes as well as academic writing on the subject of network disputes relate to the issue of net neutrality and differences between ISPs and content providers. Considering the ongoing dispute between Level 3 and Comcast, we see that some parts of the debate (involving the delivery of content, i.e. Netflix) resemble the dynamics of the network neutrality arguments. A scenario in which ISPs are able to extract fees from content providers in return for the provision of a quality of service guarantee would theoretically enable Comcast to require payment from Netflix in return for prioritized access to Comcast subscribers. Such a regime would, however, not involve alterations directly for Netflix’s ISP, Level 3. Even so, Level 3 claims that Comcast is violating network neutrality doing what they have done with regards to the dispute (Level 3, b, 2010). This represents an important complication for the analysis of the subject In order to understand the interconnection of network neutrality and inter-ISP disputes; we need a more detailed introduction to the so-called backbone of the Internet. That is the subject of the following chapter.

4 Understanding the Backbone Section 2.2.1 of this thesis introduced a simple model for understanding how users interconnect on the Internet. According to that simple understanding of the Internet, the users’ ISPs interconnect through the backbone, which in the model is an abstract construction represented by a cloud. The technical setup of this interconnection with its underlying balance of power is not uncovered further in that model. In order to understand the dispute between Level 3 and Comcast, who are both Internet access providers, it is necessary now to forego the simplification that is represented by the cloud in figure 2-3. This chapter will introduce how network operators (ISPs as well as backbone providers) connect and the economic relations between those different network operators.

4.1 The History of the Backbone This section will introduce the historical developments of the Internet’s backbone. As stated, the Internet was originally a government project, whereas the backbone today is commercially owned and governments are generally very reserved about regulating it. The change from government control to commercial control is important for understanding the structure and architecture of the backbone even today.

4.1.1 The government operated backbone One of the most critical steps in the development of the Internet was the establishment of the National Science Foundation Network (NSFNET) in the 1980s. The NSFNET was the first nation-wide network in the US and it was created in order for the National Science Foundation (NSF) to be able to link their five supercomputing centers to a larger number of users in the research community (Shah & Kesan, 2007, p. 94). This was achieved by interconnecting the handful of regional networks that had already been established in the US. The NSFNET served as the backbone for different regional networks connecting colleges, universities as well as other federally operated networks. The interconnection of all of these networks via the NSFNET was already at that time known as the Internet. Figure 4-1 illustrates the Internet’s architecture with the NSFNET as the backbone.

Figure 4-1 – The government owned Internet backbone

Source: (Shah & Kesan, 2007, p. 95)

The NSFNET was originally created as a non-profit entity, and as stated above, commercial use of the network was actually prohibited in the early days of the Internet. Even when commercial operations started up in the early 1990s they were all entirely dependent on the NSFNET for interconnectivity and the ability to reach every other computer on the Internet. The ban on commercial use, however, started to break down by the early 1990s, when an increasing number of second-level, for-profit networks started to pup up offering network interconnection. Even though the privatization of the NSFNET ultimately was the goal of the US government, as we shall see next, important events transpired that pushed in the direction of commercialization, which were not part of the government’s plan (Shah & Kesan, 2007).

4.1.2 The privatization of the backbone In practice the NSF had contracted the day-to-day operations of the NSFNET to a number of private companies (predominantly IBM and CMI) providing different types of networking equipment for the NSFNET’s infrastructure. While privatization of the NSFNET was still only in its planning stage, the contractors created a non-profit corporation that took over the management of the network. This non-profit corporation then formed a for-profit subsidiary that started offering commercial networking services based on the infrastructure of the NSFNET (Shah & Kesan, 2007, p. 97). The regionally based commercial competitors of this new subsidiary, of course, complained that they were the victims of unfair competition (Markoff, 1991). This development led to Congressional hearings on accusations of a government-sponsored monopoly, and the organization in charge of the privatization process (the NSF) came under intense scrutiny.

Shah and Kesan have argued that many of the problems that arose around the privatization of the NSFNET stem from the fact that an organization was put in charge, which core competencies lies in managing grants for basic science and notably not in supervising the privatization of government infrastructure (Shah & Kesan, 2007, p. 105). After the hearings the NSF moved forward with its plans, and in 1993 the proposed changes to the NSFNET was released. The NSF proposed the establishment of so-called network access points (NAPs) that any backbone provider could connect to and reach all other networks connected to those NAPs. Instead of regional networks connecting to one single backbone network, they would have to choose a commercial backbone provider, and then NAPs would solicit the connection between these commercial backbones thereby ensuring interconnectivity. The proposed plans are illustrated in figure 4-2.

Figure 4-2 – The NSF’s proposal for alterations to the NSFNET

Source: (Shah & Kesan, 2007, p. 99)

This new network design would privatize the backbone while establishing a level playing field between the commercial backbone providers, since any backbone network could connect itself to any NAP. Furthermore, this network design would also prevent the fragmentation of the Internet as a result of the openness of the NAPs. The establishment of the NAPs was initiated in 1994 and on April 30, 1995, the NSFNET was officially retired (Shah & Kesan, 2007, p. 100).

4.1.3 The commercial backbone Without the NSFNET the Internet relied entirely on commercially provided backbone services. One year after the retirement of the NSFNET the NSF ended its contracts for the public NAPs, thereby transferring control of these access points to their private-sector

35 contractors. This transfer of control was done without any continued requirement for keeping the access points at a sufficient bandwidth capacity that reflected developments on the rest of the Internet. Significant investments in upgrading the NAPs were therefore not commissioned by their new for-profit owners, which ultimately meant that the NAPs became congested and outdated (Shah & Kesan, 2007, p. 100). Instead of investing the continued development of the NAPs the backbone operators created private exchange points between each other. Unlike the NAPs, these private exchange points were not obligated to treat all networks equally (irrespective of their traffic volumes). This meant that a handful of big backbone operators could connect to each other privately at sufficient capacities, while smaller networks had to use the congested NAPs (Shah & Kesan, 2007, p. 101). The private exchange points thus quickly outcompeted the public exchange points. Since then, the NAPs have lost their importance, and gone with them has also the level playing field envisioned between incumbents and new network operators. A new entirely commercial backbone architecture thus developed, and this is illustrated in figure 4-3:

Figure 4-3 – The architecture of the private backbone

Today, backbone providers all over the world interconnect at their own private exchange points. The interconnection happens on terms they negotiate bilaterally and often in secret settlements (Anderson, a, 2010). The structure of the modern backbone thus heavily favors large well-established incumbents, which in the US has resulted in a backbone market with only a handful of large network operators (Shah & Kesan, 2007, p. 101). This is important to remember, when we next move on to the technical and monetary setup of private backbone interconnection relationships.

4.2 Traditional Network Interconnection This section will introduce the most common methods for network operators (backbone providers and ISPs) to interconnect and exchange data traffic. Traditionally, there have been two separate ways for network operators to interconnect: Transit and peering. Even though modern inter-network operator relationships are seldom so black and white that they fit into either category entirely, the two concepts serve well as an introduction to the theme of backbone interconnection.

4.2.1 Transit Every network operator that provides Internet services (however small the operator might be) is in need of interconnection that provides access to the entire Internet in order to satisfy the operator’s customers. At the same time it is also essential for the ISP to make sure that the entire Internet knows its IP addresses, so that users on other networks are able to connect to the ISP’s customers. Because small network operators are not able to connect directly with every other network on the Internet, they instead turn to bigger network operators, from whom they buy a service that satisfy this requirement. Such services are called Internet transit. A small network operator purchases transit from a bigger network operator, which in effect means that the small operator pays the bigger one to tell the rest of the Internet where its IP addresses are (which is called “announcing its prefixes6”), and that the bigger operator agrees to send and receive traffic between the small operator and the rest of the Internet (Faratin, Clark, Bauer, Lehr, Gilmore, & Berger, 2008, p. 54). In order for the transit to work, the bigger operator must have access to all global IP addresses. If it does not have this access, then it too will have to buy transit from an even more far-reaching network operator. Transit relationships represent the different levels that Internet providers are operating at. Therefore, backbone providers are often grouped hierarchically according to whether they purchase transit or not:

• Tier 1 ISPs are the most far-reaching network operators in the backbone. They are defined as operators, who are able to reach all IP addresses in their Internet Region7, without purchasing transit services (Norton, a, 2010).

• Tier 2 ISPs make up a very heterogenic middle group. They are defined as ISPs, who do use some level of transit services to reach parts of their Internet Region. Tier 2 ISPs come in different sizes and some of them are so big that they are able

6 Prefixes are the first parts of an IP address: E.g. 180.26.xx.xx 7 An Internet Region is a distinct part of the Internet usually defined by its geographical boundaries such as countries or continents.

terminate up to 70 percent of their traffic without the use of transit (Norton, b, 2010).

• Tier 3 operators are running even smaller networks. They are usually access network ISPs or content heavy networks, and they use transit for all of their interconnectivity (Savageau, 2006).

Transit links are technologically very convenient for the ISP purchasing the service. A Tier 3 network operator purchasing full transit can operate with a very simple so-called forwarding table with only two classes of entries: (1) its own prefixes used for routing packets towards destinations on its own network and (2) “everywhere else”. Packets that are destined for anywhere other than the operator’s own network will simply be forwarded to the transit provider. It is the responsibility of the transit provider to make sure that all other networks on the Internet knows that it is the path to the prefixes of the smaller network. Therefore, the transit provider announces the smaller network as part of its so-called cone of prefixes. Network operators can also decide to purchase transit services from more than one provider in order to obtain more resilient and diverse Internet connectivity. In such instances the addresses of the smaller network become parts of the cone of prefixes of all of its transit providers (Faratin, Clark, Bauer, Lehr, Gilmore, & Berger, 2008, p. 54).

4.2.2 Settlement free peering The other traditional form of interconnection between backbone networks is called peering. In a peering arrangement two networks agree to provide a path between their two cones of prefixes. Unlike transit, peering does not provide access beyond the cones of prefixes of the involved parties. Figure 4-4 illustrates how prefixes are advertised within peering relations in the backbone.

Figure 4-4 – Advertising cones of prefixes in peering relations

Source: (Norton, c, 2010)

Originally, no money changed hands in peering relationships, which is why it is sometimes referred to as settlement free peering. Since Tier 1 backbone providers do not purchase transit from anybody, they must peer with every other Tier 1 operator in order to be able to reach all parts of their Internet Region. The Tier 1 operators therefore collectively form a network of peering arrangements ensuring the interconnectivity of each other. However, peering is by no means restricted to Tier 1 operators. Any two ISPs can initiate a direct peering arrangement if they both find it beneficial. There are several reasons why network operators might want to enter into settlement free peering relationships. Two small ISPs who discover that they in fact have a lot of traffic for each other might enter into a peering relationship rather than both pay a transit provider to carry the traffic between their two networks. In that case peering will bring down transit costs for the two operators, while the delivery performance is increased as a result of the establishment of a shorter path from the one network to the other (Faratin, Clark, Bauer, Lehr, Gilmore, & Berger, 2008, pp. 55-56).

The costs of peering are primarily related to the establishment of the interconnection, i.e. the purchase of network equipment and the lines necessary to connect the two networks. Once a peering relationship is established the marginal costs of an extra bit sent over the interconnection is next to nothing (van der Berg, 2008). This means that ISPs will try to use their existing peering links for as much traffic as possible instead of a transit link for which the ISPs will have to pay for the amount used.

Because network operators are not always interested in peering with one another (bigger operators will for instance not peer with current or potential transit customers and

39 thereby reduce transit revenues), they usually have some peering guidelines that determine whether or not they will consider establishing a peering link to another network (Faratin, Clark, Bauer, Lehr, Gilmore, & Berger, 2008, p. 56). These may include the following requirements:

1. Geographic diversity: Potential peering partners should be able to set up links at multiple divers geographic locations. Two nation-wide US backbone operators will require each other to link at least at the east coast, the west coast and at a point in the central US so that traffic originating and terminated on the west coast does not have to go to the east coast first, if that is where the operators have their only link (Faratin, Clark, Gilmore, Bauer, Berger, & Lehr, 2007, pp. 9-10).

2. Traffic volume: The traffic between potential peering partners should be of a certain magnitude relative to the size of both network operators. If the bilateral traffic is not a significant amount of gigabits per second, peering is unlikely (Faratin, Clark, Gilmore, Bauer, Berger, & Lehr, 2007, p. 10).

3. Traffic ratio: The amount of traffic received from potential peering partner should be somewhat in balance with the amount of traffic sent to the other network. Normally the ratio is required to be within about 2:1. The rationale behind the traffic ratio requirement has to do with cost sharing and how traffic is routed between networks. There are different possible methods of data routing between two networks that place the majority of the costs on either the sending or the receiving network (see section 4.2.3 for an introduction to routing regimes). In whichever routing regime that is used, traffic ratios will work to secure balanced cost sharing.

4. Consistent announcements: Peering partners will often require each other to announce all their prefixes consistently at all interconnections. This requirement will allow for efficient cost sharing. If one network operator only announces local prefixes at their interconnections, then their peering partners are forced to carry the traffic further and pay a larger share of the routing costs (Faratin, Clark, Bauer, Lehr, Gilmore, & Berger, 2008, p. 56).

Generally, these requirements work to strengthen the hierarchical structure with different tiers of Internet backbone providers described above. At the top a group of Tier 1 operators have formed a “club” of peering partnerships, which it is almost impossible for others to become a member of (Norton, a, 2010). Beneath those operators the Tier 2

40 networks can peer with each other, however not with the Tier 1 networks, since Tier 2 operators are potential transit customers to the Tier 1. Every Tier 2 network will have to purchase some amount transit in order to reach all prefixes. At the level below, Tier 3 networks simply buy access to the entire Internet through one or more transit providers. They do not establish peering relationships, mostly because they seldom live up to the peering guidelines described above. Figure 4-5 illustrates how a group of operators forming the three tiers might interconnect with one another.

Figure 4-5 – Peering and transit interconnection in the backbone

Tier 1 consists of operators A and B, who can access all prefixes since they peer and their two cones of prefixes collectively comprise the entire network. The operators must use their peering partners to reach networks that they do not provide transit to, i.e. operator C can see B through A, but not through D. If that was the case then D would provide free transit for C. Tier 2 is much more diverse than Tier 1 and includes networks of much different sizes. They all use both peering and transit in establishing full interconnection. Operator D can see the prefixes of C, E and F directly, but not G through F. In order to reach G, D must use its transit connection to either A or B. At the bottom Tier 3 operator I must pay G for all traffic to and from its network, but as mentioned it can maintain a fairly simple forwarding table. Furthermore operator G will provide I with cheaper transit services than either A or B would, because I’s prefixes will be more appreciated as part of G’s comparably smaller cone of prefixes, i.e. the inclusion of I in G’s cone of prefixes will

41 increase the attractiveness of G as a peering partner relatively more than it would for either A or B.

4.2.3 Routing regimes – hot potato or cold potato There are primarily two different methods for networks to handle bilateral traffic travelling between their networks via a direct peering link. The traditional regime is the practice of so-called “hot potato routing”. Under a Hot potato routing regime the originating network hands off traffic to the receiving network as early as possible, i.e. traffic is exchanged between the networks at the closest of the direct interconnections between the two networks – “hot, hot! Here you take it!” (van der Berg, 2008). Traffic going from the east coast to the west coast in a scenario where two nation-wide US networks interconnect, hot potato routing will result in traffic being exchanged at their east coast link. The return traffic, however, would be exchanged at the link closest to its origination, i.e. the west coast link. For traffic that its destined to travel far, hot potato routing forces the receiving network to bear more of the burden in bringing the data to its destination (van der Berg, 2008). Furthermore, with a consistent announcement of prefixes at all the interconnection points between two networks, hot potato routing is fairly easy to manage technologically, because the routing only amounts to sending the traffic to the nearest location where the destination prefix is announced. Hot potato routing is still the most common regime for interconnection, and peering requirements (such as those listed in the section above) often just assume that peering links use hot potato routing (Faratin, Clark, Gilmore, Bauer, Berger, & Lehr, 2007, p. 10).

Another routing regime that is sometimes used for Internet traffic is so-called “cold potato routing”. If two interconnecting networks use cold potato routing, the originating network holds on to the bilateral traffic for as long as possible, i.e. traffic is exchanged at the peering location that is closest to the destination of traffic. In the scenario just used described, traffic going from the east coast to the west coast will be exchanged at the west coast link, so that the receiving network only has to bring the traffic from the west coast link to its west coast destination. With a sufficient level of interconnection the use of cold potato routing will result in the originating network taking on a majority of the routing costs from the internetwork traffic. Technologically, cold potato routing involves the receiving network’s cone of prefixes to be split into several local cones each announced at their respective local interconnection link. Such inconsistent announcement is in conflict with the common peering requirements listed above, however, it is important to note that

42 requirements above, assume peering links to use hot potato routing. Under a cold potato regime inconsistent announcements are key.

It is not predetermined if the majority of the routing costs will fall on either receiving network or the sending network. It all depends on which routing regime is used between two directly interconnecting networks. If the ratio of traffic going in one direction vs. traffic going in the other direction is about equal, it does not matter which routing regime is used, because a balanced ratio will ensure effective cost sharing. For interconnections with imbalanced traffic ratios, however, the costs will not be shared equally under either regime. With the traditional hot potato regime the network receiving the most traffic will suffer the most from imbalanced traffic ratios. On the other hand, if the interconnection is run cold potato, then the sending network will take on a majority of the costs. This distinction will become immensely important later on in this thesis.

Following the traditional peering guidelines in section 4.2.2 above, two networks that bear much the same characteristics are more likely to establish a peering partnerships than two networks that are significantly different from one another. Therefore, most traditional peering disputes (e.g. the denial of a peering request) will involve two networks that differ in size and volume. Recently, however, significant changes have happened to how major network providers interconnect and to the data streams that flow between them. These changes have altered bilateral dependency relationships between networks, so that power is not just determined by the size of a network’s cone of prefixes, but increasingly also by who is in a network operator’s cone of prefixes and whether access to those prefixes is entirely reliant on one particular operator.

4.3 Complications to the Traditional System Even though transit and settlement free peering has never been the only options for interconnection, it is not until recently that alternatives have started to get traction. These alterations are primarily the results of much the same developments that ultimately altered the e2e regime (outlined in section 2.2.3). This section will first consider the developments from a backbone perspective and then introduce the most important modification to the methods of backbone interconnection.

4.3.1 Recent developments In the early years of the commercial Internet, it was reasonable to assume some level of homogeneity amongst Internet providers and network operators in general (Faratin, Clark, Bauer, Lehr, Gilmore, & Berger, 2008, p. 57). What mattered in establishing

43 business relationships were size and traffic volumes. Today, however, the assumption of homogeneity is gone. Networks of similar sizes can no longer be assumed to be symmetric. Instead, two new and very different types of network operators have emerged making the backbone much more heterogenic:

• Content networks: Internet providers that host a large amount of content with almost no content consumers are called content networks. The incoming data traffic for these networks is primarily data requests that are considerably smaller than the resulting outflow of data traffic from the content networks (Faratin, Clark, Gilmore, Bauer, Berger, & Lehr, 2007, p. 12).

• Eyeball networks: “Eyeballs” are the content consumers that send requests to the content networks and receive a lot of data traffic from those networks. Eyeball networks are the ISPs from whom eyeballs purchase Internet access in order to get the Internet content they desire (Faratin, Clark, Gilmore, Bauer, Berger, & Lehr, 2007, p. 12).

Content networks have been established in part in order to secure satisfactory quality of data delivery to consumers. So-called content delivery networks (CDNs) hosts a large amount of the same data at various locations so as to secure short distances to consumers and thereby enhanced delivery. The eyeballs are on the receiving end of this flow of data, and so the traffic ratio between content and eyeball networks is much out of balance. This means that even though most requirements for a peering arrangement are met, content networks and eyeball networks are unlikely peering partners (see section 4.2.2 – the ratio requirement will never be met between content and eyeball networks). At the same time, the purchase of full transit by the two networks is inefficient for both parties, since transit is paid upstream as well as downstream. Therefore new forms of interconnection have appeared that presumably attempt to bridge the contractual gap between transit and settlement free peering. One of these methods of interconnection is paid peering

4.3.2 Paid peering Content networks might establish a peering relationship with an eyeball network that is settlement based in order to access the eyeball network’s customers. This is called paid peering, and it is technologically equivalent to settlement free peering in terms of availability of prefixes between the two networks. The difference is that the content network is now paying the eyeball network for the arrangement. Paid peering relationships arise because eyeball networks are not willing to provide free access to

44 their costumers, while the prospect of no peering arrangement is also undesirable for the eyeball network, since it would have to pay a transit provider for the traffic from the content network. In stead, the content network will settle for a peering fee that is smaller than the cost of third party transit, in order to access the eyeballs.

The emergence of paid peering as an interconnection arrangement is representative of an important development in the backbone in of it self. In the early days of the Internet, most eyeball networks were small start-up companies. They were all minor players in the business of Internet service delivery and used transit for all their interconnection (Faratin, Clark, Gilmore, Bauer, Berger, & Lehr, 2007), i.e. they were all Tier 3 networks. Today, however, large Tier 2 broadband providers have significantly redefined what it means to be an eyeball network. Modern eyeball networks are so big that they are able to secure peering rather than transit arrangements for up to 70 percent of their data traffic (Norton, b, 2010). The dependency of modern eyeball networks on interconnection has therefore diminished considerably as a result. With their significant size, eyeball networks have been able to shift the expectation away from a state where eyeball networks pay for transit to a new state where they are in fact being paid for the opportunity to peer (Faratin, Clark, Gilmore, Bauer, Berger, & Lehr, 2007, p. 14). This is interesting, because the routing based costs and benefits from peering would only suggest that paid peering is the appropriate option in a limited number of instances. Most often, settlement free peering is the right option between networks with a lot of traffic for each other, regardless of the direction of the traffic. This is because the fundamental economic incentives to establish a peering relationship are the same for both content networks and eyeball networks (if we assume effective cost sharing mechanisms for routing between the two networks), since transit is paid both upstream and downstream (van der Berg, 2008). Under a hot potato regime the incentives are larger for the content network, whereas the eyeball networks will save the most under a cold potato routing regime. The differences are often, though, of little significance, since the costs of operating a peering link are mostly traffic insensitive (Faratin, Clark, Bauer, Lehr, Gilmore, & Berger, 2008, p. 57). However, even though both networks will save from the establishment of a peering relationship, mechanisms like paid peering have arisen in order for content networks to pay eyeball networks for direct interconnection. How come eyeball networks are able to extract even more pecuniary gain than they would from the establishment of settlement free peering and get content networks to pay for access? This question can be answered from two (very) different perspectives both explained in the following section.

4.3.3 Value flow or access control? Faratin, Clark, Gilmore, Bauer, Berger, & Lehr (2007, p. 13) claim that value flows in modern backbone interconnection relationships are the same as packet flows, i.e. value flows from the content network to the eyeball network. It is argued that content providers on content networks place more value on the eyeballs (e.g. through advertisements revenues) than the eyeballs do on the content they view. According to this line of reasoning, it was less clear in which direction value flowed in the early days of the Internet, and since networks of the same size could be assumed to be symmetric, there was no need to account for the value flow in the establishment of interconnection agreements. Peering and transit agreements were hence sufficient, because such arrangements were set up according to just the size and volume of the involved networks. However, if an underlying value flow is thought to go from content network to eyeball network, then the traditional methods of interconnection are unable to reflect these value flows. Therefore, interconnection agreements such as paid peering have arisen in order to reflect the underlying value flows more correctly. Content networks will pay eyeball networks for interconnection services, since they presumably earn the most money from that interconnection (Faratin, Clark, Gilmore, Bauer, Berger, & Lehr, 2007, p. 13).

There are several problems with this line of reasoning. First, the concept of a value flow is not explained in any detail. Second, the argument that the perceived value flow is towards the eyeball networks is not sufficiently accounted for. It is explained with references to advertisement revenues at the content end, but any increase in revenue at the eyeball end resulting from enhanced connectivity and consumer satisfaction is apparently not considered part of the value flow. Third, it is not sufficiently explained why secondary revenue streams should be part of the negotiations of backbone interconnection. As stated, the establishment of a settlement free peering relationship rather than a transit relationship via a third party is economically sound for both content and eyeball networks. Faratin, Clark, Gilmore, Bauer, Berger, & Lehr (2007, p. 16) hint at an explanation in acknowledging the difference between negotiating terms and prices versus buying commodities at already settled prices in an open market. However, they fail to sufficiently consider the role of dependency between the two network types in such negotiations. Furthermore, as we shall see in the next chapter eyeball networks (like Comcast), who wishes to establish paid rather than free peering relationships are not using a revenue related argument, but rather a cost related argument claiming that an imbalanced traffic ratio puts an unfair burden on the back of the eyeball network (Waz, b,

2010), which of course is not necessarily true, since it all depends on the routing regime as explained in section 4.2.3.

Another way of explaining backbone interconnection relationships, where paid peering is used, focuses entirely on dependency and access control. It is stressed that the important feature of the relationship is that eyeball networks have a monopoly of access to their subscribers (also referred to as a “terminating access monopoly”). Eyeball networks can use this terminating access monopoly to be very greedy when negotiating peering agreements with content networks (Anderson, b, 2010), since the content networks are entirely dependent on sufficient connectivity in order to be attractive hosting locations for the content providers, whose content they distribute. Because there simply is no other way for the content network to reach the eyeballs, the interconnection will function on the eyeball network’s terms (Anderson, b, 2010). Since potential peering will happen mostly on terms decided by the eyeball network, it is not hard to imagine that the eyeball network will require a fee in order to peer with a content network. This explanation does not need the use of a vague concept like a value flows that is not really accounted for. It does not matter how much value is created at one end compared to the other end. Instead, payment simply happens, because the eyeball networks have the ability to make it so.

It is interesting to note in this context that the circumstances eyeball networks refer to when they claim that an unfair cost burden is laid upon their networks (i.e. the existence of imbalanced traffic ratios) are partly of their own making. Commercial broadband ISPs like Comcast provide Internet access subscriptions that are structurally imbalanced to the eyeballs. The eyeballs are simply provided with asymmetric bandwidth ratios of about 5:1 downstream to upstream (Powell, 2010). Considering the fact that users are only able to access the Internet with those bandwidth ratios, it is not surprising that the traffic ratios between the eyeball networks and their peers will become imbalanced at about the same rate. As we shall see bellow the future of Internet traffic is estimated to be in favor of ratio skewing content like one-way video. However, if the eyeballs were provided with symmetric bandwidth ratios those projections might not have been the same, and less ratio skewing protocols like p2p might be used for more of the video traffic. If imbalanced traffic ratios really were hurting the business for the eyeball networks, then providing asymmetric bandwidth to the end users is an odd thing to do. As we shall see in the following chapters, however, the imbalanced traffic ratios are important for the eyeball

47 networks in order to maintain the argument for interconnection agreements like paid peering (however invalid the argument might be).

5 Neutrality Among Content or Between Networks So far this thesis has covered the issue of network neutrality and how some ISPs want to charge online content providers for the traffic generated by customers requesting content as well as the issue of modern backbone interconnection between the ISPs (eyeball networks) and the content heavy networks. This chapter will serve to illuminate the important similarities as well as differences between the network neutrality issue and current developments in the area of backbone interconnection both described in detail separately in chapters 3 and 4 of this thesis. We shall first consider the differences between the two issues and then continue to the similarities between the two. Lastly, this section will assess the fundamental drivers of the two issues and ultimately conclude that they are more alike, than what some might suggest.

5.1.1 Comparing the actors It is important to understand that modern backbone disputes are in nature quite different from more traditional backbone disputes. Traditional disputes were mainly about whether or not to engage in settlement free peering or pay for transit, since those were the only two options. Today, disputes are increasingly involving payment as a result of the rising popularity of modified interconnection agreements, as stated earlier. It made sense to assume symmetry between backbone networks under the traditional regime, which is why disputes mostly correlated around issues like size and traffic volume. Size and traffic volume has little if anything to do with things that are at stake in the network neutrality debate. However, modern peering disputes involving content networks and eyeball networks are quite different. These modern disputes are not unlike the issues surrounding the debate about network neutrality.

In order to compare the issues, it is essential to recognize what actors are involved directly and indirectly in the two different areas. Figure 5-1 represents a sketch of the important actors in the two arenas and how the relate to one another.

Figure 5-1 – Involved actors

From figure 5-1 we see that actors in both the network neutrality debate and in modern backbone issues relate to one another in the delivery of requested content to the eyeball networks customers. The eyeballs themselves are not directly part of the conflict in either of the two arenas; however, it is their requests for content that sets the dynamics in motion in both instances. The main conflict in the network neutrality debate is between consumers’ ISPs (eyeball networks), who whish to be able to prioritize the data coming from content providers that are willing to pay for it. In the backbone the same eyeball networks want to charge the content networks that the data originates within for the direct exchange of traffic (paid peering). In both instances payment is not an obligation, i.e. content providers can rely on regular best effort delivery, and content networks can use indirect routes without establishing direct business relations to the eyeball network. However, choosing not to pay may jeopardize their quality of service in both instances.

5.1.2 The fundamentals In both instances, it is the eyeball networks that seek to be compensated for the delivery of content. Furthermore, eyeball networks are in a unique position as gatekeepers in both instances as well, i.e. they operate a terminating access monopoly. A key part of both the business of content providers as well as of business for the content networks will always be to ensure satisfactory data deliverance to the eyeballs. The eyeballs are located behind the eyeball network, and content providers as well as networks can only reach them through the eyeball ISP. The structural dynamics of both issues do therefore look very much alike.

Technologically, the network neutrality debate and issues around backbone interconnection are quite different. Firstly, network neutrality is about qualitative differentiation among data packets, i.e. using DPI to determine the priority of data packets based on certain characteristics like their origin or the used protocol. Issues between eyeball networks and content networks usually revolve around the traffic ratio, i.e. the sheer volume of inbound data traffic vs. outbound data traffic. Whereas data using peer- to-peer (p2p) protocols or VoIP might require payment to the eyeball ISP in order to be sufficiently prioritized in a world without network neutrality regulation, such protocols will not create a problem in the backbone, because traffic ratios are still kept somewhat in balance with these forms of communication. However, high-quality online video streaming on the other hand generates the single most ratio-skewing form of data traffic between content and eyeball networks (Powell, 2010). With regards to the delivery of video, the issues look alike.

This is important because the future of the Internet is video. So far, file sharing using p2p (which does not offset traffic ratios) has been the most used form of Internet traffic. However, industry experts predict that 2011 will be the year when online video surpasses p2p, and that by 2015 online video will make up 58 percent of all Internet traffic (Cisco, 2011). Figure 5-2 illustrates the global traffic predictions for different types of Internet services.

Figure 5-2 – Forecast of Global Consumer Internet Traffic

40000 Internet video 35000 File sharing 30000 Web, email and 25000 data Video calling

20000 Online gaming 15000 PB perPB Month VoIP

10000 Other

5000

0 2010 2011 2012 2013 2014 2015

Source: (Cisco, 2011, p. 9)

The traffic projections in figure 5-2 will make the technological difference between network neutrality and paid content-eyeball interconnection even less important. In

51 countries without sufficient network neutrality regulation, eyeball ISPs will be able to first require payment from the content network in order to ensure sufficient interconnection at the border of their network (paid peering) and then charge the content provider as well to prioritize the traffic within their networks so that the customers are able to watch the videos they desire.

5.1.3 The regulation The distinction between what types of data communication the eyeball networks are able to require payment for in the different instances is important, because the regulatory regimes are very different for the two areas. Backbone interconnection agreements are not subject to specific government regulation. Since the backbone was privatized backbone networks have been able to arrange themselves however they saw fit. Until recently, this was the same for network management practices within the eyeball networks in the network neutrality debate. In the EU it is still mostly the case, however, in the US the federal government represented by the FCC has taken significant steps away from the unregulated past. As outlined above US ISPs will likely not be able to establish a “fast-lane” with pay-for-priority services that content providers have to buy in order to secure sufficient traffic speeds. This impedes the US eyeball networks’ ability to extract revenues from delivering the content that their customers request. However, as section 4.3 demonstrates, US eyeball networks will still be able to retrieve some content revenue by forcing the providers’ network operators to engage in paid peering in return for sufficient connectivity at the border of their networks.

In 2009, when the FCC first announced that they were going to take on paid prioritization, it was debated whether the proposed ban on paid prioritization actually also applied to instances of paid peering (Norton, b, 2009). It was argued that whether the paid prioritization took place at the border of the eyeball network or within it did not make much of a difference. In the adopted regulations, however, the FCC clarified that they did not consider interconnection arrangements to be part of what the rulemaking concerned (FCC, 2010, p. 40). This move by the FCC has since been called the “FCC’s utter incoherence on Paid Prioritization” (Ou, c, 2010).

Because the FCC has chosen to distinguish between what they call interconnection agreements (such as paid peering arrangements) and what they call paid prioritization (differentiation among data packets on the basis of payment), it matters a great deal whether an ongoing dispute can be categorized as one or the other. If the relationship is

52 paid peering, it is legal; if it is paid differentiation of data packets, it is illegal. Even though structural dynamics of the two cases might be the same, US regulation only prohibits the latter. That is also why the recent dispute between Level 3 and Comcast has been attempted to be characterized as being the first thing by one party and the second thing by the other party. The next section will introduce this important case.

6 Level 3 vs. Comcast This chapter will serve to introduce the actors and their main accusation in the dispute between Level 3 and Comcast, which became public in late November 2010. Firstly, this section will provide a little background on the situation, and then it will describe how the dispute unfolded, and what accusations came from the different parties.

6.1.1 The background8 Level 3 Communications is a large Tier 1 backbone provider. The company’s backbone network covers the continental US as well as Western Europe. More recently the company started offering CDN services as well. On November 11, 2010, Level 3 acquired a deal with the content provider Netflix to serve as a streaming media for Netflix videos starting January 1, 2011 (Anderson, a, 2010). Netflix is an online movie rental subscription service providing customers with direct streaming access to movies and other video content they might desire. Before the choice of Level 3 for hosting and delivery services, Netflix had used the CDN Akamai. How the different players interconnect is shown in figure 6-1.

Figure 6-1 – The delivery of Netflix content to Comcast eyeballs

Source: (Ou, b, 2010)

When Akamai delivered the Netflix videos to Comcast eyeballs they used a paid peering relationship with Comcast in order to secure sufficient connectivity. Pure CDNs do not own a lot of infrastructure, which means that they will have to purchase interconnection

8 The description of the dispute in this section is primarily based on Anderson (a 2010)

54 services when delivering content. Level 3, however, is a much more complex entity to explain. The fact that it owns and operates a Tier 1 backbone network in principle means that it can access all the prefixes in the region in which it operates without payment. This does not mean, however, that Level 3’s CDN has sufficient connectivity to the entire region – just that it is has access. Though there is no doubt that operating its own geographic diverse backbone network brings down Level 3’s establishment costs for CDN purposes, since their network is already well connected (Rayburn, b, 2010). Comcast for instance purchases transit services from Level 3 (as well as other transit providers), but they also interconnect via direct peering (Ou, b, 2010). Until Level 3 got the Netflix deal, the two networks used settlement free peering for part of their inter-network traffic, which they exchanged at several locations throughout the US. This settlement free peering gave Comcast free access to the networks comprised in Level 3’s cone of prefixes. Comcast purchased transit in order to reach the prefixes in networks that were beyond those in Level 3’s cone. Since Level 3 is a large Tier 1 network operator and therefore operates a sizeable transit division, Comcast is able to reach quite a large size of Internet for free through its peering arrangement with Level 3 (Anderson, b, 2010). In return Level 3 is able to use the direct interconnection to secure sufficient connectivity for its hosted content. When the deal with Netflix was acquired Level 3 informed Comcast that their eyeballs would request much more traffic from their network starting January 1, and that the peering interconnection between the two should be upgraded accordingly. Comcast (who had lost paid peering revenue from Akamai as a result of the deal) refused Level 3’s request. Instead they required that Level 3 engaged in a paid peering relationship with their company, like the one Akamai had. Since the only route to Comcast eyeballs goes through Comcast’s network, Level 3 had no choice but to comply with Comcast’s request, if they wanted to be able to deliver the Netflix content (the newly established paid peering relationship between the two networks is illustrated in figure 6-1 as a dotted arrow).

6.1.2 How the dispute developed On November 29 Level 3 went public with their complaints over Comcast’s behavior in the negotiations that had been handled bilaterally and in secrecy until that point, as it is most often the case with network interconnection negotiations. In their press release Level 3 pointed out among other things the following important assertions about the dispute (Level 3, a, 2010):

• That Comcast had shown it was willing to effectively decide whether and how its eyeballs could interact with content, and that it therefore was in violation of the spirit of network neutrality.

• That the content Comcast now would be charging them to deliver to its costumers was in fact in direct competition with some of Comcast’s own video services.

• That Comcast’s action was an abuse of its dominant position as one of the largest eyeball networks in the US.

The following day (November 30) Joe Waz, Senior Vice President at Comcast, released a blog post with 10 purported facts about the dispute. Waz’s blog post included among other things these three viewpoints (Waz, a, 2010):

• That Comcast’s eyeballs had access to all the content they wanted regardless of its source.

• That the quarrel was just an old-fashion peering dispute between network operators having nothing to do with paid prioritization.

• That Level 3 just wanted an unfair advantage over its competitors by shifting the cost of delivery to Comcast.

Both operators claim that the other wants to change the rules of the game, as they have existed for more than ten years. Comcast has pointed out that paid peering arrangements have existed for more than a decade (Waz, a, 2010), thereby implying that Level 3 wants to alter the way backbone networks interconnect. Meanwhile, Level 3 argues that Comcast wants to use its local access dominance to charge Level 3 for the ability to deliver the content that its eyeballs have requested, i.e. Comcast requires a “toll” for content delivery, which in their view is a major shift away from how the Internet used to operate (Level 3, b, 2010).

Comcast’s main argument for the requirement of a fee for direct interconnection after the Netflix traffic moves to Level 3, is that it will significantly offset the existing traffic ratio over the two network’s peering links – the ratio is estimated to go from 2:1 to 5:1 in favor of traffic from Level 3 to Comcast (Waz, b, 2010). This is important. The main argument behind paid peering in the case of content network to eyeball network traffic is that the unbalanced ratio puts an unfair burden on the eyeball network – as we have seen in

56 section 4.2.3, and as it will be reiterated below, however, the validity of this assumption is largely contingent on the merits of the specific interconnection arrangement.

Level 3’s argument is principled, in so far as the company claims that it is not entitled to a special deal. Level 3 wants the interconnection agreement to be reflective of the size and scale of the two networks exchanging traffic. Because Level 3 has its own infrastructure, it is able to carry much more of the costs of delivering traffic than its competitors in the CDN business. During negotiations in December 2010 Level 3 proposed to pay for the establishment of extra interconnection links in several cities where Comcast owns large cable systems through out the US in addition to the ten cities in which they already interconnects. (Level 3, c, 2010). This would enable Level 3 to carry the traffic much further into Comcast’s network (cold potato routing), thus taking over much of the costs of routing the content to the eyeballs that have requested it.

Comcast’s initial reaction to this proposal was to claim that:

(…) Level 3's new peering proposal is unprecedented, as is its insistence that Comcast and its customers bear 100 percent of the costs of this new design (…). The proposal raises significant and complex technical and economic questions that could impact both parties' customers in uncertain ways (…). (Charytan, 2010) Comcast does not go into details about how it reaches the conclusion that cold potato routing will put 100 percent of the costs on Comcast and its customers. The statement seems quite peculiar considering the fact that cold potato routing is used to put a majority of the routing costs on the originating network, as explained in section 4.2.3. Furthermore, while the use of hot potato routing is more common on the Internet than cold potato routing, the latter is not uncommon. It is therefore noteworthy that a large network operator like Comcast considers its impact to be uncertain. Level 3 neither found the proposal to be raising Comcast’s costs nor to be technologically or economically complicated:

Level 3 offered to carry content, using its own network and at no cost to Comcast, to several additional cities where Comcast’s residential customers are concentrated. We believe that this (...) is economically and technically straightforward. (Level 3, c, 2010)

Level 3 ended up accepting Comcast’s requirements for paid interconnection in order to prevent a congestion of the existing links and secure sufficient connectivity to carry the content (Anderson, b, 2010). However, they did not retreat form their initial position and instead requested the FCC to look into the matter. Level 3 and Comcast kept on writing

57 letters to the FCC on the matter through late February 2011 (Lasar, 2011), though so far the matter has not been resolved.

6.1.3 The financial consequences of the proposals When Netflix decided to move its business from Akamai to Level 3, it meant that traffic patterns were about to shift and as a consequence revenues and costs would also change for the involved actors. Netflix presumably got a better deal with Level 3 and were thereby able to reduce hosting and delivery costs, whereas Akamai lost some CDN revenue, but they were also relieved of some costs regarding the paid peering relationship with Comcast. Level 3 got the new CDN revenue from Netflix and with it some added expenses to increase its hosting capacity as well as its interconnection arrangements with the eyeball networks that Netflix is delivering content to. Comcast stood to lose paid peering revenue from Akamai while still recieving the same amount of traffic just from another source. Originally, Level 3 merely requested an increase in the capacity of the existing peering links, which presumably would be paid by both parties, thereby also increasing Comcast’s costs. There is little doubt that Comcast would lose the most from this initial state of affairs in the dispute. Whether or not that loss is inappropriate depends on what is considered to be Comcast’s obligations. If Comcast’s eyeballs were seen to pay their ISP for (sufficient) access to the content they desired, then Comcast would have no choice but to accept the new circumstances (or perhaps increase subscription prices). Obviously, they did not comply – which implicates that the company’s view of its obligations is not like the one just described.

Instead, Comcast told Level 3 that they would have to take Akamai’s place, and pay it to peer for the extra traffic, that was going to increase the imbalance in their interconnection links. This move would leave Comcast’s revenue streams unchanged, but still increase their costs from upgrading the capacity of their interconnection links to Level 3. As a Tier 1 operator Level 3 had never before paid for access to prefixes, and a paid peering link to Comcast would mean that the company would have to take on new costs from the interconnection. It has been suggested that Level 3 was only able to underbid Akamai’s arrangement with Netflix, because they assumed that they would be able to use settlement free peering with Comcast, that Level 3 would lose money, if they were forced into paid peering; and that in turn this is the reason they were so upset with the situation (Ou, a, 2010). It has since been pointed out that this claim is a falsehood, and that Level 3’s ability to deliver cheaper CDN services is primarily connected to the fact that it possesses its own infrastructure (Rayburn, b, 2010). This ownership enables Level 3 to store the

58 data within one of the largest backbone networks in the US without paying rent. Furthermore, ‘economies of scale’ is significant in this industry, and Level 3 therefore have lower marginal costs than any pure CDN will ever have for most of the necessary expenses. However, according to Level 3, their problem was not with the costs (which were not substantial and could be managed easily), but rather with the principle of paying the eyeball network to deliver the content that had been requested by its eyeballs (Rayburn, b, 2010). This would amount to the same sort of paid prioritization that is ad odds in the network neutrality debate. Even though Level 3 were capable of delivering the data the eyeballs have requested very close to its destination, Comcast’s insistence on double payment for this delivery (from its eyeballs as well as Level 3) is indirectly changing the architectural setup of the Internet as explained in Chapter 2 of this thesis.

As a result Level 3 proposed some modifications to the original scenario that were intended to shift some of the costs from Comcast to Level 3 without requiring direct payment (Level 3, c, 2010). As explained above, Level 3 and Comcast interconnects in ten large cities throughout the US. Therefore, while just switching to cold potato routing would diminish Comcast’s cost considerably, the eyeball network would still bear the burden of carrying the traffic to its eyeballs from the closest of the ten interconnections. In order to lower Comcast’s costs even more, Level 3 offered to pay for the establishment of more interconnection points deep within Comcast’s network in cities where the company operates large cable systems and thus have a lot of eyeballs. This would mean that Level 3 would be taking responsibility for almost the entire route that the content had to travel from its servers to the eyeballs, and thereby Level 3 would reduce Comcast’s burden significantly. Table 6-1 is a payoff matrix that illustrates the financial costs and benefits for the actors of the different changes and proposals in the dispute between Level 3 and Comcast.

Table 6-1 – Financial payoff matrix

Fixed Comcast’s Level 3’s proposal changes requirement

Netflix moves Paid peering Level 3 route traffic Main library to Level cold potato and pay to characteristics 3 create more links

CDN revenue

Interconnection Pay recurring Increased Level 3 − costs peering fee establishment costs Hosting costs Increased routing costs

Receive Decreased recurring establishment costs + peering fee Decreased routing costs

Interconnection

Comcast costs − Revenue loss

Whereas Comcast’s requirement would not alter anything technologically regarding the two networks interconnect (it would only open up the necessary ports that Level 3 initially requested), Level 3’s counterproposal would result in enhanced interconnectivity between the networks. Comcast would not only see its routing costs drop, however, it would also see an increase in its customer’s quality of service. More direct peering will increase network performance by reducing latency and minimizing packet loss, which in turn will mean more revenue to the peering parties (Norton, a, 2009).

Even so, Comcast decided to refuse this proposal and insist on the direct payment of a recurring fee in order to run sufficient direct peering. As explained above, the refusal was accompanied by some peculiar arguments about the alleged uncertainty of Level 3’s proposals as well as an odd claim that Comcast would bear 100 percent of the costs surrounding the proposal. This peculiarity might cover a larger truth about the whole arrangement. Another detail that point to this observation has to do with loss of efficiency. Comcast insists on keeping the old interconnection arrangement between the parties, even though it would be significantly less efficient overall, compared to what Level 3 has proposed. Since Level 3’s backbone network operates on a much larger scale

60 than Comcast, and Comcast actually leases fiber from Level 3 for its intercity network, it is reasonable to assume that Comcast’s costs of providing the backbone intercity traffic are considerably higher than Level 3’s (Ryan, 2011). It is hardly rational for Level 3 to purchase a service from Comcast that it could provide itself at a lower cost – especially considering the fact that Comcast leases fiber from Level 3 in order to deliver that service. This loss of efficiency and Comcast’s insistence on being paid a minor fee to carry out a costly task will be addressed in detail in chapter 8 of this thesis. In the meantime, chapter 7 will assess the degree to which the Level 3/Comcast dispute is a network neutrality issue or a traditional backbone interconnection dispute.

7 Network Neutrality and Peering dispute This Chapter will analyze some of the important aspects of the Level 3/Comcast dispute in order to get a more coherent understanding of its merits. It will assess the validity of the different characterizations by Level 3 and Comcast of the main substance of the dispute, i.e. whether it is a network neutrality dispute (as Level 3 asserts) or whether it is an old- fashion peering dispute (as it is Comcast’s opinion).

It should be noted from the beginning of this discussion that the author is fully aware that the two companies’ differences on this fundamental question is representative of their financial interests in the matter. Level 3 and Comcast are both promoting the discourse that constitutes their bilateral relationship in the ways that are most beneficial for them respectively. If Level 3 is able to create a discursive consensus characterizing the quarrel as part of the bigger network neutrality issue then the agreement between Level 3 and Comcast will be subject government intervention under the FCC’s agenda on preserving an open Internet. If on the other hand it is considered an old-fashion peering dispute in the backbone of the Internet, as Comcast has suggested, then government intervention is unlikely if past is any prologue. However, even though two competing discourses exist, the two are not necessarily equally valid or invalid.

7.1.1 Network neutrality in Level 3 vs. Comcast It is Level 3’s assertion that the dispute is key to the debate over network neutrality. As outlined in chapter 3, the concept of network neutrality can be understood according to two different principles: The zero-price rule and the non-discrimination rule. The zero- price rule states that no last-mile network operator should charge a fee to terminate traffic. Comcast is not doing this. As Comcast pointed out early on in the dispute its eyeballs have access to all the content they desire regardless of its source, i.e. even if Level 3 and Comcast disconnected their networks altogether, Level 3 could still access Comcast’s prefixes via other routes (albeit with significantly decreased speed). The non- discrimination rule states that a last-mile network must not differentiate between lawful data traffic in any (unreasonable) way. If this rule is understood strictly as related to the differentiation between packets on the basis of deep packet information within the last- mile network, then the rule does not apply to the dispute. If on the other hand the non- discrimination principle is interpreted a little more broadly, it might apply. As explained in section 5.1.2, Comcast’s insistence on balanced traffic ratios as a requirement for settlement free peering will amount to a de facto system of paid prioritization for data

62 communication that is characterized by imbalanced traffic ratios, such as high-quality video streaming. While differentiating is not made on the basis of packet information, the dynamics of the differentiation is the same, at least with regards to high-quality video. With video traffic becoming ever more significant on the Internet, this system of indirect paid prioritization will only become more important in the near future. It is, however, unlikely that the FCC will intervene on the basis of its open Internet rules, since the Commission has clarified that it does not consider interconnection agreements to be part of what is regulated by those rules. But while the FCC might not intervene on the basis of its open Internet rules, it might conclude (as it is done here) that the dynamics of the issues are the same, and as a consequence step in to protect a broader notion of network neutrality and to limit the ability of eyeball networks to use their unique position to disadvantage their commercial counterparts (Lennett, Losey, Meinrath, Brown, & Turner, 2010).

7.1.2 Level 3 vs. Comcast as a peering dispute Comcast argues that in fact the disagreement is “a good, old-fashioned commercial peering dispute” (Waz, a, 2010). In order to assess the validity of this statement we must consider what constitutes an old-fashion peering dispute. It seems clear that the situation between Level 3 and Comcast is a peering dispute, since it involves a disagreement over peering as an interconnection agreement, but whether its characteristics are old- fashioned is less obvious. As it was pointed out in chapter 4, the traditional forms of interconnection arrangements were either transit or settlement free peering. In the traditional system of backbone interconnection it made sense to assume symmetry between networks. Therefore, a network’s position in the hierarchical tier structure was of the upmost importance, and disagreements were most often characterized by the denial of a request for settlement free peering. That is not what is at stake in the Level 3/Comcast relationship. Furthermore, regular traditional peering disputes are generally not characterized by access monopolies. The dispute disagreement between Level 3 and Comcast is therefore not a traditional or old-fashion peering dispute. In stead, it is what this thesis is referring to as a modern peering dispute; one that involves an eyeball network (Comcast) as well as a content network (Level 3) and the asymmetric traffic patterns between the two. Comcast do not distinguish between traditional and modern peering disputes, however, modern disputes are driven by the dynamics of imbalanced traffic patterns from the delivery of data like high-quality video streaming, which is quite

63 new, even considering the relatively young age of the Internet. To attribute the term ‘old- fashion’ to this dispute is therefore somewhat misleading.

Comcast furthermore argues that its newly established (and contested) paid peering relationship only reflects how it has connected to other content networks for some time, thereby implying that Level 3 is no different than its other content network partners (Waz, b, 2010). While it is true that Level 3 runs a CDN division that sells services that are essentially the same as the services other CDNs provide (the hosting and delivery of content), Level 3 is not like a regular CDN in how it provides these services. As explained above pure CDNs have little infrastructure, which means that they will be forced to hot potato traffic and thereby force the eyeball networks to take on much of the routing costs of the traffic. Whether it is fair or not that eyeball networks require payment for the delivery of the content that their customers have requested, it is correct that interconnection with pure CDNs is cost-heavy for an eyeball network. As explained above, however, Level 3 is unlike its competitors (such as Akamai) in so far as it has its own sizable network. This would allow Level 3 to take on more of the routing costs, as it has proposed to do, which would make the interconnection agreement between it and Comcast very different than Comcast’s other interconnection agreements with CDNs like Akamai. This fact makes the relationship between Level 3 and Comcast even more unique and certainly not ‘old-fashion’.

Why is it then so important for Comcast to insist that its relationship with Level 3 is like its other CDN relations and require the relationship to work according to a paid peering deal? In order to understand this, we must consider where prices come from, and how money is made in general in a capitalist society. This is the subject of the following chapter.

8 Owning the Eyeballs This chapter will move on to the subject of Comcast’s insistence on the establishment of a paid peering relationship between it and Level 3. In order to answer this question this chapter will draw upon the logic of institutional economics and how scarcity is key in price negotiations. Following this theoretical perspective the relative market positions of the two companies involved will be characterized. It will be shown that Comcast is in a monopoly-like position, and that it is attempting to protect this position by manifesting its control over the scarcity of access to its eyeballs.

8.1.1 Prices and scarcity rents According to the mainstream neoclassical school of economic thought the capitalist mode of production is explained by marginal productivity theory (MPT). Following the theory of the marginal productivity system, income is earned by selling so-called factors of production, i.e. entities like land, labor and capital (Frank, 2006, p. 664). The owners of factors like labor and capital are paid (wages and profits) in proportion to the contribution of their factor (the factor’s marginal productivity). However, it has been pointed out that the use of these factors in MPT is in fact a tautology. For MPT to work it requires quantifiable homogenous inputs of production factors like capital, and these quantifiable inputs must be independent of the factor’s price. But homogenous capital inputs do not exist. As a result the price of capital must be used as a measure of its quantity. Therefore, because the price ought to be a consequence of the quantity, the logic then becomes tautological (Lewis & Perry, 2010, p. 8). Furthermore, neoclassical economics arranges factors in production according to the so-called production function (Frank, 2006, p. 289). The production function is a mathematical representation of the law of variable proportions in production, where the underlying assumption is that a given level of output can be achieved by an infinite number of different input- combinations. However, multiple empirical investigations have shown that production actually uses relatively fixed combinations of inputs (Eichner, 1983, p. 212).

Instead of the neoclassical framework, we must turn to institutional economics, if we want to understand, how prices are determined in business relations such as the one between Level 3 and Comcast. Where neoclassical economics find all productive inputs to be complementary (an extra input will always increase output), institutional economists view it differently. For instance, scholars like John Commons (1934) advocated the principle of limiting and complimentary factors (LCF). LCF views production as the

65 employment of a particular combination of inputs in order to produce output. Within this combination there are one limiting factor and numerous complimentary factors. The limiting factor of production is the factor that controls the level of output at any given level of production. They are usually relatively scarce and irreplaceable, while the complimentary factors are abundant and replaceable (Commons, 1934, p. 630). Following this logic prices are determined in a bargaining process between owners of different factors of production. The price of the limiting factor in production has nothing to do with its efficiency, only the scarcity (Commons, 1934, p. 631). If a firm is able to make its own factor of production the limiting one, it will be able to capture more output than the owners of the relatively abundant factors (Perry, 2009, p. 139). The industrial production system is viewed as a large set of interconnected nodes (firms), between which a continuous bargaining process exists. It is in these bargaining processes that input prices are created, and they are primarily the result of controlled scarcity at a particular node (Perry, 2009, p. 141). If one particular node has full control over an industrial bottleneck, it is able to charge scarcity rents from the surrounding and dependent nodes. It is this concept of scarcity rent that allows us to fully understand Comcast’s position in its dispute with Level 3.

8.1.2 Market positions The relationship between Level 3 and Comcast involves primarily four different services that are not all equally competitive. These different services are: Tier 1 backbone transit, CDN operations, consumer broadband services and eyeball interconnection. Level 3 operates a backbone network as well as a CDN division. While backbone interconnection has traditionally been very hierarchical with the formation of a ‘Tier 1 club’, Tier 2 networks have always had a choice in which operator to purchase transit from. Comcast, as an example, uses both Level 3 and Tata for transit services (Rothschild, 2010). Figure 4-4 illustrates a small part of the Internet in which there are only two Tier 1 operators; in reality there are several, and they all interconnect with each other, which means that a network buying transit has multiple options when acquiring access to the entire Internet (Norton, a, 2010). Even considering the significant market concentration that has taken place recently among the Tier 1 networks with Level 3 acquiring its major competitor, Global Crossing (Taylor, 2011), Level 3 do still not have a monopoly of access to any significant part of the Internet that it would be able to exploit at the negotiating table.

Level 3 also provides CDN services to content providers. As explained above, the company has an advantage over its competitors in the CDN market, since it possesses its own large

66 backbone network. However, it will not be able to abuse this advantage to increase CDN revenues at any significant rate. This is because the CDN business is highly competitive, and content providers like Netflix have a number of excellent choices apart from Level 3 (Anderson, b, 2010). Furthermore, as Netflix’s shift from Akamai to Level 3 exemplifies that content providers are not loyal, and they will switch to another CDN operator, if they deem it more efficient or less costly. In sum, Level 3 operates in markets that are characterized by both a high degree of competition (even if it is among only among a handful competitors). The company has the possibility to take advantage of the complementarities that exist in running a CDN while also owning a Tier 1 network, however, it is not in a position in which it can utilize this advantage or anything else to extract more pecuniary gain from its current business relationships with either content providers or eyeball networks.

Comcast, on the other hand, provide two different sets of services in which its market position is quite different. First, Comcast’s primary business is providing cable television services as well as high-speed consumer broadband to its cable costumers. However, the consumer broadband market in the US is not particularly competitive. Unlike in most European countries the consumer ISPs in the US are not forced to lease access to their networks to potential third party competitors at regulated prices (so-called ‘line- sharing’). This means that effectively most US households today are limited to either one or two possible high-speed ISPs, i.e. a telecommunications company and/or a cable company (like Comcast). Furthermore, in the near future, when the requirements for even more high-speed broadband will increase, telecommunications companies will not be able to provide consumers with the bandwidth that cable companies can (due to technical limitations with the existing copper infrastructure), which means that US customers requesting very high-speed broadband services will soon be captives of a cable-monopoly (Anderson, 2011). Moreover, those eyeballs that actually do have a choice in broadband provider often view the switching costs of changing ISP to be relatively high, which increases the eyeball network’s sense of ownership over its eyeballs (Faratin, Clark, Gilmore, Bauer, Berger, & Lehr, 2007, pp. 12-13). This monopoly-like status and the sense of ownership over the eyeballs might explain in part, why Comcast does not consider it an obligation to secure sufficient connectivity to the content that its eyeballs might request, as explained above.

The second relevant service that Comcast perceive itself to be providing in relations to the dispute with Level 3 is eyeball interconnection through paid peering. In fact, Comcast is only major cable operator, who views this as a business in of itself and thus charges content networks for interconnection. All the other major operators maintain settlement free peering relations to content networks (Rothschild, 2010). The service Comcast provides against paid peering is sufficient access to its eyeball (the ability to run imbalanced traffic ratios over peering links). Since Comcast ‘owns’ the eyeballs and their network is the only route to them, the Company operates a strong monopoly regarding this sort of service. This strong monopoly status might help to explain some of Comcast’s actions in the dispute with Level 3.

8.1.3 Comcast wants to charge scarcity rents As it has been pointed out, the whole situation with Level 3 and Comcast is not about money (at least not in the short term); it is about power (Rayburn, a, 2010). The recurring fee that Comcast is requiring from Level 3 is not substantial, and it will likely not cover the loss of efficiency and the extra routing costs that Comcast will now be taking on compared to Level 3’s proposal of cold potato routing the traffic deep into Comcast’s network. Therefore, what must be important for Comcast is simply the ability to use its terminating access monopoly to require a fee for imbalanced interconnection now and in the future. Remember that the only online content service that produces significant imbalances in traffic ratios is high-quality video streaming. If Comcast executives have seen the projections in figure 5-2, then that might explain, why it is so important for the company to retain its access monopoly and the ability to charge for significant traffic imbalances. Even though Level 3’s proposal might be a better alternative in the concrete instance of backbone interconnection, it would also loosen Comcast’s control and its ability to charge scarcity rents for access to its customers. If instead a new precedent is set, according to which Comcast is entitled to revenue from imbalanced network interconnections, the company will be able to actively exert control over the traffic going to and from its eyeballs and extract pecuniary gain from the delivery of video content via its interconnection arrangements. Meanwhile, Comcast is not vulnerable with regards to loss of customers, since its users are captives. Because there are no alternative high-speed ISPs, Comcast can simply act as if it owns the eyeballs.

If an ISP like Comcast wants a share of the profits related to the projected boom in Internet video, they can assert their role as gatekeepers to the eyeballs and extract scarcity rents. The architecture of the Internet allows them to do this in two different

68 ways. They can interpose themselves in the relationship between eyeball and content provider and charge the provider of the video service directly for prioritization at the last mile and thus the ability to deliver products to the eyeballs. However, they can also require direct payment at the border of the network in instances of traffic imbalances, i.e. paid peering. With the use of online video increasing rapidly in the near future, this strategy will be as efficient for ISPs like Comcast in establishing themselves as gatekeepers and thus the ability to retrieve scarcity rents. While the FCC is signaling that it is willing to prohibit the use of paid prioritization within networks at the last mile, Comcast will find paid peering to be a very sufficient substitute for extracting scarcity rents relating to the projected growth in Internet video services.

9 Conclusion Regarding research question A: So far, the issue of network neutrality has generally been assessed as a matter of prioritization within last-mile networks. Academic research on the topic has revolved around the effect of potentially limiting prioritization within last-mile networks on societal welfare. The omission of de facto prioritization at the borders of the last-mile networks (or eyeball networks) through arrangements like paid peering is inconsistent with the structural similarities of the issues. Requiring a fee in order to accept direct network interconnections running imbalanced traffic ratios will amount to a de facto system of paid prioritization for data traffic like Internet video. Content providers will not have to pay a direct fee to the last-mile network in order to make sure its customers have a satisfactory quality of service. However, payment will be required through the content providers’ network operator. For content providers as well as content networks there is only one route to the eyeballs, and that route is through the eyeball networks. This terminating access monopoly is key to understanding the issues of both network neutrality as well as backbone interconnection using paid peering. The structural dynamics are the same, and paid peering is therefore indeed about network neutrality.

Regarding research question B: The dispute between Level 3 and Comcast provides a perfect empirical manifestation of this point. Comcast is requiring an interconnection fee based on structurally imbalanced traffic ratios that are the results of its customers (eyeballs) requesting video content. There is not other way than through Comcast’s network for content providers and content networks to secure sufficient interconnection with the eyeballs, and the delivery of video is therefore subject to differentiation on the basis of payment to Comcast. Consequently, Comcast is violating the spirit of the non-discrimination rule, which is the more strict interpretation of network neutrality. These dynamics are important for understanding the struggle between Level 3 and Comcast, and it is hence inaccurate to portray it as merely a traditional peering dispute. Even so, Comcast pushes this discourse in order to constitute its relationship with Level 3 as merely a backbone issue having nothing to do with the FCC’s agenda on the open Internet thereby minimizing the possibility of the FCC intervening on Level 3’s behalf.

Regarding research question C: Comcast’s insistence on the ability to require a fee for sufficient direct interconnection with Level 3 went so far as to decline a proposal to relieve Comcast of the increased burden that asymmetric traffic ratios put on eyeball networks, when direct interconnection is governed by a hot potato routing regime. Financially, Comcast’s position on this proposal is peculiar, because the proposal is designed to optimally address what Comcast have stated is their major concern with continued settlement free peering (i.e. increased routing burden on its network). However, with the projected boom in Internet video traffic and imbalanced traffic ratios becoming even more lopsided Comcast’s interests are first and foremost in asserting its control over the access to its eyeballs. In the long run, Comcast will be able to utilize its terminating access monopoly to indirectly control the flow of competing video content on its network, while also extracting scarcity rents from the delivery of Internet video in general.

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Abstrakt Netværksneutralitet er et emne, der har været debatteret en del i de senere år. Spørgsmålet om, hvorvidt man skal tillade internetudbydere at prioritere det indhold, der leveres til deres kunder imod betaling fra indholdets udbydere, har ligget til grund for flere akademiske artikler. Formålet med denne litteratur har primært været at adressere, hvorvidt det betaler sig samfundsøkonomisk at begrænse internetudbydernes mulighed for at tage sig betalt for dataprioritering. Denne afhandling tager et andet afsæt. Indtil nu er henholdsvis netværksneutralitet og dataudveksling mellem netværk i internettets rygrad (backbone) udelukkende behandlet som to separate emner. Denne afhandling forsøger at undersøge, hvorvidt denne distinktion mellem dataprioritering i internetudbydernes egne netværk (traditionel netværksneutralitet) og de facto prioritering i udvekslingen af data mellem rygradsnetværk er gavnlig. Internetudbyderne har i begge tilfælde monopol på adgangen til kunderne og kan derfor udnytte den kontrol, som denne unikke position giver dem, til at kræve betaling for at stille tilstrækkelig netværkskapacitet til rådighed for både indholdsudbydere og indholdsnetværk (dvs. indholdsudbydernes netværksoperatører). Markedsstrukturerne er således ens for både dataudveksling i internettets rygrad såvel som i den generelle debat om netværksneutralitet. Det gør ingen forskel om prioriteringen af data foregår i internetudbydernes egne netværk eller om den foregår de facto i forbindelser mellem netværk. Effekten på kvaliteten af dataleverancen er den samme, hvorfor de to emner bør integreres fremadrettet.

Konflikten mellem rygradsudbyderen Level 3 og internetudbyderen Comcast, der brød ud i lys luge i november 2010, er et udmærket eksempel på, hvorledes dataudveksling mellem netværk er styret af de samme fundamentale strukturer som de, der findes i debatten om netværksneutralitet. Level 3 vandt i efteråret 2010 en kontrakt med videoindholdsudbyderen Netflix, der betød at dataudvekslingsforholdet mellem Level 3s netværk og Comcasts netværk ville gå fra 2:1 til 5:1 i favør af datatrafik fra Level 3 til Comcast. Comcast ville tage sig betalt for denne ændring, og da Level 3 ikke kunne opnå tilstrækkelig forbindelse til Comcasts mange internetbrugere uden direkte forbindelse til Comcast, blev firmaet nød til at acceptere Comcasts krav. Fordi videodatatrafik altid vil forsage ubalancerede dataudvekslingsforhold mellem en kommerciel internetudbyder som Comcast og et såkaldt indholdsnetværk, som Level 3 også er, er det oplagt at sammenligne Comcasts krav om betaling for direkte dataudveksling med den generelle

79 debat om netværksneutralitet. Konflikten kan derfor heller ikke sidestilles med gammeldags eller sædvanlige konflikter om dataudveksling i internettets rygrad, da disse traditionelt har handlet om andre faktorer som netværkenes datamæssige størrelse og potentielle kundeforhold. Det til trods forsøger Comcast alligevel at italesætte en diskurs, der definerer forholdet til Level 3 udelukkende som en konflikt i internettets rygrad, hvilket vil minimere risikoen for at de føderale myndigheder griber ind.

Som et forsøg på at undgå et scenarie, hvor Comcast blev betalt for at give tilstrækkelig adgang til kunderne, fremsatte Level 3 et forslag, der var designet til at reducere Comcasts afledte omkostninger ved en udvidelse af parternes daværende vederlagsfrie dataudvekslingsaftale. Level 3 foreslog således at ændre routingsystemet mellem de to netværk, så trafik med oprindelse hos Level 3 blev fragtet på deres rygradsnetværk på langt den største del af strækningen til slutbrugeren. Dette forslag ville betyde betydelige besparelser for Comcast, der leaser en del af Level 3s fiberkabler til deres nationale netværk, og som således må antages at have betydeligt højere routingomkostninger end Level 3. At Comcast insisterer på selv at fragte datatrafikken fra Level 3 til gengæld for et mindre beløb, er derfor umiddelbart mærkværdigt. Beslutningen skal imidlertid forstås i et større perspektiv. Ved at insistere på betalt dataudveksling beskytter Comcast sit monopol på adgangen til deres kunder, hvilket på den længere bane kan være med til at sikre firmaet betydelige indtægter. Det forudses nemlig, at videotrafik, der skaber betydelige ubalancer i dataudvekslingsforhold mellem netværk, i den nærmeste fremtid vil udgøre mere end halvdelen af al internettrafik, hvorfor Comcast vil få stor gavn af et regime, der dikterer at betaling skal ske på baggrund af netop ubalancerede dataudvekslingsforhold.