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Internet Traffic Exchange: Market Developments and Policy Challenges”, OECD Digital Economy Papers, No Please cite this paper as: Weller, D. and B. Woodcock (2013-01-29), “Internet Traffic Exchange: Market Developments and Policy Challenges”, OECD Digital Economy Papers, No. 207, OECD Publishing, Paris. http://dx.doi.org/10.1787/5k918gpt130q-en OECD Digital Economy Papers No. 207 Internet Traffic Exchange MARKET DEVELOPMENTS AND POLICY CHALLENGES Dennis Weller, Bill Woodcock Unclassified DSTI/ICCP/CISP(2011)2/FINAL Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 29-Jan-2013 ___________________________________________________________________________________________ English - Or. English DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY COMMITTEE FOR INFORMATION, COMPUTER AND COMMUNICATIONS POLICY Unclassified DSTI/ICCP/CISP(2011)2/FINAL Cancels & replaces the same document of 17 October 2012 Working Party on Communication Infrastructures and Services Policy INTERNET TRAFFIC EXCHANGE MARKET DEVELOPMENTS AND POLICY CHALLENGES English - Or. English JT03333716 Complete document available on OLIS in its original format This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. DSTI/ICCP/CISP(2011)2/FINAL FOREWORD In June 2011, this report was presented to the Working Party on Communication Infrastructures and Services Policy (CISP) and was recommended to be made public by the Committee for Information, Computer and Communications Policy (ICCP) at its meeting in October 2011. The report was prepared by Dennis Weller of Navigant Economics and Bill Woodcock of Packet Clearing House. It is published on the responsibility of the Secretary General of the OECD. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. 1. Footnote by Turkey The information in this document with reference to « Cyprus » relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognizes the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the “Cyprus issue”. 2. Footnote by all the European Union Member States of the OECD and the European Commission The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus. ©OECD (2012) 2 DSTI/ICCP/CISP(2011)2/FINAL MAIN POINTS The Internet has continued to develop at a spectacular rate over the past five years. It now includes two billion users, and traffic has grown eightfold in that time. Yet debate continues about the efficacy of the Internet’s economic model of traffic exchange. This report seeks to make information available for policy makers and other stakeholders. Since the Internet was commercialised in the early 1990s, it has developed an efficient market for connectivity based on voluntary contractual agreements. Operating in a highly competitive environment, largely without regulation or central organisation, the Internet model of traffic exchange has produced low prices, promoted efficiency and innovation, and attracted the investment necessary to keep pace with demand. The performance of the Internet market model contrasts sharply with that of traditional regulated forms of voice traffic exchange. If the price of Internet transit were stated in the form of an equivalent voice minute rate, it would be about USD 0.0000008 per minute—five orders of magnitude lower than typical voice rates. This is a remarkable and under-recognised endorsement of the multi-stakeholder, market driven nature of the Internet. A survey of 142 000 peering agreements conducted for this report shows that the terms and conditions of the Internet interconnection model are so generally agreed upon that 99.5% of interconnection agreements are concluded without a written contract. That these “rules of the game” are so ubiquitous and serviceable indicates a degree of public unanimity that an external regulator would be hard-pressed to create. The parties to these agreements include not only Internet backbone, access, and content distribution networks, but also universities, NGOs, branches of government, individuals, businesses and enterprises of all sorts—a universality of the constituents of the Internet that extends far beyond the reach of any regulatory body’s influence. As incumbent networks adopt IP technology, there is a risk of conflict between legacy pricing and regulatory models and the more efficient Internet model of traffic exchange. By drawing a “bright line” between the two models, regulatory authorities can ensure that the inefficiencies of traditional voice markets will not take hold on the Internet. The Internet has expanded to cover the globe, with many emerging economies growing at a faster pace and closing the “digital divide” gap with OECD countries; yet some emerging economies still suffer from the effects of lack of competition or regulatory liberalisation. Evidence shows that, when allowed to do so, market participants will self-organise efficient Internet exchange points, producing Internet bandwidth to the benefit of the local economy and significantly reducing their costs, including in foreign currency. This course of action is strongly recommended in economies that do not yet have abundant domestic means of Internet bandwidth production. An unbroken chain of basic physics research, development, and production of new technologies allowed the Internet’s growth to keep pace with demand for the first thirty years of its existence, but investment in basic optoelectronic physics fell during the economic downturn in 2001. Consequently, the speed of network interfaces has stalled, and this has led to a transition from exponential growth to linear growth. Investment in basic research needs to be reinstated to return to a level of growth that will meet the economic and social development goals OECD countries expect of the Internet economy. 3 DSTI/ICCP/CISP(2011)2/FINAL TABLE OF CONTENTS FOREWORD .................................................................................................................................................. 2 MAIN POINTS ............................................................................................................................................... 3 MAIN POINTS ............................................................................................................................................... 6 INTRODUCTION AND EXECUTIVE SUMMARY .................................................................................... 8 Performance of the Market .......................................................................................................................... 8 Structural Evolution of the Market .............................................................................................................. 9 Legal and Policy Frameworks ................................................................................................................... 10 Challenges for the Future .......................................................................................................................... 11 Challenges for Internet Architecture ......................................................................................................... 11 Challenges for Technical Innovation ........................................................................................................ 11 Challenges for the Internet model of traffic exchange .............................................................................. 12 Challenges for Policy ................................................................................................................................ 12 Market Performance Measures .................................................................................................................. 14 CHALLENGES FOR THE FUTURE .......................................................................................................... 17 Architecture ............................................................................................................................................... 17 Challenges for the Internet mode of traffic exchange ............................................................................... 21 Incumbent perspective ............................................................................................................................... 21 Entrant perspective .................................................................................................................................... 21 Policy maker perspective........................................................................................................................... 22 Existing frameworks and applications of regulation ................................................................................. 22 ONGOING DEVELOPMENT OF THE MARKET ....................................................................................
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