HowtothinkaboutIXPsifyouareatelecomregulator

ENOGYerevan,ArmeniaOctober2016

WhatthispresentaGonisabout

•  IXPsexisttosolvecertainproblems;•  Theyarearemarkablesuccessstory;•  They,liketheInternetitself,areembeddedinanolderworldoftelecommunicaGons,whichrunsondifferentinfrastructure,economicsandideas.

•  ThispresentaGondealsinpartwiththeintersecGonoftheIXPandsomeofthoseolderconceptsandmaterialfacts.

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Whatthegoalsare•  Thegoalsare–  toencourageregulatorstoregulatewhereregulaGonisneeded;

–  TopreventthemfromregulaGngwhereregulaGonisnotneeded;

–  Toknowthedifferencebetweenthetwodomains•  Ingeneral,theInternetisworkingfine;leaveitalone

•  Intelecomcarrierpolicy,thereisseldomenoughcompeGGon.

•  RegulaGonandoversightisneededatthatlevel.

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ThesuccessofInternetExchangePoints(IXPs)

•  Asrecentlyas2013itwassaidthatIXPs“hadgoneunnoGced”.

•  Fromfour‘networkaccesspoints’in1995to86inNorthAmericaasof2013.

•  Therearenowapproximately350IXPs,halfofwhichareintheUSandEurope– accordingtoPCH– Thetotalisalwayssubjecttosomemeasureofdisagreement

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InEurope•  Sincethe1990s,theEuropeanactors(telcosturnedISPs,andnewcompeGtors)realizedthatexchangingtheirtrafficlocallybroughtlargecostsavings.

•  Thenotforprofit(NFP)modelbecamestandardinEurope.DE-CIX,AMS-IX,Ecix–  ThesearetypicallywhollyownedbyanassociaGon;customersprovideadvicethroughanadvisoryboard.

– MostNFPspublishtheirdata,membership,serviceofferings,&detailedspecificaGonsoftheirinfrastructure

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WhatisanIXP?

•  AMS-IXdefinesanISPas– “AnetworkinfrastructurewiththepurposetofacilitatetheexchangeofInternettrafficbetweenAutonomousSystems(ASes)andoperaGngbelowlayer3.ThenumberofASesconnectedshouldatleastbethreeandtheremustbeaclearanopenpolicyforotherstojoin.”

•  ThevastmajorityrelyonanEthernetswitchingfabric

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ThestunningsuccessoftheInternetmarket

•  AnOECDstudy(2013)showedthat–  theInternethasallowedpricedfor

connecGvitytobefiveordersofmagnitudelowerthanwhatitisforitsTDMequivalent.

–  Statedastheper-minutepriceforVoIPtraffic,thecombinedcosttocallerandrecipientisUSD0.0000008perminutethanwholesaleserviceprovidingcomparablefuncGonsinTDMmarkets.

–  ThishasbeenachievedwithnodirectintervenGonbyregulators

•  Whysocheap?–  EfficiencyofpacketrouGng–  CompeGGoninInternetmarkets–  FlexibilityofrouGngarrangements

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Othersourcesconfirmloweredprices

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Stunningsuccess,conGnued

•  TheInternethasdevelopedahighlyefficientmarketinconnecGvity,basedonvoluntarycontractualarrangements.

•  Asurveyof142,000peeringarrangementsshowedthatthetermsandcondiGonsoftheInternetmodelaresogenerallyagreedonthat99.5%ofinterconnecGonagreementsareconcludedwithoutawrikencontract.–  TransacGoncostsarelow–  Eachpartyagreesthatthedealaddsvalue

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Cause:economicsandhands-offregulatoryapproach

•  TheparGcipantsarefreetodeclinetodobusiness–  Theabilitynottointerconnectwiththosewhofailtoobservestandardsdisciplinesthemarket

•  AlternaGveroutesarefrequentlyavailable,andmarketpowerofanyplayerislimited;

•  NooneintheISPworldisobligedtointerconnect.

•  NoregulatorneedstopromotecompeGGonatthisleveloftheprotocolstack,inthesemarkets.

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OtherEuropeaninquiriesintotheInternet

•  TheBodyofEuropeanRegulatorsforElectronicCommunicaGons(BEREC)issuedareportonIXPissues[6December2012]astheyarosefromnetneutralitydebates–  BEREChashighlightedthefactthattheInternetconnecGvitymarketandhosGngserviceshavegrownfromzerotoamulG-billion-Eurobusinessinfipeenyearsonacommercialbasis.

–  [Peeringandtransit]interconnecGonarrangementsdevelopedwithoutanyregulatoryintervenGon,althoughtheobligaGontonegoGateforinterconnecGonappliestoIPnetworksaswell.TheseagreementshavebeenlargelyoutsidethescopeofacGvityofNaGonalRegulatoryAuthoriGes{NRAs}.ThisappearedjusGfiedinparGcularduetothecompeGGvenessofthetransitmarketonIPbackbones.

•  TheBERECreportshowsconsiderableunderstandingoftheInternetmarketandIXPsgenerally.

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TheTDMworldisdifferent

•  AssumpGonsandfactsrelevanttotheInternet(layer3)donotapplyintheolderTDMtelephoneworld(layer2and1).

•  Maintainingtheruleoflaw,openmarketsandpromoGngcompeGGonisvital,butthewayithasbeendoneintelecommarketsiscondiGonedbytheoldereconomicsandphysicsofthetelephone(TDM)era.

•  Solet’slookatthestricturesimposedbyolderwaysofcommunicaGng.

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DefiniGons•  Inthiscontext,“transport”

signifiesmakerspertainingtolayers1and2oftheOSImodel.

•  “transit”pertainstoOSIlayer3.

•  ThereisplentyofcompeGGonatlayer3,andlimitedcompeGGonatlayers2and1,usually

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InterconnecGon

•  IntheInternetmodel,norighthasbeengrantedbyregulatoryauthoriGestoacquireinterconnecGonwithanotherparty;– Proventobeahighlysuccessfulmodel

•  IntheworldofTDM,arighttointerconnecGon,thatis,regulatedaccesstofaciliGes,isopentheunderpinningofcompeGGon–infacili6es.

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IntervenGonandnon-intervenGon•  ThesuccessoftheInternetIPmarketfortrafficexchangeflowedfromabroadpolicyframeworkofliberalizaGonoftelecommarkets–thatis,infaciliGes(layers2and1).–  TherehasbeenacloserelaGonshipbetweenliberalizedtelecompoliciesandthedevelopmentoftheInternet

•  ThreatstotheInternetinclude–  ExtendingregulatoryconceptsfromtheTDMworldintotheInternet

–  extendingthelifeGmeofoldpolicygoals(e.g.equalgeographicaccess)

–  Treaty-basedrevenueseklements

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SohowmuchcompeGGonisenough?

•  HowmanyfaciliGesbasedcarriersisopGmal(fortransportatlayers1and2)?Whatisthenumberbelowwhichwerunintoproblems?

•  HerewepassoutoftelecomandInternetideasintotherealmofcompeGGonpolicy.– WearenottalkingabouttheminimumnumberofinterconnecGngnetworksneededforanIXP,whichhasbeensetatthree.

– WearetalkingabouttransportfaciliGes.

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ConceptsfromcompeGGonpolicy

•  Itisgenerallyagreedthatamonopolist(solesupplier)hasincenGvestorestrictoutputandraiseprices.

•  CompeGGonregulatorsconsiderthatduopolies(2suppliers)reachcozy,unspokenaccommodaGons.–  CokeandPepsi

•  At3suppliers,somerealcompeGGonbegins–  CompeGtor#3isseldomaslargeas#1and#2–  PriceandfeaturecompeGGonbegininearnest

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HowdoyoumeasurecompeGGon?•  TheUSemploystheHerfindahl-Hirschmannindex.–  ItisarrivedatbythesumofthesquaresoftheparGcipants.Ascoreof.25ormoreindicatesstrongconcentraGon.

•  CanadausesMergerEnforcementGuidelines.Ifthe4largestplayersinamarketwouldcollecGvelyhave>45%ofthemarket,nomergerofthemwouldbeallowed.MarketconcentraGonof35-45%wouldputthemergerintothecauGonzone.

•  ThedefiniGonoftheproductandgeographicmarketisalwaysdecisive.TheeasieritistosubsGtute,theeasiertogetyourmergerapproved.

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EuropeanApproachestoTelecomsMergers

•  “Thereisnomagicnumber,”ofmobileoperatorsinamarket,statedtheEuropeanCommissionerMargretheVestagerinearlyOctober2015–  Afewyearsago,thenumber“three”seemedtohavemagicalpowers,whentheSwissCompeGGonCommissionblockedthemergerbetweenthesecondandthethirdlargestmobileoperatorsin2010,whichwouldhavecreatedaMNOduopoly

–  effecGvecompeGGonintheretailmarketisthecriterion–  areducGonofthenumberofplayersfromfour-to-threeinanaGonalmobilemarketintheEUcanleadtohigherpricesforconsumers…butnotthatitleadstomoreinvestmentpersubscriber,”Ms.Vestagersaid.

–  mergerswhichreducedoperatorsfrom4to3hadpreviouslybeenapprovedinIreland,Austria,andGermany

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Whatistheproblemmergershelptosolve?

•  Carriersfaceenormouscosts,thinprofitmargins,customersdis-intermediaGng,andnewbusinessmodelsthatcanmovethemoneyawayfromthem.

•  Thewayoutistomerge–  verGcalmergerstointegratefixedandmobilebusinessestoachievecostssynergiesandbringnewproductstomarket,

–  networksharingagreements,and–  horizontalmergersbetweenmobileoperatorstoreducecostsandfinancenewinfrastructureinvestments.

•  Thepressureisonregulatorstofindthe‘best’numberofcarriers,withnofixedanswertotheproblem.

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Sowhyatleastthreetransportproviders?

•  FromtheperspecGveoftheIXP,indeed,anyone,theexistenceofatleast3transportproviders(faciliGes,circuits)isaboutasgoodasitgets.– PracGcallimitaGons,suchascapitalinvestments,tendtolimitthenumberofcarriers;

– Morewouldbedesirable,butfewerthan3producesalltheproblemsassociatedwithunspokencollaboraGonbetween2,andmonopolywith1.

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LessonsforPolicyMakers•  LiberalizedtelecommunicaGonspolicieshavesupportedthesuccessoftheInternet,parGcularlyIXPs–  Ahands-offapproachhasletmarketparGcipantsdisciplinethemarket,attheIPlayer.

–  InsufficientcompeGGoninfaciliGes(layers1and2)keepstransportpriceshighandretardsthespreadoftheInternet

–  Byrequiringplayerstoholdgovernmentlicences,andrestricGngthem,regulatorscanupholdinsufficientcompeGGon

–  Findingthe“right”numberoftransportcarriersatlayers1and2isnoeasytask;countervailingpressuresfavourmergersofcarriers

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Sources1•  Chatzis,N.,Feldmann,A.,SmaragdisG.,Willinger,W.2013Onthe

importanceofInternetexchangepointsfortoday’sInternetecosystem.Availableathkp://arxiv.org/abs/1307.5264

•  HaithamEl-Nakhal,Implementa6onandManagementofInternetExchangePoints(IXP),Feb2014ITU-TSG3RG-AFRReg.andEcon.Forum

•  NSFImplementaGonPlanforInteragencyInterimNREN,Aiken,Braun,Ford,Claffy.May1992

•  OECDDigitalEconomyPapers,No.207.InternetTrafficExchange:MarketDevelopmentsandPolicyChallenges,DennisWeller,BillWoodcock,2013

•  OECDDigitalEconomyPapersNo.232,InternaGonalCables,Gateways,BackhaulandInternaGonalExchangePoints,RudolphvanderBerg,2013

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Sources2•  hkps://ec.europa.eu/commission/2014-2019/vestager/

announcements/compeGGon-telecom-markets_en•  hkps://www.compeGGonpolicyinternaGonal.com/magic-

numbers-and-merger-control-in-the-telecommunicaGons-sector/

•  hkp://www.wsj.com/arGcles/eu-anGtrust-chief-cauGons-against-4-to-3-mobile-telecom-mergers-1443789301

•  hkp://www.nortonrosefulbright.com/files/gcr-the-european-anGtrust-review-2016-uk-telecoms-130445.pdf

•  hkp://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32004R0139&from=EN

•  DrapBERECReportonOligopolyAnalysisandRegulaGon

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Acknowledgements

TheauthorwishestothankGeoffHustonofAPNIC,MikeLeberofHurricaneElectric,JohnCurranofARIN,andKonradvonFinckenstein,formerDirectorofCanada’sBureauofCompeGGonPolicy,andGernotKofler,oftheBureauofCompeGGonPolicy,forclarifyingconversions.AllmistakesofinterpretaGonaremyown-TMD

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