Monday, January 16, 2017

Who Pays What to Whom in the Internet Ecosystem?

Internet interconnections and compensation arrangements have been based on voluntary terms and conditions after government underwriting stopped. In a commercial context, funds flow on the basis of traffic volume, but also bargaining power (individually, or collectively held).

Last mile ISPs have significant bargaining power in light of their control of access to end users ("eyeballs" to advertisers and content providers alike).  While we could debate about the robustness of competition and last mile broadband options (functional equivalency), few would disagree that most consumers select one and only one last mile wireline provider (where available) for traffic requirements exceeding 10 Gigabytes.  The FCC termed last mile ISPs as "terminating monopolists," appropriate insofar as most consumers are willing to pay for and rely on a single wireline last mile ISP.  Consumers might also subscriber to a wireless broadband carrier, but data caps force conservation and create incentive to retain a wireline option offering unlimited data, or very high caps like Comcast's 1 terabyte monthly cap, plus Wi-Fi tethering.

In the context of platform/double-sided markets model, last mile ISPs have 2 compensation/revenue streams available: 1) last mile broadband subscriptions and 2) payments from upstream CDN and content providers.  While I can see how a credit card company might need to offer free cards, or even pay car users with airline miles and rebates, last mile ISPs have not given up imposing tiered service rates, primarily based on transmission speed (and not data volume like wireless carriers).  Last mile ISPs now want to increase the compensation received from upstream players.

Netflix, Google and other large volume generators of content have been free riders only if one considers content providers/distributors as solely responsible for compensating downstream carriers handling more traffic than generating upstream.  But Netflix is not the sole revenue source: last mile ISPs used to rely primarily (if not exclusively) on their retail subscribers' monthly payments.  The last mile ISPs want to maximize revenues on BOTH sides of their platform and I don't see the same financial constraints like that incurred by credit card companies.

Netflix blinked first, had payer's remorse, but the commercial negotiation process generates winners and losers.  For my part, I don't see how commercially negotiated compensation arrangements trigger network neutrality concerns, unless and until the FCC has jurisdiction to apply Title II, which it now has, plus evidence that the arrangement is discriminatory and/or unreasonable as defined by the FCC.  Bear in mind that the FCC has eschewed requiring tariffs and doesn't apply the prohibition of paid prioritization upstream from the last mile ISP.

So in large part, it seems to me that a maturing Internet ecosystem has diversified from the traditional peering/transiting dichotomy into a variety of hybrid arrangements.  Has such diversification harmed competition and/or consumers?  I'm not sure that it has, even when zero rating has the potential to influence consumers' content choices by injecting a possible cost avoidance factor.

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