IP interconnection on the Internet: a European perspective for 2022

In recent months, some European telecom operators have been urging policymakers to consider regulating the exchange of traffic on the Internet, so that Internet companies pay them to deliver traffic to end users. They, with the European Telecommunications Network Operators (ETNO), which represents the largest operators in Europe, are arguing that this is necessary to foster ‘fair contributions’ by all stakeholders to the costs of digital infrastructure in Europe but appear to disregard the large and growing infrastructure investments made by Internet companies. In the views put forward by ETNO and some large ISPs, regulation may be necessary because they have too little bargaining power compared to large Internet companies.

In a new paper, sponsored by public cloud providers, we examine the factors related to interconnection that have enabled the Internet to be scalable and resilient even as demand for online services and Internet access services have grown, to the extent that they are now critical to the functioning of our economies and societies. We find no evidence that the current, freely-negotiated approach to interconnection on the Internet, is detrimental to ISPs.

Proponents of ‘network usage fees’ that would be paid directly to telecoms operators to ‘terminate’ Internet bits have been pushing for years for a change in the way interconnection for Internet traffic works. In 2012, they failed to convince regulators and policymakers, who instead reinforced net neutrality and a pro-competitive regulatory regime in Europe. The arguments put forward by ETNO and some operators hinge on similar arguments as a decade ago.

A first line of argument is that Internet companies are ‘imposing’ costs on ISPs by ‘sending’ traffic to them – in fact, this traffic results from requests by broadband users and companies using public cloud services, who pay ISPs for the connectivity required to access content and services online. There is a virtuous circle at play here, with users willingly upgrading their broadband connections to get better quality of experience with the services they are interested in online, leading to shift in demand and revenue over time for telecoms operators, towards Internet access services revenues. Ultimately, the success of gigabit-capable networks in Europe will be visible through the use people and businesses make of them, not in the networks themselves.

A second line of argument relates to relative bargaining power between ISPs and Internet companies. The Internet developed, grew, and evolved on the basis of voluntarily negotiated interconnection between providers, notably in the form of peering arrangements, to create the ‘network of networks’ that is the Internet. These arrangements work well overall because there is a balance of bargaining power and incentives, with a mutual dependence between the parties bringing content to consumers. Based on the evidence available, far from imposing their bargaining power, Internet companies generally maintain open interconnection policies with ISPs to make their content and services accessible. On the other hand, some ISPs have been the source of high-profile disputes over time, by refusing to peer or limiting capacity used for interconnection at the expense of content providers and their own end users. Some ISPs in Europe still impose selective peering policies on Internet companies, which they must accept to reach their end users.

Taken together, these points point to a lack of evidence on the part of proponents for significant changes to the way interconnection works on the Internet. Beyond this lack of justification, the approach advocated by some operators and by ETNO would involve complexity and regulatory costs, and risk being detrimental to consumers and businesses in Europe.

Regulating 'network usage fees' in Europe would enable ISPs to exercise their ‘termination monopoly’ by imposing fees on Internet companies to reach broadband subscribers, a phenomenon familiar to European regulators who spent twenty years regulating the mobile termination rates that mobile operators imposed on other operators to complete their calls. The question of how fees would be set, and how to guarantee enhanced investments as a result, remains unanswered. The experience in South Korea, the one country that has adopted a comparable approach, demonstrates the complexity and potential pitfalls of imposing such fees.

Finally, the implications for European stakeholders who are neither ISPs nor large Internet companies must be considered carefully. Network usage fees will ultimately impact the users of content and services, who are essentially the broadband subscribers who already pay ISPs for a connection to the whole Internet. There could also be less investment in content and services, at a time when Europe is pushing to accelerate the growth of its tech industry. Fees payable to ISPs irrespective of where and how traffic is exchange could also negatively impact the incentive of CDNs and public cloud providers to invest in infrastructure that delivers content closer to the users, raising ISPs’ costs or risking users’ quality of experience. European public cloud customers, including content providers such as broadcasters and other European digital-native businesses, but also SMEs, non-profits, and large companies and public services migrating to cloud services, all rely on unimpeded interconnection, and will also be impacted by the imposition of network usage fees.

When ETNO first raised the idea of network usage fees ten years ago, regulators, including the Body of European Regulators for Electronic Communications (BEREC), took the view that the commercially negotiated interconnection regime on the Internet worked well. There is no evidence that there have been any fundamental shifts that would warrant a different conclusion today, as demonstrated by the success of the providers working together in meeting the sudden increase in demand resulting from COVID-19 lockdowns. Regulators in Europe should consider the necessity for, and implications, of heeding the call of ETNO for Europe in terms of not just the users, but also the broader digitalization agenda of Europe.