Mandatory Interconnection: Should the FCC Serve as Internet Traffic Cop?

By / 5.27.2014

Since the agreement between Comcast and Netflix was struck in February 2014, several parties have called on the Federal Communications Commission (FCC) to regulate dealings between networks that comprise the Internet generally, and to dictate the terms of interconnection by Internet service providers (ISPs) in particular. This Policy Brief considers the costs and benefits to consumers if the FCC interferes with the terms under which ISPs connect with transit providers, content providers, and others. A key lesson from the economics literature that informs this question is that antitrust enforcement acts as a substitute for sector-specific interconnection obligations in industries that have made sufficient progress along the “deregulatory arc.” Because the communications sector was set on a deregulatory path nearly 20 years ago, has the time come to rely on antitrust to adjudicate interconnection disputes on the Internet?

Introduction
To date, interconnection agreements between the networks that comprise the Internet have been privately negotiated without a regulatory backstop. The vast majority of these negotiations have gone down without a hitch. Some notable interconnection disputes in the United States involved Cogent-AOL (2002), Cogent-Level 3 (2005), and Cogent-Sprint (2008). While transit companies such as Co-gent and Level 3 have complained about the quality of interconnection with certain Internet service providers (ISPs), consumers have largely been unaffected; rarely does a dispute turn into a prolonged service disruption for customers. Yet the question of the FCC’s role in dealings among these “core” networks is front and center inside the Beltway.

The interconnection controversy is playing out as the FCC grapples with new rules to “Protect and Promote an Open Internet,” which are designed to protect “edge” providers such as content providers, application providers, and device makers. In its May 2014 Notice of Proposed Rulemaking, the FCC tried to distinguish interconnection from so-called “net neutrality” issues:

Separate and apart from this connectivity [to the Internet by the ISP] is the question of interconnection (‘peering’) between the consumer’s net-work provider and the various networks that deliver to that ISP. That is a different matter that is better addressed separately. Today’s proposal is all about what happens on the broadband provider’s network and how the consumer’s connection to the Internet may not be interfered with or otherwise compromised.

Although the Open Internet proposals are designed to address the management of traffic within an ISP’s network, the FCC also seeks comment on how it can ensure that an ISP “would not be able to evade [its] open Internet rules by engaging in traffic exchange practices that would be outside the scope of the rules as pro-posed.” The issue is clearly timely and ripe for resolution.

Some scholars have advocated for greater FCC involvement in interconnection disputes. For example, Werbach (2014) suggests that the FCC’s mobile-data-roaming order could serve as a regulatory template for compelling interconnec-tion on the Internet. Under this approach, networks could negotiate terms for interconnection; where conflicts arise, the FCC would provide a backstop for dispute resolution. Narechana and Wu (2014) advocate that the FCC classify the ISP’s transfer of data from content providers to consumers as a telecommunications service, subject to “common carrier” regulation. The authors argue that “because such sender-side regulation focuses on incoming traffic, it also provides a useful framework for addressing interconnection disputes between broadband carriers and content providers.” This more invasive approach would give the FCC power to compel interconnection without need for voluntary negotiations, and interconnection rates could be set by regulatory fiat.

Missing from much of this debate is an analysis of the social costs and benefits associated with mandatory interconnection. This Policy Brief seeks to identify these effects from the consumers’ vantage and offers an economic principle that may guide policymakers to a narrowly tailored solution. In their review of inter-connection obligations across several network industries, Carlton and Picker (2006) explain that sector-specific interconnection obligations and antitrust enforcement serve as complements in partially deregulated industries; in fully de-regulated industries, antitrust enforcement acts as a substitute for sector-specific interconnection obligation. Because the communications sector was set on a deregulatory path nearly 20 years ago, has the time has come to rely on antitrust to adjudicate interconnection disputes on the Internet?

Download the complete brief.