Comments on network interconnection in communications markets

Article Highlights

  • Public-utility style regulation in the form of mandatory interconnection requirements is a serious threat to the communications sector.

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  • Economic theory predicts that interconnection issues common in traditional phone networks are unlikely to be present in IP-based networks.

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  • Regulators lack the information necessary to set efficient interconnection prices & the flexibility to adjust them.

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  • While interconnection mandates may appear at first blush to be costless, they are not.

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Thank you for the opportunity to respond to your inquiry on an update of the Communications Act. Your latest inquiry asks the public to comment specifically on the question of peering and interconnection in communications markets, and on the role of government in regulating these agreements.

I have written extensively on these issues in several contexts, including with regard to wireline and wireless interconnection mandates of various kinds, as well as proposals to extend interconnection mandates to the IP environment in one form or another.  I have provided a copy of my AEI monograph on Broadband Competition in the Internet Ecosystem in response to your previous requests for comments, and note that much of that paper addresses issues relevant to your current inquiry.  

More recently, in December 2013, I was among 14 economists who wrote to newly-confirmed FCC Chairman Tom Wheeler expressing our views on competition issues likely to arise during his tenure. A copy of that letter is attached.  In pertinent part, it reads as follows:

One serious threat to continued innovation and dynamism in the communications sector is the potential for public-utility style regulation to be imposed on IP networks in the form of mandatory interconnection requirements.

Economic theory predicts that the incentive issues associated with interconnection among traditional telephone networks are unlikely to be present in IP-based networks, and these theoretical predictions are supported by two decades of empirical evidence: Since its inception in the 1990s, the modern commercial Internet has functioned remarkably well without mandatory interconnection requirements. There are virtually no significant instances of traffic being blocked or delayed as a result of failures to interconnect. At least equally important, the peering and transit regime has responded to changing market and technological conditions through continuous, transformational change.

The success of the Internet’s voluntary interconnection regime stands in stark contrast to the distortionary, inflexible regulatory regimes that have governed interconnection in the POTS world. Simply put, regulators lack the information necessary to set efficient interconnection prices and the flexibility to adjust them in the face of changing market conditions, leading to inefficient market structures, misallocated investment, arbitrage schemes, and regulatory gamesmanship.

Allowing even “weak form” interconnection mandates to spill over onto the Internet would distort market outcomes and limit innovation. Moreover, since the Internet is global in scope and scale, any interconnection mandate imposed by the U.S. would invite involvement by international regulators, many of whom would surely welcome U.S. support for the principle of regulating interconnection of IP networks. 

In summary, both economic theory and a large body of real-world experience demonstrate that the potential costs of prophylactic imposition of mandatory IP interconnection are very high, while the benefits likely are non-existent.

The most important point I would ask you to consider is that, while interconnection mandates may appear at first blush to be costless, they are not.  Rather, as with virtually every other economic institution or arrangement, interconnection has costs as well as benefits.  Such costs may take the form of reduced incentives for network owners to invest in their networks,  the loss of specialization that accompanies forced standardization, or various other forms.  That is why interconnection and interoperability are not ubiquitous – why all applications that run on Android devices don’t also run on Microsoft’s, why Playstation games can’t generally be used on Nintendo devices, why Skype is not fully interconnected with Facetime, etc.  In the Internet environment, the value of interconnection is very high – which is why, again, IP interconnection has been both ubiquitous and voluntary from the Internet’s inception – but that does not mean that interconnection is always the right answer.

The question for policymakers is whether the task of balancing the benefits of interconnection against the costs should as a general matter be made by administrative process, or by the marketplace.  As suggested in the letter to Chairman Wheeler quoted above, a simple comparison – between the successful voluntary regime that has governed the Internet and the terribly flawed and politicized POTS interconnection regime overseen by the FCC – should be all it takes to answer the question.

I thank you again for the opportunity to submit comments to the Committee, and applaud your initiative to review and replace the Communications Act. I remain at your service to discuss ideas and answer any questions you might have.

Respectfully,

Jeffrey Eisenach
Visiting Scholar, Director for the Center for Internet, Communications, and Technology Policy
American Enterprise Institute

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