Internet backbone competition
and broadband penetration
A Very Brief History of the Internet
1957 US DoD formed the Advanced Research
Projects Agency (ARPA), which sponsored many
1969 ARPANET a computer network of 4 nodes was
commissioned. Expanded over the next decade.
1986 NSFNET built as a backbone linking 6
supercomputer centers. By 1989, it links 100,000
hosts. ARPANET’s TCP/IP made mandatory as the
NSF encouraged its regional networks of the NSFNET to seek
commercial, non-academic customers, expand their facilities to
serve them, and exploit the resulting economies of scale to
lower subscription costs for all.
On the NSFNET Backbone - the national-scale segment of the
NSFNET - NSF enforced an "Acceptable Use Policy" (AUP)
which prohibited Backbone usage for purposes "not in support
of Research and Education."
This encouraged the growth of private competitive long-haul
networks such as PSI and UUNET.
Commercialization of the Internet
Over the early 1990s, the NSF contracted for 4
network access points (NAPs)– each consisting of a
shared switch to exchange traffic.
– Originally 4 NAPs, 4 different commercial operators.
On April 30, 1995, NSFNET was dissolved, and the
network was transferred to commercial operators.
NSF maintained investments in a research network
(vBNS), later the core of the Internet 2 project.
Crucial to this development
– The earlier set of FCC decisions allowing customer
provided premise equipment.
Hush-A-Phone Carterfone Modems
– FCC decisions that have consistently held (since the early
1970s) that data processing service providers are
Not subject to common carrier regulations
– Such as universal service requirements
Entitled to non discriminatory service from telecomm providers.
Didn’t have to pay the access charges paid by long distance
– Long distance carriers pay charges for every minute that a call is
connected to both originating and receiving local telco.
– Network X and network Y exchange traffic without paying each other.
– Applies only to traffic originating on X and terminating on Y & vice versa.
– Initially how all traffic was handled.
Smaller IBP can “free ride” off of larger ones.
Now only common between larger Tier-1 IBPs.
– Can occur at NAPs or at private peering points.
– Network X connects to network Y. X pays Y to reach Y and any other
network that can be reached through Y.
These interconnection arrangements are totally unregulated--- well
Backbone Market shares, 2003
GTE (Genuity) 17%
Cable and Wireless 6%
All other 19%
Source: Economides (2004)
Should we worry about market
power in this market?
Arguments raised in objection to
MCI/Worldcom merger about market power
on the Internet backbone.
– Concerns that MCI/Worldcom were refusing to
peer with smaller backbones.
Proposed Sprint/Worldcom merger (2000)
opposed by DOJ over this issue.
If there were a dominant backbone
Could potentially refuse to interconnect with
smaller backbone networks, and attempt to
take the smaller backbone’s customers,
extending the dominant backbone’s market
VI backbone-ISP could foreclose access to
Is this likely?
Number of major backbone providers.
Commodity product: Multiple backbone providers
can/have an incentive to compete for transit
Potential competition at the ready: Fiber used in
voice networks redeployable into packet networks
The more connected I am the better off my
EU blocked MCI-Sprint merger in 2000
largely due to backbone concerns.
Dispute now over AT&T/MCI’s position in
backbone market at the time of the
AT&T/SBC and MCI/Verizon merger:
As a condition of the MCI-Verizon merger
approval and AT&T-SBC and AT&T-
Bellsouth, parties agreed to peer without
settlement with as many parties for 2 years
after the merger as before.
As a condition of AT&T-SBC and Verizon-
MCI and AT&T-Bellsouth, parties agreed to
adhere to net neutrality for 2 years.
Regulatory issues facing VoIP in US
On February 12, 2004, the FCC found that
an entirely Internet-based VoIP service was
an unregulated information service.
In November 2004, FCC rules that individual
states may not regulate VoIP as a telephone
May 2005, FCC rules that VoIP providers
that interconnect with the PSTN must provide
Broadband and NGNs:
US versus the World
Broadband buildout: why do we care?
The number batted around in the US for the
economic impact of universal broadband =
President Bush said, in 2004 “The US is in
10th place in broadband deployment, that’s
10 places too low…”
The FCC’s 5th report on Advanced
Telecommunications Capability (2005):
“….. advanced telecommunications capability is
indeed being deployed on a reasonable and
timely basis to all Americans.”
“Fierce competition” in broadband markets.
High speed lines increased 30% in 2004.
April 2006: FCC Chairman Kevin Martin has an
article in the Financial Times, in which he
explained that "with 42.9 million subscribers, the
US has more people connected to broadband
than any other country.“
Buildout Percent of zip codes
(High speed lines)
40 4 or more
30 No lines
2001 2002 2003 2004 2005
5/2006 GAO report criticizing definitions,
methodology in FCC report.
US penetration low relative to other
Subscribers per 100 inhabitants
2000 2001 2002 2003
“Advanced telecommunications capability” is
defined as a “high- speed, switched,
broadband telecommunications capability
that enables users to originate and receive
high-quality voice, data, graphics, and video
telecommunications using any technology.”
FCC high speed line definition: 200 kbps; downstream
As of 6/2005, high speed lines in the US
>200kbps in one direction only 12%
>200kbps in both directions with the faster direction:
<2.5 Mbps 34%
2.5 Mbps < x < 10 Mbps 54%
> 10 Mbps <1%
In Japan/Korea, >25% of subscribers have speeds
Why would we expect buildout and
takeup to vary across countries?
GDP per capita
– Government subsidies
– Competition and pricing
– Effects on DSL vs. Cable
Given the geographic and demographic diversity of our nation,
the US is doing exceptionally well. Comparing some of the
"leading" countries with areas of the US that have comparable
population density, we see similar penetration rates. For
example, in Belgium, ranked eighth in broadband penetration
by the OECD, there are about 343 inhabitants per sq km and
18 out of 100 people are broadband subscribers. In Japan,
ranked 11th by the OECD, there are 350 inhabitants per sq km
and 16 out of 100 people have broadband. These countries
are comparable to Massachusetts where there are 317 people
per sq km and 19 out of 100 people subscribe to broadband.
Alaska, with less then one person per sq km, has a higher
broadband penetration rate than France." Kevin Martin, 2006
Competition/Number of providers
Provider serving one customer in the zip code marked as
serving the zipcode, even if they don’t offer service to the
Zipcodes with access to:
– DSL 78%
– Cable 62.1%
– Fiber 27%
– Satellite 86%
Satellite: for $100/month its <1Mbps download, and
– Accounts for <1% US broadband subscriptions
U.S. zipcodes with:
– Zero DSL/cable providers 15.1%
– Two providers: DSL and/or cable 24.8%
3.8% of ADSL lines are non-ILEC
(Note: all as of June 2005)
Why is buildout better in other places?
– 21% telephone penetration in 1980; per capita income
$9400US in 2001
– Modest government subsidies
– Open to competition starting in mid-1990s
KT privatized 1993
Competitors Hanaro and Thrunet laid fiber
No line-sharing regulations until 2002
– Hanaro broadband 2003 price ~$31 for 8Mbps/8Mbps.
1.5x the price of 20 hours of dialup.
Japan: Competition and Price
NTT East (incumbent) provides DSL and fiber-to-the-
Yahoo! BB (competitor) has greater volume with 36
percent of Japan’s DSL market. YBB is $18/month
BB cheaper than 20 hours dialup
– Line-sharing at very low regulated rates for both the local
loop AND long-haul fiber.
Canada is the only other of the top 20 broadband penetration
countries to be dominated by cable modems.
Canada introduced unbundling requirements in 5/1997, but only for
“essential facilities” and at actual incremental cost plus 25%.
In 1999 the Canadian Radio and Television Commission (CRTC)
issued Telecom Decision CRTC 99-8 that ordered the country's four
largest MSOs to file firm tariffs to provide competitive ISPs with
wholesale access to their cable facilities.
In contrast, the Supreme Court upheld the FCC’s policy of treating
cable operators as content providers rather than common carriers in
a 2005 decision.
Key current policy questions
Should the Federal government get into the act?
– Reed Hundt, former FCC chair advocates a government-
procured nationwide fiber network
Gov’t. built the highways.
Estimates costs of $25b.
Should municipalities get into the act?
– Wi-Fi: connects computers in a small area such as a park or
– WiMax: allows usage for 30 mile radius around a base tower
but requires special receiver. Base speed of 70 Mbps.
802.16d requires stationary antenna
802.16e allows mobile transmission up to 70mph.
Should we care about the “digital divide.”
Pros and Cons of municipal provision
Unify a local area on one Can you trust a city
Emergency system, close government to do this?
digital divide. Raise taxes on people who
Incumbent telcos cable don’t care about the
systems have under- service?
incentive to provide content- Crowds out and expropriates
neutral pipes. private investment.
Economies of scale. – Though city will obvious
procure through private
Tech support and security