CHARGING THE CONSUMER

As we noted above, the only options for access network A to recover costs C_a are to impose fees on the interconnected content delivery networks or to impose additional fees on their own subscribers - the residential broadband consumers.

Price tiers seem like a reasonable way to allocate fees in rough proportion to costs, but a move to usage tier pricing can significantly alter the balance of power in negotiation about interconnection fees. For example, in countries where residential broadband access is sold with rather low monthly usage caps, some ISPs are offering a ‘premium service’ to their content network partners. With this premium service (sometimes referred to as ‘zero rating’), the content delivery network CD pays a per GB fee to the access network A, in exchange for which the consumer can download the content without having it count against their monthly quota.³⁸ Setting a consumer-facing price for usage, in effect, allows network A to set a per GB price for interconnection.

For these reasons, access ISPs that move toward usage tiers and similar forms of usage­based pricing can expect to receive increased attention from consumer advocates and regulators, not just because of price tiers, but also because of the potential implications for interconnection agreements.

One could ask whether usage-based pricing makes good sense, either from a business or ‘fairness’ point of view. In flat-rate pricing, the smaller users subsidize the larger users. However, the magnitude of the subsidy is important. If the average subsidy were a frac­tion of a dollar, we might expect few light users to argue for tiered pricing. The cost of implementation might swamp the benefit to the smaller users, and there is considerable evidence that flat-rate pricing has encouraged experimentation by users, and thus driven innovation and the creation of fresh value. On the other hand, if the cross-subsidy were (say) $10, it would be hard to imagine that flat-rate pricing could survive. If the cross­subsidy were substantial, there would be a strong temptation in a competitive market for one ISP to offer a cheaper price tier targeted to the large number of small users, leaving the other ISP only with the expensive larger users. That ISP would have to increase prices accordingly, and price tiers would emerge.

Again, it is hard to get exact values for costs, and somewhat challenging to get infor­mation about the distribution of usage by different broadband customers. The Sandvine data quoted above suggest that the mean usage is approximately 20 GB per month, but the medial usage is only around 5 GB per month. If usage costs $0.20/GB, this means the medial user is paying around $3/month to subsidize the heavy users. Reasonable people could disagree about what conclusion to draw from this $3/month number, but it seems large enough to pay attention to, but not so big that usage tiers will necessarily emerge. As evidence of this ambivalence, we see differences in approach in the USA and abroad. For example, in Australia there are relatively high per GB charges, presumably because a significant portion of the content is delivered via expensive inter-continental undersea cables.

16.5.1 What is Reasonable?

We have argued that negotiation to recover operating costs related to usage is reasonable. We called these transport payments. We observed that negotiations leading to fees that seem unrelated to transport costs would raise the concern that transport providers were using market power to extract a part of the content payments.

One way to mitigate this concern would be for the industry to provide additional infor­mation to make interconnection negotiations more transparent. First, better information about costs and how those relate to usage would support a more informed debate over what usage-based fees might be appropriate. Second, information about traffic trends and distributions (e.g., about how heavy and light users differ) would help verify cost claims.

Finally, information about actual interconnection agreements, which may include public commitments to interconnection or peering policies, may help in better under­standing how interconnection markets are changing and what the emerging norms are. Because there are significant shared and non-traffic-sensitive costs that need to be recovered, and because the details of interconnection agreements may convey sensitive strategic information, we are not surprised that ISPs are reticent to share publicly the terms that are negotiated. If needed, the proprietary information might be shared with regulators with adequate disclosure restrictions to protect confidentiality.

In each case, we hope that industry and independent analysts will take the lead in expanding the information available to all stakeholders, since, ultimately, we think that the market may do a better job of ensuring transparency than regulatory interventions. However, we recognize that more activist interconnection policies may be needed in the future if clear evidence of market failures surfaces. Our policy recommendations focus on enhancing transparency because we are not convinced by the evidence we have seen to date that more activist policies (e.g., direct regulation of Internet interconnection) is warranted; and equally importantly, even if we were to see a need for such regulation, we are concerned any such regulation might cause more harm than good. The Internet ecosystem is evolving rapidly and the expansion in interconnection agreements seems consistent with the need to accommodate new types of business relationships and service requirements.

16.6