Next month (December 2012), representatives of the 193 member countries of the International Telecommunications Union (ITU) will meet in Dubai to discuss and agree on new principles governing the international exchange of Internet traffic across countries and associated pricing principles.
The ITU is a specialized agency within the United Nations (UN) that establishes treaty-level agreements to govern international communications among member countries — decisions taken by the ITU are approved by a majority vote of member countries (unlike the UN’s Security Council, no country has veto powers), but the ITU has historically tried to issue its decisions on a “consensus” basis.
In Dubai, the ITU members will discuss, among other issues, whether to extend the existing treaties regarding the international exchange of two-way telephone communications to include Internet-protocol communications. More specifically, the ITU is considering whether to:
- Set rules to govern how backbone Internet networks exchange traffic among themselves — basically, to intervene in privately negotiated Internet “peering” contracts that have been a catalyst for the Internet’s explosive growth during the past decade, and
- Establish a “sender-party-pays” principle for Internet communications, similar to the treaty now in force for legacy international telephone calls.
This latter principle would, for example, essentially mean that every time a user in Morocco watches a YouTube clip of Casablanca through her broadband connection provided by Maroc Telecom, Google (the corporate parent of YouTube) would have to pay a “termination fee” to Maroc Telecom, just like Verizon now pays to complete a phone call from an U.S. caller to a Moroccan phone number.
Content providers have raised concerns about this “content tax.” Content providers may want to consider the history of international payments for voice telephony. In 2000, a U.S. carrier wishing to terminate a call abroad was essentially required to pay about $0.20/min on average, while getting $0.10 for terminating a call coming from abroad. The FCC reports that this disparity, coupled with a greater amount of traffic flowing from the United States towards other countries than coming into the United States from abroad, resulted in U.S. carriers paying out $4.5 billion more to foreign carriers than they received in return. Since then, international telephone traffic has more than doubled (while the ratio of outgoing-to-incoming calls has stayed about constant at 2.5:1), yet the deficit has shrunk to about $2.0bn, largely due to FCC actions that cut and re-balance termination rates, and in part to technological advances that have reduced overall telecommunications costs.
Internet communication is much harder to track and tax than voice telephony, and thus workarounds necessary to implement the “sender-party-pays” proposal would result in the wasteful expenditure of resources and potentially require fundamental engineering changes to how the Internet operates. Such changes have implications for incentives for private investment in the broadband ecosystem in all countries and put underdeveloped countries just starting to build out broadband infrastructure at a disadvantage if other countries deny or block their content from being distributed within the United States or elsewhere.
The proposal before the ITU to intervene in peering contracts goes against a recent OECD report on “Internet Traffic Exchange: Market Developments and Policy Challenges” that concludes:
Since the Internet was commercialised in the early 1990s, it has developed an efficient market for connectivity based on voluntary contractual agreements. Operating in a highly competitive environment, largely without regulation or central organisation, the Internet model of traffic exchange has produced low prices, promoted efficiency and innovation, and attracted the investment necessary to keep pace with demand.
In the end, these proposals before the ITU do not have sound economic justification. No “market failure” exists that needs correction. The proposals call for unnecessary regulatory oversight of private contracts (backbone regulation) and content taxation. The “sender-party-pays” principle for Internet communications risks isolating these countries, deepening an international digital divide, by providing content providers with the incentive to refuse requests from poorer countries where the expected revenue from putting content in front of users is less than the payment required by the receiving network.
The “free and open Internet” has thrived globally over the past decade, but the proposals before the ITU seek to redefine it as having geographical boundaries, where countries act as content gate-keepers.