Kennard Explains Why Sending-Party-Pays Is Bad Idea As Operators Scramble to Profit from Pipes

ETNO’s “sending-party-pays” approach to Internet traffic termination is not feasible given the complexity of global networks, Kennard said. It’s inappropriate for a treaty-based organization to manage the Internet, where 90 percent of peering arrangements are “made on a handshake,” he said. Those commercial agreements are evolving every day, and don’t need the rubric of a government umbrella, he said.

Kennard said he’s heard two concerns from ETNO: that net neutrality regulation will harm incumbents and that existing business models for traffic carriage will harm competition. The U.S. agrees network operators should be able to use tiered pricing but doesn’t see any “tsunami of regulation” coming on the issue, he said. The U.S. also agrees there’s imbalance in how traffic is terminated, but believes the market will resolve the matter, he said. The only long-term solution is a structural one such as completing the digital single market in Europe, which will spur content generation, he said.

If there are regulatory problems in Europe, why should anyone believe that giving more authority to a treaty-based organization is the answer? Kennard asked. He acknowledged that network operators face challenges, but said telcos have struggled for the past 20 years with the legacy of rules that don’t work in the digital era. That raises the question of why creating another layer of regulation would help the sector keep pace with the digital environment, he said. He also questioned why anyone would believe that giving governments more authority at the expense of stakeholders is a good idea. Europe lived through the Anti-Counterfeiting Trade Agreement debate, and the U.S. through the Stop Online Piracy Act dispute, he said: ETNO’s proposal undermines the move toward a multistakeholder process.

Moreover, some administrations may seize on the proposal to gain greater control over the Internet, Kennard said, and he wondered why telcos would want their iconic brands associated with that. Nor is the sender-pays approach good for developing countries, who would find content generation much harder, he said. The U.S. doesn’t believe a case has been made for abandoning a system that has served everyone well for decades.

"Confusion” and misunderstanding surround some WCIT proposals, said ITU Telecommunication Standardization Bureau Director Malcolm Johnson. Many of the concerns are related to issues that have arisen since 1988, such as the ITU’s role in the Internet and worries about censorship, he said. The ITU membership, which includes governments, private sector entities, nongovernmental organizations, civil society and academia, has spent a great deal of time preparing for the conference, he said.

The ITU has yet to decide anything, Johnson said. There are no proposals so far to create a new regulatory mechanism to allow the ITU to take control of the Internet, he said. As for increased censorship, Johnson said, the ITU constitution allows member governments under national law to cut off any communication which threatens state security, contains child pornography, or for other reasons, and it’s unclear how anything WCIT decides could affect that, he said.

The Internet ecosystem has worked well so far but telecom providers are now at the point that the old trends are creating a “perverse effect,” said Telecom Italia CEO Franco Bernabè. The industry keeps building infrastructure and is being pressed to build even more at a time when its revenues are sinking and over-the-top players build on its success, he said in a discussion on a new and sustainable Internet ecosystem.

In July, the European Commission unveiled rules aimed at spurring investment in superfast broadband networks. The package isn’t perfect for everyone because there are so many competing interests to balance, said Digital Agenda Commissioner Neelie Kroes at the conference. It’s not “a squabble about who gets a bigger or smaller share of the pie” but about making the pie bigger, she said. The more people get ultrafast broadband, the more they'll demand new online applications; the more market players will supply them; and the more their neighbors, families and friends will see the benefits, she said. Demand will soar, driving a growing business in supplying connectivity and boosting revenues, she said.

That approach doesn’t solve incumbents’ problems, said Bernabè. Their competition is coming from outside the industry, and they need the freedom to reorganize their markets differently, he said. The distinct advantage networks have is quality of service (QoS), he said. They want it recognized that the QoS they provide needs to be paid for, he said. He blamed network operators for being lazy and doing nothing about the peering mechanism 10 years ago. At the very least, ETNO has launched a discussion at WCIT on a problem that seriously affects the industry, he said.

Mobile operators bring three strengths to the discussion, said GSM Association Director General Anne Bouverot. Their global reach offers an opportunity for them to work together on services such as mobile payments. Mobile operators and networks have the ability to guarantee the identity of their subscribers via SIM cards, and as mobile increasingly enables the Internet, that should be kept in mind, she said. Finally, mobile operators are able to give consumers differentiated QoS levels, she said.

Etisalat CEO Ahmad Abdulkarim Julfar urged operators to stop using the term “OTT players,” and instead call them Internet players or companies. Telcos must show respect for such companies and work with them, he said. Today’s market isn’t well balanced or healthy and it needs drastic change, he said. What happened to the telecom sector is no different from what occurred in the rest of the world in the financial crisis, he said. The sector has to change from within before someone does it for it, he said. That means lighter regulation, he said.

The industry is edging toward a time when it’s not a matter of margins but of survival, said Türk Telecom Group CEO Hakam Kanafani. It’s not about innovation, because telcos can’t compete with free, he said. There must be policies that allow them to reap the benefits of their investments, he said. It’s not about changing the business models of an industry that has been very innovative, but about having a level plain on which to compete, he said. Internet companies say the issue is freedom of choice and enterprise, but the fact is that telcos are investing and Internet companies aren’t, he said. Nor are telecom companies resisting internal change, he said. They understand they must invest more in corporate clients and find ways to differentiate their services, he said.

The FCC decided in 2003 not to require unbundling for new network builds, said Commissioner Robert McDowell, who stressed his comments were personal. At that time, 15 percent of the population had access to at least one broadband provider, and today it’s 96 percent, he said. It’s no coincidence that when the agency decided “old wires, old rules, new wires, new rules,” that sparked adoption and investment, he said. European incumbents are concerned that they're being forced to have unbundling obligations, he said. That approach should be revisited, he said.

McDowell said he hears a lot of “angst” about legacy regulations that are shackling innovation. Industry often wants the FCC to “please regulate my rival,” instead of asking for lighter regulation for all provided there’s competition, he said.

OTT players pay billions for QoS but the carriers have missed out, said Swisscom CEO Carsten Schloter. The good thing is that QoS exists and the OTT side is spending a lot of money to get it for their end-customers, he said. Network operators should offer it themselves, he said. It doesn’t require regulation, just models for monetizing QoS, he said. End-customer pricing is the ticket, he said. Customers are now pulling the data but soon they'll be pushing it, so network providers must consider their pricing mechanisms, he said.

Telcos know “iVoice” is coming and that it will disrupt their businesses, Schloter said. If they don’t cannibalize themselves, somebody else will, he said. Voice services must available on every broadband connection today, he said. TV will be the “next voice” of Internet Protocol and there will be Internet players who offer it free, he said. The network business is becoming one of access, which is good, because when subscription-based models are used, average revenue per user rises if services are priced right, he said. Swisscom gives all its subscribers unlimited voice, SMS and data, but differentiates them by speed, he said. The customers love it, he added.