My correct views on net neutrality

OK, the net neutrality. Just to set down how I think about this. The fundamental issue here is the termination fee regime on the Internet, or rather the lack of one.

So what is termination? When a phone call (remember them?) goes from network A to network B, network B charges network A for “terminating” the call, i.e. accepting it for final delivery to one of their subscribers. This practice originates with the way 19th century German postal administrations handled cross-boundary mail. There were other options, but the Prussians insisted on being paid for accepting inbound mail, and what they said went. This practice was taken over by the Universal Postal Union as a worldwide standard, so you can blame Anthony Trollope.

When international telephone interconnection became a thing, the ITU took over the postmen’s practices. Later we got privatisation, and with the emergence of GSM, a vast increase in the importance of interconnection through the issue of roaming.

But on the Internet, there is no termination regime, or rather there is one, but the termination fee is in principle zero. It’s possible, of course, to charge termination on IP traffic, and in fact mobile operators do this to each other via the GRX/IPX system, but there isn’t very much mobile-to-mobile traffic because everything interesting is on the proper Internet.

The first big, important point about termination is that it’s a purely regulatory construct. It feels aesthetically right to think in terms of “importing” or “exporting” traffic, but it doesn’t actually describe an economic reality. For two internetworks to interconnect, they have to run a cable down to a meet-me room somewhere, perhaps place some equipment, and do some configuration. These costs are all incurred at the time of setting up the link.

This takes us to the second big, important point, which is that it’s a purely regulatory construct. Very importantly, the direction that the traffic is flowing doesn’t affect the costs at all. The glass fibres don’t know which way the packets are moving. Whether the up/down ratio is 50:50, 80:20, or something else doesn’t change the costs of production. How much total traffic there is certainly does change the total cost, but that’s a separate issue.

This has important consequences.

Mobile carriers love termination; this is why they whine so much about Neelie Kroes and why they tend to report their numbers as “ex-MTR” and also as “including regulatory MTR changes”. (The technical term for the second metric is “the truth”.) They have two reasons for this. The first is that, although termination is charged to other operators, that doesn’t mean it’s a wash. Even if all the operators had roughly balanced termination accounts, they would still be able to pass the cost on to the customer, i.e. you.

The second is that termination fees flow towards the big battalions. If I have 20 million subscribers and you have 1 million subscribers, your subs are much more likely to call mine and hence generate termination revenue than the other way around. And because termination has nothing in principle to do with the underlying costs of production, it’s pure economic rent and hence, margin. Mmm, margin!

There is of course no reason to treat 1870s Prussian postal practice as sacrosanct, to say the least. There might have been more reason back when telecoms operators were public services, but that was then, and anyway there were plenty of problems with that set-up. Now that the big battalions are private interests, it’s much harder to defend.

By contrast, a system with no termination regime, known variously as bill-and-keep, settlement-free interconnection, etc has the property that big operators implicitly subsidise small ones, and specifically, access operators implicitly subsidise hosting operators. I don’t have to pay Deutsche Telekom or whoever to let its subscribers read my blog. This is a very important part of the Internet’s special nature.

The telephony ecosystem provides for universal interconnection – anyone on the phone can call any other number – but it provides only very poorly for applications, rather than access, operators. It sometimes claims to provide more thoroughly for public service, but it usually only does so when forced to by regulatory action. The Internet termination regime provides for universal interconnection, but also provides much more thoroughly for the existence of stuff you might want to interconnect with.

It is also true that, because termination is a regulatory construct, major access operators who want to charge something like a termination fee are usurping the powers of the regulator.

Universal interconnection is very valuable. Fans of markets in everything tend to think that it wouldn’t be so bad if you needed to subscribe to multiple ISPs to get the whole of the Internet. This is just a reflection of their general pollyannaism. We can see this because the market has spoken; nobody wants not-quite the Internet. When something like that is offered, customers invariably demand the real thing. Similarly, when filtering is offered as a commercial product, nobody ever buys it. They may think it’s good for everyone else, but they don’t want it for themselves. Everyone would like 1Gbps symmetric, thanks, and get out of the way. They would also want a full BGP routeview if they only knew what one was.

This is also why it is a much less important issue in the EU than in the US. In the EU, structural separation and wholesale requirements mean that the whole of the Internet and shut up is always likely to be on offer. In the US, not so much.

As the former chief engineer at Akamai, Patrick Gilmore, said on NANOG recently, having seen the size of the routing table pass 500,000, why don’t we make an effort to tidy up and push it back underneath? Especially as this would give all the world’s Cisco Super 720 routers a new lease of life.

In general, brilliant schemes to reorganise the Internet aim for incremental efficiency gains at the cost of the weirdness, slack, and flexibility that makes it special. The slack and quirks are a source of antifragility and strength. It is crazy talk to spoil the ship for three months’ deferred investment, especially when tweaking and better practice often deliver more.

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