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Saturday, September 26 • 9:33am - 10:05am
Interconnection and Capacity Allocation for All-IP Networks: Walled Gardens or Full Integration?

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With Internet evolution and the convergence towards all-IP networks, the equation for interconnection in communications is changing fundamentally. While traditional interconnection agreements in telecommunications and the Internet ensured universal connectivity in a rather homogenous environment, the transition to broadband, and further the migration towards all-IP make IP-based interconnection agreements run up against a wide spectrum of different application services requiring heterogeneous levels of quality of service (QoS). Although the relevance of end-to-end inter-operator QoS has been recognized for a long time and technical means for implementing such strategies were developed more than a decade ago, there is no widespread implementation of differentiated IP interconnection agreements (cf. Weller and Woodcock 2013). Taking into account the evolution in the Internet ecosystem and the transition towards all-IP, the aim of this paper is to describe the evolution and future challenges in the markets for “all-IP interconnection”. We analyze and compare two alternative scenarios for all-IP interconnection from a network economic perspective.

Introducing a conceptual systematization of the evolutionary process we distinguish between three stages towards all-IP interconnection. Starting after the commercialization of the Internet, the first stage was characterized by traditional IP interconnection agreements ensuring universal connectivity. The public-switched telephone network (PSTN) and broadcasting networks coexisted and provided corresponding services. In a second stage, while traditional networks remained to provide fallback solutions for IP-based voice and broadcasting services, IP interconnection has been shaped significantly by content providers’ and content distribution network providers’ innovative business models resiliently responding to the insufficiencies of underlying best effort Internet principles – mitigating its drawbacks. As a result, price and QoS differentiations have been introduced and a regionalization of traffic flows is observable. In particular, the emergence of media content providers (e.g. Netflix) has led to substantial shifts in Internet traffic patterns (cf. e.g. Reed et al. 2014). Increasing complexity has spurred the adoption of innovative interconnection agreements like partial transit and paid peering (cf. Faratin et al. 2008). The integrated provision of all-IP services (i.e. voice, data and media) within multipurpose architectures marks a third stage of IP interconnection. With major providers projecting the phasing-out of the PSTN by the end of the decade, the ultimate migration to all-IP creates an urgent need for quality-equivalent IP-based substitutes for legacy telephone services (cf. e.g. Elixmann et al. 2014). The provision of such services requires end-to-end QoS guarantees by means of capacity allocations based on active traffic management and tailored interconnection agreements. As any IP-based service provision is based on the same traffic capacities, an unprecedented rivalry situation between converged services results and a single market for IP-based data services is created.

We analyze two different scenarios for all-IP interconnection. In the first scenario we consider an application-specific “walled garden solution” based on logical separation between different standardized non-Internet services and the public Internet as proposed by the recent FCC regulation (cf. FCC 2015) and similarly envisaged in Europe. In the second scenario a solution based on fully integrated all-IP service provision is introduced. Based on a network economic analysis we derive implications for an economically desirable all-IP interconnection regime. As economically optimal capacity allocation requires market driven price and QoS differentiation based on the opportunity costs of network usage (cf. Knieps and Stocker 2014) and as the integrated optimization of capacity allocation can only be based on an unrestricted evolutionary search for bilateral and multilateral interconnection agreements, we argue for a fully integrated solution resulting in a flexible and resilient all-IP ecosystem relying on a continuum of interconnection agreements capable of reflecting heterogeneity in demand for QoS.


ELIXMANN, D., MARCUS, J.S. AND PLUECKEBAUM, T. (2014), ‘IP-Netzzusammenschaltung bei NGN-basierten Sprachdiensten und die Migration zu All-IP: Ein internationaler Vergleich’, WIK-Diskussionsbeitrag Nr. 392, Bad Honnef.

FARATIN, P., CLARK, D., BAUER, S., LEHR, W., GILMORE, P. AND BERGER, A. (2008), ‘The Growing Complexity of Internet Interconnection’, Communications & Strategies, 72(4), pp. 51-71.

FEDERAL COMMUNICATIONS COMMISSION (FCC) (2015), In the Matter of Protecting and Promoting the Open Internet, REPORT AND ORDER ON REMAND, DECLARATORY RULING, AND ORDER, GN Docket No. 14-28, FCC 15-24, Adopted: February 22, 2015, Washington D.C.

KNIEPS, G. AND STOCKER, V. (2014), ‘Market Driven Network Neutrality and the Fallacy of a Two-Tiered Internet Traffic Regulation’, Paper prepared for the 42nd Annual Telecommunications Policy Research Conference, September 12-14, 2014, George Mason University, Arlington,VA, available at SSRN: http://ssrn.com/abstract=2480963

REED, D.P., WARBRITTON, D. AND SICKER, D. (2014), ‘Current Trends and Controversies in Internet Peering and Transit: Implications for the Future Evolution of the Internet’, Paper prepared for the 42nd Annual Telecommunications Policy Research Conference, September 12-14, 2014, George Mason University, Arlington,VA, available at SSRN: http://ssrn.com/abstract=2418770

WELLER, D. AND WOODCOCK, B. (2013), ‘Internet Traffic Exchange: Market Developments and Policy Challenges’, OECD Digital Economy Papers, No. 207, OECD Publishing. http://dx.doi.org/10.1787/5k918gpt130q-en


Volker Stocker

University of Freiburg

Saturday September 26, 2015 9:33am - 10:05am
GMUSL - Room 225

Attendees (15)