1. ““Electronic Communications Infrastructure and Competition Policy: an insight into the European Experience” Emanuele Giovannetti School of Economics UCT Alessio D’Ignazio University of Cambridge Infrastructure and Growth – Theory, Empirical Evidence and Policy Lessons Cape Town, May 29-31, 2006 www.CoCombine.org

2. Plan of the talk A snapshot of the Internet Infrastructure Antitrust Issues for the Internet and EU Regulation Problems in applying standard antitrust tests Description of the New data available – and their use for the inference of business relations Applications to market concentration indexes and to detection of “unfair” interconnection practices Relation to the game theoretic literature on interconnection

3. Internet as an infrastructure The Internet is an infrastructure essential as an intermediate input in many production processes The geographical distribution of the Internet infrastructure is highly asymmetric and this has strong repercussions on the cost of accessing the Internet and on the Digital Divide. Also very important is the functioning of this infrastructure, its competitiveness, the presence of bottlenecks and the fairness of its interconnection practices

4. The Internet Differently from many other Network industries, the “Commercial” Internet did not emerge as a natural monopoly. After the initial public investment in the NSF backbones in the US, different interconnections were privately and publicly added through time, to create today’s network of networks The lack of an original monopolist does not preclude the possibility that crucial network nodes can detain some type of monopoly power …an use it..

5. A snapshot at the Internet Infrastructure Topology A snapshot at the Internet Infrastructure Topology

6. The Internet seen before is different from Intranetwork infrastructures: UUNET/WorldCom European Network

7. Interoute

8. Early Antitrust analysis for the backbone market The first relevant antitrust enquiry was the 1998 MCI WorldCom merger analysis. The merger received an approval conditional on divesture of UUNET. The second was about the MCI-WorldCom proposed merger with Sprint in January 2000. the Commission concluded that the proposed merger would have led to the emergence of a top level network provider, …Able to act almost independently of its competitors and customers and to determine its own, and its competitors, prices and the technical developments in the industry. …Able to act almost independently of its competitors and customers and to determine its own, and its competitors, prices and the technical developments in the industry.

9. New Regulatory Framework and the Commission’s guidelines In July 2000 the Commission introduced a New regulatory framework for electronic communication networks and services. This was intended to provide a lighter regulatory touch where markets have become more competitive The application of the Regulatory framework was then essentially described in the “Guidelines on market analysis and assessment of significant market power ……” published on the 11th of July 2002.

10. The guidelines The Commission’s guidelines focus only on issues related to (i) market definition; and (ii) the assessment of significant market power (SMP) The relevant market for a product is the smallest set of products which, as a whole, does not face competition from other products. This requires the estimation of the demand cross elasticities, to assess commodity substitution.

11. Input Demand substitution: Transit and Peering ISPs have two main inputs of production, since they have to transfer traffic across networks these are two different forms of interconnection. Transit: provider-to-customer relationship: the customer is provided connectivity to the entire Internet, in front of a payment of a settlement fee. Peering: bilateral peer-to-peer relationship: each peer provides the other connectivity to its own network (customers) only, usually without any settlement fee.

12. The Internet hierarchy and Market definition Tier-1 IBP ISP IAP

13. The Market for ISP’s inputs The Market for ISP’s inputs Defining the relevant market would require the estimation of cross-price elasticities of input demands: for peering and transit. However transit prices and peering agreements are often sealed in confidential bilateral contracts

14. Discrimination in interconnection Furthermore input demand substitution is not smooth since both peering and transit contracts are rife with discrimination practices: refusal to peer, for peering, non linear pricing, for transit. This prevents the application of usual tests, like the SSNIP (Small but Significant non transitory increase in price) for market definition

15. Inference from new Dataset for the micro- interconnection policies The objective is to infer the type of relation describing the interconnection between two ISPs and to use this for market definition and analysis. Inference approaches are based upon publicly available data: Border Gateway Protocol (BGP) Border Gateway Protocol (BGP) Internet Routing Registry (IRR) Internet Routing Registry (IRR) IRR = set of databases where the ISPs can publish their routing policies BGP = set of rules (paths) through which data packets are forwarded between connected networks (Oregon Route View Project)

16. BGP based inference relies upon the “valley free” property Each data packet follows a series of customer-to-provider or peer to peer relationships until it reaches a peak, then it descends to the destination network following provider-to- customer relationships The interconnection inference algorithms is based on the idea that: “valleys” are invalid Valley: would imply that a customer pays to receive traffic from a provider and to have it forwarded to another provider(GAO) valid invalid (valley)

17. 2 Metrics for Asymmetry : Customer Cone and Betweenness Once inferred the set of peer to peer and customer-provider relations one can derive the number of customers for each ISP: its Customer cone (CAIDA) as a proxy for market size. From the BGP data we can also read the micro-instructions (at the router level) describing the blueprint of traffic paths across ISPs The Betweenness of an ISP is defined as the number of paths that traverse it. We use it as a proxy for network centrality of an ISP.

18. Betweenness and Bottlenecks High betweenness indicates that an ISP has a certain degree of market power over the other ISPs in terms of unavoidability This measure is particularly relevant for spotting bottlenecks, or partial essential facilities, often the root cause of market power in network industries

19. Market Concentration We used these 2 metrics to calculate 2 different We used these 2 metrics to calculate 2 different Herfindahl- Hirschman Index of concentration: divided by geography, and vertical segment of the market, HHI=∑ i m i 2 One based on the customer cone looking at concentration in Market Shares, the other based on betweeness looking at concentration in market centrality. Market is considered moderately concentrated when HHI is between 1000 and 1800, highly concentrated when HHI is greater than 1800 Below we show calculations for Market Concentration,

20. location class specific Concentration Indexes Class No. of members HHI customer cone HHI betweenness TIER 1 812531981 CORE20416616 OUTER CORE 2610371711 TRANSIT63324452 ISP Customers 34303471 LINX Matrix 151241460 TIER 1 714322244CORE21526746 OUTER CORE 258401916 TRANSIT77302298 ISP Customers 44285370 AMS-IX Matrix 174251512 LINX AMS-IX

21. Strategic interconnection models We can use the same database to assess fairness of interconnection practices, among competitors In any network industry Interconnection affects competition for downstream users and vice versa, hence the choice of the interconnection is a strategic game Together with the competition effect, there is however also an opposite complementarity effect (network externalities) to be considered

22. Peering between competitors: contrasting results Crémer, Rey, and Tirole (2000) Jahn and Prüfer (2004) Weiss and Shin (2004) Foros and Hansen (2001) Baake and Wichmann (1999) Economides (2005) Badasyan and Chakrabarti (2003) Asymmetry leads to business stealing if interconnected Asymmetry leads to Network complementarit y if interconnected

23. Results from Theory Crémer, Rey and Tirole (2000) The quality of interconnection decreases when the difference in installed base of customers increases. Foros and Hansen (2001) firms do not have conflicting interests about the interconnection quality, whether they have different exogenous off-net quality or not. Baake and Wichmann (1999), Economides (2005) Peering may be profitable even if it leads to lower market share for one of the ISPs (due to business stealing effect).Indeed, higher prices can be charged in front of higher network quality

24. Fairness in interconnection among asymmetric players? In the following we assess the role played by asymmetry in interconnection We consider a peering relation as a form of non discriminantory interconnection, Transit is the alternative to this. We consider also other possible geographical factors.

25. ISPs Location and peering links, does distance matter for interconnection?

26. Model Result dependent variable: peering ProbitLogit Customer cone - Market Size 0.0040.008 SIZE DIFFERENCE (10.26)(9.26) Membership of IXPs 0.0430.070 SIZE DIFFERENCE (3.67)(3.62) Location0.0250.044 GEOGRAPHIC DISTANCE (2.83)(3.01) Reputation0.2810.463 COMMON NUMBER OF IXPs (10.45)(9.91) Betweennes –Network Centrality -0.128-0.220 SIZE DIFFERENCE (23.87)(20.90) constant-0.096-0.170 (1.80) (1.90)

27. Inferred Agreements Internet Operators ISPs ISPs ISPs

28. Conclusions The model improves prediction: Predicting that there is always a peering relation between any two ISPs, we would guess right in 56,2% of the cases, given the actual frequency of Peering at the LINX. By using the independent variables of the model introduced, we obtained 68.6 % of correct guesses about the peering relation. But, what is the relation between asymmetry and the “fairness” of interconnection contracts?

29. Conclusions We introduced two distinct metrics to model the providers’ asymmetry: the customer cone, a proxy for “market share” and the betweenness, expressing the market power, by showing the degree of unavoidability of a provider in the Internet traffic routing. The two variables representing competitors’ asymmetry have opposite effects. Difference in betweenness, affects negatively peering, while the difference in the customer cones affects positively its probability. Finally Geographical differentiation also has a positive effect on peering.

30. Conclusions The contrasting results of the game theoretic literature can therefore be liked to the type of asymmetry considered: Crèmer, Rey and Tirole, (2000), findings reflect the role of asymmetry in terms of network centrality, expressing market power via the betwenness. Foros and Hansen (2001), and Economides (2005), pointing to differentiation and network externalities can be linked to a notion of asymmetry in terms of customer cones. Foros and Hansen (2001), and Economides (2005), pointing to differentiation and network externalities can be linked to a notion of asymmetry in terms of customer cones. This richness of roles played by ISPs’ asymmetry in affecting fairness of the interconnection decisions should be carefully considered by Antitrust Authorities when assessing Network Industries Cases.

31. Conclusions Thank you For more material see www.cocombine.org Contactsgiovannetti@cantab.net