Margit Vanberg, Differentiating Internet core and Internet periphery in:

Margit Vanberg

Competition and Cooperation Among Internet Service Providers, page 26 - 28

A Network Economic Analysis

1. Edition 2009, ISBN print: 978-3-8329-4163-5, ISBN online: 978-3-8452-1290-6

Series: Freiburger Studien zur Netzökonomie, vol. 14

Bibliographic information
26 2.2 Differentiating Internet core and Internet periphery In his definition of Internet services provision, Knieps (2003, 2007) focuses on the differentiation between market elements that are unique to Internet services provision and market elements that are related to the Internet but also have viable uses apart from it. The present analysis follows this approach by differentiating between Internet core services and Internet periphery services. The primary functions of the Internet, as defined by the Federal Networking Council, are counted among the elements of the Internet core. The complementary functions to the Internet core are counted among the elements of the Internet periphery. Figure 2.2 illustrates this concept. The Internet core services include Internet application services, meaning those services provided by Internet Service Providers (ISPs) that end-users are usually familiar with, such as E-mail services, homepage services, web-portal services, etc. Other customer-related services, such as accounting, billing, and technical support also belong in this category. The other two segments belonging to the Internet core are Internet access services and Internet backbone services. Both are Internet transport services. They encompass the hardware and software that enhance plain physical infrastructure with Internet logistics in order to allow Internet traffic to be transmitted over a network. Internet access services are transport services that are provided on top of local communications infrastructure and serve to transmit Internet traffic between the end-users’ premises and a point of presence of an ISP’s network. Internet backbone services are provided over long-distance communications infrastructure and serve to transmit data within an ISP’s networks and between ISPs’ networks. The installation of routers and switches as well as routing software, also IP-address assignment, the realization of interconnection with other networks, network management, etc. are part of Internet transport services. Internet application services and Internet transport services belong to the Internet core because they have meaningful functions only in connection to the Internet. communication services, traditionally offered only on public switched telephone networks (PSTN), are now also being offered on Cable-TV (CATV) platforms, while telecommunications platforms are recently being employed to deliver video-signaling. The Internet facilitates convergence, through its platform-independent protocols for data transmission, which allow any application, which can be broken down into information packets, to be sent over a variety of network infrastructures. With this trend towards platform-independent services previously independent industries are now competing on the same markets. The relevance of network convergence for the present analysis is discussed in chapter 4. 27 Figure 2.2: Internet core vs. Internet periphery Source: Based on Knieps (2007: 3) The Internet periphery includes the complementary functions to core Internet service provision. These are the underlying infrastructure platforms, further distinguished into (1) local communications infrastructure, the infrastructure which joins the end-user’s host to the Point of Presence (PoP) of the ISP, and (2) long distance communications infrastructure, the infrastructure which provides the bandwidth for long-distance data transportation in the network of the ISP and between ISPs. Communications infrastructures are counted among the elements of the Internet periphery because they can be put to alternative uses, such as the transmission of voice telecommunications or Cable-TV broadcasting. The Internet periphery further includes terminal equipment, the end-user devices connected to the Internet (i.e. phones, PCs, notebooks, and work-stations). Lastly, content is part of the Internet periphery. Information and content provided via the Internet, as for instance news and entertainment, shopping opportunities, home-banking, etc. can be consumed via the Internet channel, but can also be obtained via alternative distribution channels. Given this understanding of the functions of Internet services provision, an Internet Service Provider can be defined as a provider of core Internet services. Vertical integration by an ISP into the provision of Internet periphery services is possible but not necessary. If the ISP is not vertically integrated into Internet periphery services, Terminal Equipment Content Long Distance Communications Infrastructure Internet Application Services Internet A ccess Services Local Communications Infrastructure = Internet core = Internet periphery Int er ne t B ac kbo ne Se rv ice s 28 then those functions necessary to provide Internet core services to the end-user can be bought from third-party suppliers.10 2.3 A layered model of Internet services provision A policy analysis of the market for Internet services provision will naturally focus on core Internet services. However, core Internet services cannot be analyzed in isolation. In order to understand the market for Internet services provision, it is important to pay attention to the vertical interrelations between the Internet core and the Internet periphery as well. Only then can potential sources of market power in Internet services provision be located and their influence on market performance be estimated. At the same time such an analysis can also disclose whether existing regulatory interventions in the Internet periphery - interventions that are present due to market failure in other sectors - need to be adapted or extended due to the functions these network elements perform in the context of Internet services provision. This subsection introduces a conceptual framework for the analysis of the market for Internet service provision that takes into account the demands formulated above. The starting point for this approach is the reference model of Open Systems Interconnection (OSI model) developed in 1978 by the International Standards Organization. This general model of communications networks was written for technicians and describes the interrelationships between the diverse protocols that are used on the different layers of communications networks from an engineering perspective. Figure 2.3 shows the seven protocol layers of the OSI model. Inspired by the OSI model, economic analysis of communications networks increasingly uses simplified layered models to describe the architecture of communications networks for the purpose of policy analysis (Werbach, 2002). As one observer puts it: “The Layered Model is a market policy mapped onto a technical conception” (Cannon, 2003: 195). The weight the OSI model places on the technical functions performed by any communications network directs the view towards the similarities between services that are based on these protocols rather than to the differences in these services. The simplified models used for competition policy usually differentiate between a physical (network-oriented), a logical (transportoriented), and an applications layer (service-oriented); sometimes a content layer is analyzed separately.11 10 Whenever it is not necessary for the present analysis to differentiate between the different core functions of Internet service provision, then, throughout the thesis, reference will generally be made only to an ISP. When the difference between the core Internet services is important for the analysis, then reference will be made to Internet access service providers or Internet backbone service providers etc. 11 The layered approach used in this thesis is based on Werbach (2002). For an overview of alternative layering models of communications networks see Whitt (2004).

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Die Konvergenz der Netztechnologien, die dem Internet, der Telekommunikation und dem Kabelfernsehen zu Grunde liegen, wird die Regulierung dieser Märkte grundlegend verändern. In den sogenannten Next Generation Networks werden auch Sprache und Fernsehinhalte über die IP-Technologie des Internets transportiert. Mit den Methoden der angewandten Mikroökonomie untersucht die vorliegende Arbeit, ob eine ex-ante sektorspezifische Regulierung auf den Märkten für Internetdienste wettbewerbsökonomisch begründet ist. Im Mittelpunkt der Analyse stehen die Größen- und Verbundvorteile, die beim Aufbau von Netzinfrastrukturen entstehen, sowie die Netzexternalitäten, die im Internet eine bedeutende Rolle spielen. Die Autorin kommt zu dem Ergebnis, dass in den Kernmärkten der Internet Service Provider keine monopolistischen Engpassbereiche vorliegen, welche eine sektor-spezifische Regulierung notwendig machen würden. Der funktionsfähige Wettbewerb zwischen den ISP setzt jedoch regulierten, diskriminierungsfreien Zugang zu den verbleibenden monopolistischen Engpassbereichen im vorgelagerten Markt für lokale Netzinfrastruktur voraus. Die Untersuchung zeigt den notwendigen Regulierungsumfang in der Internet-Peripherie auf und vergleicht diesen mit der aktuellen Regulierungspraxis auf den Telekommunikationsmärkten in den Vereinigten Staaten und in Europa. Sie richtet sich sowohl an die Praxis (Netzbetreiber, Regulierer und Kartellämter) als auch an die Wissenschaft.