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5.3 Analysis of the cost characteristics of the network elements on the Internet
applications and Internet content layers
Given access to the network elements of the physical layer and the logical layer,
entry into the Internet applications layer is similar to entry into competitive product
markets of other conventional industries. The costs of providing Internet application
services such as E-mail services, portal services, web-hosting, etc. are driven primarily by comparable cost pools of traditional markets such as product development
costs, marketing costs, and costs for customer care. The proportion of fixed costs in
these production and marketing costs are not so high as to give rise to substantial
economies of scale or scope. Furthermore, as the relevant market size on which
Internet applications are offered is large, any small economies of scale or scope will
be exhausted in the relevant market.
The same reasoning applies to the content layer of Internet service provision. The
goods and services offered via the Internet are often closely related to similar goods
offered on conventional markets. The adjustments necessary in sales and marketing
activities for distribution of goods and services over the Internet do not give rise to
substantial economies of scale or scope.
Among the Internet-specific costs of Internet application provision are the costs
for operating servers. Servers are required for web-hosting services, for E-mail services, and for caching of remote web-sites.66 The size and therefore also the costs of
these servers are scaleable. The required server capacity can be bought to scale such
that the incurred fixed costs do not substantiate economies of scale in the relevant
range of output.
Further Internet-specific costs of Internet application provision are associated
with the billing of electronically generated data records. The billing of such data
records requires powerful rating engines. The fixed investments for these rating
engines could be the source of economies of scale in the relevant output region,
since smaller ISPs are not likely to generate enough traffic to exhaust the economies
of scale of the most cost-efficient billing technologies. However, there are companies specialized in offering billing solutions to ISPs, telecommunications carriers,
cable providers, etc.67 Smaller Internet application providers therefore do not need to
invest into expensive billing equipment which may not be reversible upon exiting
the market. Rather, it is possible to outsource all billing functions such as the rating
of call records and the printing and shipping of invoices. This decreases the investment risk for Internet application providers. In summary, because there are no network elements on the application level that substantiate economies of scale in the
66 Caching refers to the temporary storage of remote content closer to the user. ISPs use the
caching of web-sites to lower interconnection costs and to enhance the performance of their
network (download speed).
67 See, for instance, www.billcom.de or www.intec-telecom-systems.com/; both sites last visited
on Feb. 15, 2008.
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relevant output region paired with irreversible investments, there are no monopolistic bottlenecks in the market for Internet application services.
In conclusion, both the content layer and the applications layer of Internet service
provision are competitive. There are no substantial economies of scale in these markets that could give rise to monopolistic network elements. According to the disaggregated regulatory approach, sector-specific regulation cannot be justified in these
layers of Internet service provision.
5.4 Analyzing the cost characteristics of the logical layer of the Internet
A large part of costs on the logical layer of Internet service provision can be attributed to the skilled personnel employed for network management and interconnection negotiations. The wage costs of personnel are part of variable costs and consequently do not substantiate stable market power. Possible sources of large fixed
investments on the logical layer are Internet Exchanges, routers, and software.
Therefore, the cost characteristics of these network elements are important to look at
in more detail.
Operation of Internet Exchanges68
Internet Exchange Points (IXPs) are shared interconnection points, where carriers
meet for the purpose of exchanging Internet traffic.69 The primary service provided
by an Internet Exchange (IX) is a central switching platform and a pre-provisioned
fiber mesh often comparable to a local area network, to which carriers can connect
their own equipment in order to realize interconnections with other carriers. Secondary services of IXs include help in establishing contacts between carriers, for instance by establishing mailing lists of carriers present at the IX.
Carriers can gain efficiency from interconnecting at IXs, because interconnection
at IXs minimizes the cost for building fiber to the location of several peering points.
Furthermore, an IX offers the opportunity for direct interconnection between networks when the amount of traffic between the two networks would not have warranted a bilateral interconnection. Smaller carriers also use IXs to bundle traffic in
order to negotiate a joined agreement for interconnection with larger carriers and
thereby better the commercial terms of the contract (Hussain, 2002).
There are economies of scale in providing IX services. Firstly, the cost of the shared infrastructure at the IX falls with the number of carriers supplied by it. Secondly,
a smaller number of IXs in a given area is more efficient because the benefit of
68 I am grateful to Arnold Nipper, the technical manager of the DE-CIX, in Frankfurt Germany,
for an interview, which provided extensive background knowledge for this section on IXPs.
The DE-CIX is an IX organized by the Association of the German Internet Economy
(www.eco.de; site last visited on Feb. 15, 2008).
69 The European Internet Exchange Association has an informative website on Internet Exchange Points (www.euro-ix.net; site last visited on Feb. 15, 2008).
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Zusammenfassung
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.