FOR IMMEDIATE RELEASE: News Media contact:

September 26, 2000 Michael Balmoris at (202) 418-0253

**FCC RELEASES STUDY OF INTERNET BACKBONE MARKET**

***Study Concludes that Competitive Internet Backbone Market Should
Remain Free of Telecommunications Regulation***

Washington, D.C. -- The Federal Communications Commission's (FCC) Office
of Plans and Policy (OPP) today released the 32^nd^ in its OPP Working
Paper Series, entitled "The Digital Handshake: Connecting Internet
Backbones." The paper, authored by Michael Kende, Director of Internet
Policy Analysis in the Office of Plans and Policy, examines the
interconnection arrangements between Internet backbone providers that
lead to the universal connectivity that characterizes the Internet.

Since its commercialization in 1995, the Internet has served as an
example of a network industry in which interconnection agreements are
reached through commercial negotiations in a "handshake," rather than a
regulated, environment. This paper offers a primer describing the
existing Internet interconnection agreements -- notably peering
arrangements -- which have arisen in place of traditional regulation.
Issues covered include:

-   Interconnection Agreements -- The paper shows how competition,
    governed by antitrust laws and competition enforcement, can prevent
    the emergence of a dominant firm, and act to restrain larger
    backbones from engaging in behavior that might otherwise warrant
    industry-specific regulations, such as interconnection obligations.

-   Future Internet Services -- The paper shows how the Internet
    marketplace may prevent any fragmentation of the Internet as it
    evolves to support new real-time services.

-   International Interconnection -- The paper concludes that legacy
    international telecommunications cost-sharing models are not
    appropriate for the Internet backbone.

OPP periodically issues working papers on emerging issues in
communications; these papers represent the individual views of their
authors and do not necessarily reflect the views of the FCC, any FCC
commissioner, or other staff.

A summary of the working paper is attached. The full text is available
on the FCC's web site at www.fcc.gov.

-   FCC -

Office of Plans and Policy contact: Michael Kende, (202) 418-7512,
<mkende@fcc.gov>.

Summary of "The Digital Handshake: Connecting Internet Backbones"

by Michael Kende[^1]

Office of Plans and Policy

Working Paper No. 32

The Internet is a network of networks, owned and operated by numerous
companies, including the Internet backbone providers that use
telecommunications networks and routing equipment to deliver data
traffic to and from their customers. Internet backbone providers must
interconnect with one another in order to enable their customers to
exchange traffic with the customers of other backbones, resulting in the
universal connectivity that is the hallmark of today's Internet. In an
example of the Commission's "unregulation" of the Internet,
interconnection between backbone providers is not regulated; instead,
backbones decide whether, how, and where to interconnect in commercial
negotiations among themselves.

This paper examines the interconnection agreements that have evolved in
place of traditional interconnection regulations. The most commonly
known form of interconnection is *peering*, an agreement enabling
backbones to exchange traffic with one another at no cost. Another form
of interconnection is known as *transit*, an agreement whereby one
backbone pays another backbone for delivering its traffic.

In the past several years, a number of parties have questioned whether
it is fair when larger backbones refuse to peer with smaller backbones.
This paper demonstrates that in a competitive backbone market, there may
be legitimate reasons for a backbone provider to not peer with another
backbone. The paper shows that, in place of peering, backbone providers
offer transit arrangements. As long as transit arrangements are
available on a competitive basis, smaller backbones can enter and ensure
that the backbone market remains competitive. The paper concludes that
competition, governed by antitrust laws and competition enforcement that
can prevent the emergence of a dominant firm, can act to restrain the
actions of larger backbones in place of any industry-specific
regulations, such as interconnection obligations. If a dominant backbone
provider should emerge through unforeseen circumstances, however,
regulation may be necessary, as it has been in other network industries.

There is concern that in the future, backbones may attempt to
differentiate themselves by offering real-time services only to their
own customers. As a result, the Internet would "balkanize," with
competing backbones not interconnecting to provide all services. This
paper demonstrates how market forces, including consumer demands, are
likely to ensure that Internet backbone providers continue to provide
universal connectivity. Any future calls to overturn the status quo and
impose interconnection regulations on Internet backbone providers bear
the burden of identifying the harms that would be remedied, as well as
identifying a focused means for resolving these harms.

The paper also examines an interconnection issue raised by a number of
carriers outside the United States, particularly from the Asia-Pacific
region, who question whether it is fair that they must pay for the whole
cost of the transmission capacity used to carry Internet traffic between
international points and the United States. The paper describes the
market forces that currently govern these interconnection arrangements,
and concludes that they need not be supplemented by the imposition of
any international interconnection regulations.

[^1]: ^\*^ The views expressed in this paper are those of the author,
    and do not necessarily represent the views of the Federal
    Communications Commission, the Chairman, any Commissioners, or other
    staff.