Effects of ISP Interconnection Agreements on Internet Competition: The Case of the Network Access Point as a Cooperative Agreement for Internet Traffic Exchange

This paper presents and analyzes the main aspects of the historical development and the current issues at stake in the South American Internet access market. We have studied the interconnection schemes for the exchange of local and regional traffic in the South American region, trying to identify the main incentives large ISPs have for improving the financial conditions under which interconnection agreements occur, usually at the expense of smaller ISPs. In fact, the model of cooperative agreement for the exchange of domestic (national) traffic has been adopted all through the region; the Internet access market has benefited from the cost reduction and the improvement in the quality of service that the operation of a NAP has brought in each country. We have also contacted representatives of the cooperative exchange points (also called Network Access Points or NAPs) at Latin American NAPs Second Meeting in Buenos Aires, Argentina1. The most important achievement of this work is the understanding of the basics upon which the stability of the exchange points is founded. This is especially critical for the growth of Internet in South America. We have identified come crucial aspects such as the characteristics of the interconnection agreements and the payments ISPs make to the NAP administration. We have developed a sufficiently detailed understanding of important issues such as the impact of new forms of interconnection such as secondary peering agreements and multi-homing on the stability of Internet growth in the context of the fast developing and ever more complex South American Internet access markets. We have collected information on the structure of exchange points in different countries in the region to study the ISPs patterns of behavior arising from the new interconnection agreements, in particular, and the changes in the traditional hierarchy induced by new contract forms, in general. Such agreements are essentially bilateral agreements at the exchanges, a relatively new feature in South and Central America. For that purpose we have developed theoretical models using bargaining theory and have also dealt with cost allocation problems at cooperative exchange points. The structure of the paper is as follows: in Chapter 1 we summarize the main questions and the main conclusions achieved. In Chapter 2, we describe, to the best of our information collection, the current state of the access markets in different countries, mainly in Argentina, Chile, Brazil and Colombia, where NAPs have existed longest in the region. In Chapter 3, we present the main conclusions of a theoretical model of interconnection agreements evolution whose purpose is to identify the incentives that a large ISP has for exerting its market power upon the smaller ISPs. We have reasons to believe that the stability of NAPs is an aspect that should concern governments in order for them to promote the development of the Internet retail market in a region with low penetration of Internet deployment. 1 Organized by CABASE, Cámara Argentina de Bases de Datos y Servicios en Línea in Buenos Aires, Argentina, the 21st of August, 2003. We turn our attention, in Chapter 4, to a specific problem which may become an important concern for those involved in the administration of cooperative exchanges: the procedures for cost allocation. All NAPs in the region are cooperative enterprises born out of the common interest of competing ISPs. Currently the traffic at a NAP, which is not switched at the exchange, is just a fraction of the traffic in and out of every country,.In short, the cost recovery method is not an issue for the NAP administrators. Nevertheless, the growth of Internet, propelled by government-funded programs and new commercial ISPs, will demand a more rational approach to the allocation of cost among members of a NAP. We present the current practices and explore a traffic-based theoretical method. Finally, in Chapter 5, we use Nash bargaining theory to gain some insights on the possibility of interconnection between NAPs. The need in the region for cost reduction has prompted some NAP administrators to explore the possibility of directly exchanging traffic instead of routing international traffic across the US Internet backbones. This issue is of important concern especially for the southern countries. In spite of having counted on the collaboration of various NAP Executive Officers as they provided useful information about the main characteristics of their exchanges, traffic data and traffic flows were not available in any country studied. The public web page of NAP Chile provides information on the three main indicators ISPs are legally obliged to publish and the NAP Colombia web site provides information on the growth of total traffic at the NAP; such information stops short of providing a clear picture of traffic interest in the region. In the final session of the second meeting of Latin American NAP administrators held in Buenos Aires, several representatives spoke about the need for regional interconnection as they mentioned the high costs of international capacity and the increasing congestion as sources of concern for the optimal operation of their exchanges. In the upcoming months a trial connection will be set up between Argentina and Chile; this experiment will allow both, NAP Chile and NAP Cabase, to quantify the traffic between the two countries and will open the path for a series of regional interconnections among the NAPs in the region. 3