Conference Notes

Network Neutrality: Implications for Europe
Hotel Kanzler, Bonn, 3./4.12.2007

An intensive debate as to whether Internet service providers should be obliged to offer non-discriminatory access to providers of content, applications, and end devices has been raging in the United States for quite some time. This discussion, which takes place under the label of "network neutrality", tends to focus on network operators on the one hand, and on content providers on the other.

Proponents of regulatory and legislative interventions aiming to ensure network neutrality emphasize the public utility characteristics of the Internet, which are in some sense comparable to electricity or water, and which therefore call for a protection by the state. In particular, for private network operators to exercise control over content offered and network applications run over these networks would run counter to long-standing U.S. and English concepts of "common carriage". This group, which includes Internet companies such as Google and Ebay, emphasizes the importance of open access to the Internet as a fundament for innovation, which could be harmed by unjustified discrimination.

Large telecommunication operators such as Verizon and AT&T lobby against further regulations ensuring network neutrality. They point to large investments associated with the deployment of fibre infrastructure, which would be potentially be negatively impacted by regulatory interventions. As a consequence, infrastructure upgrades would decelerate, and therefore public welfare would decrease. At the same time, opponents of network neutrality argue that certain types of discrimination are economically beneficial in general and are also part of the natural evolution of a "two sided" market (which will achieve an appropriate equilibrium price in the medium run).

Despite the heated debate in the States, this topic has not yet achieved much prominence in Europe, although it was dealt with within the 2006 Framework Review.

Against this background, WIK organized a conference on network neutrality, which took place in Bonn on December 3rd and 4th, 2007. It aimed to make the U.S. debate comprehensible to Europeans on the one hand, and to assess its implications and relevance for European regulation on the other hand. 130 representatives of businesses, regulatory and competition authorities, consultancies and academics from the U.S., Asia, and all parts of Europe attended the conference, enabling an international and interdisciplinary view of these topics.

After a short introduction and welcome by Dr. Karl-Heinz Neumann (WIK), Prof. Eli Noam (Columbia University) gave the keynote speech. Prof. Noam described the ongoing debates between proponents and opponents of network neutrality as a clash of cultures "… between those who want to upgrade the national infrastructure and those who want to maintain freedom of speech." He emphasized that the strong degree of politicization in the current debate has distracted attention from the fact that both point of views are, at least to a certain extent, justified. Therefore, he focussed on a compromise proposal in his speech, a so called "third way", where he suggested that the access bottleneck should be placed under the end users’ control. This idea was intensively discussed in the following question and answer session.

J. Scott Marcus (WIK) and Prof. Ingo Vogelsang (Boston University) gave overviews on important facets of the network neutrality discussion. Marcus pointed out that the U.S. broadband market is more vulnerable to anticompetitive discrimination than that of Europe due the collapse of the U.S. broadband marketplace to a series of geographically non-overlapping duopolies between cable and telecommunication incumbents, increasing concentration in the market as a consequence of several mergers and acquisitions, and the progressive withdrawal of regulatory obligations. This is all very different from the current situation in Europe. Furthermore, he emphasized that violations against network neutrality are not limited to the fixed network – there is an emerging debate on wireless network neutrality in the U.S., which was launched by a recent paper by Tim Wu.

Prof. Vogelsang dealt with economic implications of network neutrality. He questioned whether network neutrality should be interpreted as welfare increasing in any case. Furthermore, he emphasized that improvements in network competition should have priority to new regulatory obligations.

The subsequent panel dealt with network neutrality in the fixed network. Dr. Dennis Weller (Verizon Wireless) was the first speaker. He provided the perspective of a U.S. telecommunications incumbent. According to Weller, Verizon had the largest Capex of all U.S. enterprises in 2006. The ability to offer differentiated services is vital to ensuring incentives to invest in infrastructure; conversely, investment incentives would decrease in a business environment subject to additional regulations to ensure network neutrality. Dr. Klaus Müller (DTAG) stressed the importance of competition between different technology platforms as the best way to achieve the goals that network neutrality proponents are fighting for. Finally, from a competitor’s perspective, Gerd Eickers (QSC) argued that the competitive structure of the German broadband market, ensured by access regulation, made network neutrality regulations unnecessary and counterproductive.

The second day of the conference started with a panel on "wireless network neutrality". Richard Feasey (Vodafone) noted that Vodafone already fulfils most of the specific obligations put forward by the proponents of wireless network neutrality regulation; additional regulatory interventions on mobile operators would be inappropriate. Prof. Rob Frieden (Penn State University) noted two issues that are key to the debate on network neutrality on mobile wireless markets: Contractual rights regarding subscribers’ use of their handsets, and discrimination with regard to end users’ access to content and applications. Finally, Reinhard Wählen (Motorola) provided a manufacturer’s perspective and called for flexible rules for standardisation and regulation.

The subsequent panel dealt with economic aspects of network neutrality. Prof. Walter Brenner (Universität St. Gallen) presented his recent research on the quality of service in the Internet. His findings suggest that the "best efforts" principle, as currently applied, is inefficient from an economic point of view. Instead, he recommended that different classes of quality of service be defined, which would result in a win-win situation for all market participants. Prof. Jonathan Cave (RAND Europe and University of Warwick) questioned whether this would actually be realizable due to the different perceptions and attitudes towards quality in the Internet. Furthermore, he stressed the larger potential for discrimination in "walled gardens" in comparison to open environments, which is largely a consequence of high switching costs.

Prof. Bernd Holznagel (Universität Münster) opened the third panel that day, which dealt with content and pluralism. Prof. Holznagel gave an overview on European Directives and national law applicable to discrimination in the ICT sector. He concluded that a number of remedies could potentially be applied to prevent the blocking of content, at least in case where the party doing the blocking possessed significant market power. Huey Tan (Skype) pleaded for a pluralistic Internet, in light of the importance of the Internet as a breeding ground for innovative business models. Georg Merdian (KDG), providing a cable operator’s perspective, stressed that network neutrality is primarily a problem of telecommunication operators rather than of the cable business, which is already subject to far-reaching obligations, such as "must carry" rules. Finally, Andrew McLaughlin (Google) noted that there have been ongoing and generally fruitful discussions between Google and different telecommunication operators, seeking to find a common point of view despite significantly different interests. He went on to provide numerous examples of the Internet’s ability to enable new and innovative services and businesses, which could be threatened if network neutrality were in jeopardy.

The fourth panel dealt with regulation and politics. Three government officials offered their respective views on network neutrality, which were colored by the market and regulatory climate in their respective countries. Yasu Taniwaki (Ministry of Internal Affairs and Communications, Japan) started with the Japanese perspective. He pointed at an enormous increase in broadband penetration (in particular with regard to fibre) and in IP traffic in Japan, with the traffic growth posing a substantial challenge for the regulator. As a consequence, Taniwaki recommended to consider the significant impact of P2P traffic on networks in the discussion on network neutrality. Dr. Iris Henseler-Unger (Vice President of the German Federal Network Agency, or Bundesnetzagentur) did not see any immediate necessity for additional regulation. She felt that strong competition on the network level, as is present in the German broadband market, is the most important means of preventing unjustified discrimination. Finally, Dr. Patrick deGraba (one of the authors of a recent study on network neutrality by the U.S. Federal Trade Commission) gave a short overview of the U.S. situation, and particularly of regulatory decisions affecting the current situation. Referring to these decisions with large impact on telecommunications regulation in the U.S., he also drew attention to the institutional differences between the U.S. and the European system.

The final panel comprised Ferenc Banhidi (National Communications Authority, Hungary), Dr. Richard Cawley (European Commission) and Prof. Pierre Larouche (Tilburg University). Dr. Neumann led the panel in discussing possible conclusions and the need for further research. Unlike most of the other European speakers, Cawley was not convinced that network neutrality issues were solely a matter of market power. As a consequence, he questioned whether the current remedies would be sufficient to deal with all violations of network neutrality. Banhidi emphasized that the revised market recommendation has not been expanded to include a number of markets where the threat of network neutrality violations is substantial, even though this had been an issue in the 2006 Review. Finally, Prof. Larouche felt that ensuring network neutrality was largely a matter of NRAs applying existing remedies rather than establishing new ones.

In his concluding remarks, Dr. Neumann emphasized the persistent need for further research despite the precious insights brought about through the lectures and discussions during the conference. He closed with the remark that the conference had shown that network neutrality is discussed from a rather problem-oriented point of view in Europe in particular in comparison to the politicized debates on this issue in the United States.

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J. Scott Marcus
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