You might think new debates about application providers paying fees to internet service providers mostly affects the funding mechanisms for internet access networks or the costs of doing business for hyperscale content providers.
In fact, it also affects edge computing, in particular content delivery network economics. In South Korea, such rules--requiring payments to terminating networks by content sources--actually affects the economics of creating and using content delivery networks.
Arbitrage is the problem (or strategy, for some providers). Arbitrage is the business strategy of exploiting price differences between at least two different markets. In the case of termination rates, arbitrage can occur when networks are of vastly-different sizes, in terms of traffic exchanged.
In South Korea, internet and content providers are subject to a “Sending Party Network Pays” regime that requires ISPs and some content providers to pay to send traffic to another ISP.
In essence, that is a codification of interconnection rules that used to apply only to carriers (connectivity service providers) and which exists between internet domains as well, though those arrangements normally are the result of commercial deals, not government regulations.
If a large ISP hosts a content delivery network, then the large ISP would pay to send traffic to a smaller ISP. That same dynamic has been seen in voice markets, when similar “calling party pays” rules have applied to large and small voice providers in about the same way: larger providers send more traffic to small providers than the small providers send to the larger networks. Arbitrage is the result.
If that CDN is then moved outside of the country, then all ISPs have to pay for the transit to get the data from the CDN. This motivates smaller ISPs to get a CDN on their own network because they could save on International IP transit fees.
The point is that interconnection rules can shape the economics of CDNs serving South Korea, and simply the business models of access and content providers.
In 2017, two ISPs, SK Broadband and LG Uplus, asked for payment from KT for the Facebook traffic KT was sending them using the Facebook CDN KT was hosting. In other words, KT had to pay for sending excessive traffic to the other networks.
KT tried to pass the charges onto Facebook, who refused to pay. After the breakdown of negotiations between KT and Facebook, Facebook disabled the CDN, which meant that Korean telcos had to access other CDNs, such as the one in Hong Kong.
As a result, connections to Facebook took 4.5 times longer on SK’s network and 2.4 times longer on LG Plus’s network.
KT complained to the regulator, KCC, which issued Facebook a fine of 396 million won (US$ 321,000), arguing that the removal of the cache had significantly harmed users. On 11 September 2020, the Seoul High Court sided with Facebook and dismissed the KCC case.
But the issue continues to loom large.
The debate over how to fund access networks, as framed by some policymakers and connectivity providers, relies on how access customers use those networks. The argument is that a disproportionate share of traffic, and therefore demand for capacity investments, is driven by a handful of big content and app providers.
It is a novel argument, in the area of communications regulation. Business partners (other networks) have been revenue contributors when other networks terminate their voice traffic, for example.
But some point to South Korea as an example of cost-sharing mechanisms applied to hyperscale app providers.
South Korean internet service providers levy fees on content providers representing more than one percent of access network traffic or have one million or more users. Fees amount to roughly $20/terabyte ($0.02/GB).
The principle is analogous to the bilateral agreements access providers have with all others: when a traffic source uses a traffic sink (sender and receiver), network resources are used, so compensation is due.
Such agreements, in the past, have been limited to access provider networks. What is novel in South Korea is the notion that some application sources are equivalent to other historic traffic sources: they generate remote traffic terminated on a local network.
So far, such claims are not officially bilateral, which is how prior arrangements have worked. The South Korean model is sender pays, similar to a “calling party pays” model.
Those of you with long memories will recall how the vested interests play out in any such bilateral agreements when there is an imbalance of traffic. Any payment mechanisms based on sender pays (calling party pays) benefit small net sinks and penalize large net sources.
In other words, if a network terminates lots of traffic, it gains revenue. Large traffic generators (sources) incur substantial operating costs.
Of course, as with all such matters, it is complicated. There are domestic content implications and industrial policy interests. In some quarters, such rules might be part of other strategies to protect and promote domestic suppliers against foreign suppliers.
At the level of network engineering, the imbalances and costs are a direct result of choices about network architectures, namely the shift of content delivery from broadcast or multicast to unicast or “on demand” delivery.
This is a matter of physics. Some networks are optimized for multicast (broadcast). Others are optimized for on-demand and unicast. Satellite networks, TV and radio broadcast networks are optimized for multicast: one copy to millions of recipients.
Unicast networks (the internet, voice networks) are optimized to support one-to-one sessions.
So what happens when we shift broadcast traffic (multicast) to unicast and on-demand delivery is that we change the economics. In place of bandwidth-efficient delivery (multicast or broadcast), we substitute bandwidth “inefficient” delivery.
In place of “one message, millions of receivers” we shift to “millions of messages, millions of recipients.” Instead of launching one copy of a TV show--send to millions of recipients-- we launch millions of copies to individual recipients.
Bandwidth demand grows to match. If a multicast event requires X bandwidth, then one million copies of that same event requires 1,000,000X. Yes, six orders of magnitude more bandwidth is needed.
There are lots of other implications.
Universal service funding in the United States is based on a tax on voice usage and voice lines. You might argue that made lots of sense in prior eras where voice was the service to be subsidized.
It makes less sense in the internet era, when broadband internet access is the service governments wish to subsidize. Also, it seems illogical to tax a declining service (voice) to support the “now-essential” service (internet access).
The point is that what some call “cost recovery” and others might call a “tax” is part of a horribly complicated shift in how networks are designed and used.
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