To Regulate or Not to Regulate

There is an ongoing debate between those who allege inequitable and anti-competitive behavior by the Tier-1 carriers - sometimes referred to as Internet Backbone Providers (IBPs) - at the expense of smaller providers, and those who argue that the market is working and that any government intervention is unnecessary and would risk stifling Internet development. Although this debate is far from being settled⁶, there is a growing perception in many quarters, and particularly in the developing countries, that some kind of international regulation is needed.

It has been said that in the complete absence of rules protecting competition, industries that display strong network effects, like IBP market, have a tendency to drift toward monopolization, most probably through the aggressive takeover of rivals. That is why some researchers have suggested that competitive forces could use a hand from governments: “In general, the market outcome cannot be relied upon to generate the greatest benefits for end users. Governments can intervene usefully to improve on the market outcome. This is precisely what the US government did for the early commercial Internet, despite a persistent myth that the Internet developed because of non-intervention by government.”⁷ For example, in a related area, the European Union recently introduced some regulation “to stimulate the emergence of a competitive leased lines market”⁸.

Finally some observers are concerned that this issue could affect the stable functioning of the Internet in the long run. As a recent study suggests:

…without the adoption of a settlement regime that supports some form of cost distribution among Internet providers, there are serious structural problems in supporting a highly diverse and well populated provider industry sector. These problems are exacerbated by the additional observation that the Internet transmission and retail markets both admit significant economies of scale of operation. The combination of these two factors leads to the economic conclusion that the Internet market is not a long term sustainable open competitive market that is capable of supporting a wide diversity of players both large and small.⁹

Conversely, some analysts have said that regulation is not needed because the reduction of the revenues that developing countries receive from international telephony settlements can be compensated by the lower costs of the Internet based telecommunication services. But this savings can occur only in countries where the infrastructure is already in place, and this is not the case for most of the developing countries. And even if lower costs are made available to ISPs in developing countries, the fact remain that the flow of revenue is reversing. As more telephone and fax traffic shifts to the Internet, what will replace the yearly US$7-10 billion developing countries receive from telecommunications settlements?

This has created the paradox that in many developing countries, the use of newer and lower cost technologies, like Voice over Internet Protocol (VoIP), are seen as more as threats than as beneficial. This is because they deprive national carriers of the revenue needed to modernize infrastructure and to deploy widely new technologies such as Internet. This applies regardless of whether a country has a liberalized competitive regime or a traditional monopoly one.