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Telecommunications Policy and the Internet

by Geoff Huston

The past decade saw two major shifts in the telecommunications industry: the introduction of a entirely new class of technology and services in the shape of the Internet and the general trend of national telecommunications environments toward deregulation. There is no doubt those two issues are now tightly inter-related, as the Internet presents a number of fundamental challenges to the process of the evolution of public policy in the communications sector.

The historical view of the communications market and the associated regulatory structure saw a regulated public telephone operator-as well as radio, television, and print operators-all operating within varying degrees of regulatory control from country to country.

The regulatory control placed on the telephone operator in particular was designed to achieve a number of social objectives, relating principally to ubiquity of access, affordability of the service, and reliability and robustness of the service platform. Such objectives fit well within the context of the Internet, because they are worthy social objectives of any truly useful public communications system. Although the policy objectives may have remained constant, the landscape has changed. No longer is there a single monopoly service provider, often working as a public agency with direct accountability to government. The Internet is being constructed on a wave of policy deregulation, with a significant level of private investment. This article looks at that landscape in further detail and then looks at the likely directions of public policy with respect to the Internet and its evolution.

The Deregulated Communications Market

The existing regulatory structure of the communications market was seriously questioned in the 1970s. At that time, the model of the public utility monopoly operation of critical public infrastructure elements was complemented by a visible shift into monopoly trading models. As digital technology entered the telephony world, the operating cost-efficiencies achieved through adoption of this technology shift were not always passed directly to the consumer in the form of lower retail tariffs. Telephone operators were perceived to be using the advantages of this technology shift to move to a pricing model that charged the consumer on the value of the voice service rather than on the marginal cost of the provision of a switched voice circuit. The introduction of this technology also had the effect of reducing the entry price for sector-based communications service providers. The reduced barrier to entry-coupled with expectations of continued buoyant financial returns-generated strong pressure on the regulator to open the telecommunications market to private investment. The typical public policy response to this situation was to advocate competitive business practices as a means of reintroducing cost-based pricing models into the communications market. Of course, this was not a uniform call for competition across the world. In some countries, exploitation of the incumbent operator's monopoly position had allowed international-call accounting rates to be inflated so far above cost that they had become a highly valued source of foreign currency. In these countries, public telephone operators had become a critical component of the national economy.

The call for the introduction of competition into the telephone operations area was phrased as a call for deregulation of the communications market. The stream of argument within that call for competition was that the excessively regulated telephone service had created an environment in which the consumer price was being inflated through exploitation of the regulatory environment. Consequently, the telephone system was no longer an effective facilitator for domestic commerce, but was, at best, a source of indirect public taxation and, at worst, an overhead of massive inefficiency and waste. The call for deregulation indicated that the primary outcome of a competitive market was removal of inefficient and wasteful operational practices, and the longer-term outcome was the expectation of a cost-efficient market operation wherein the realization of efficiencies of operation was passed to the consumer through lower prices. As it relates to the telephone industry, deregulation implied a shift in the public investment profile of the national telephone network, advocating its replacement by a structure of private investment and private operators and operating competitively.

Many countries have responded positively to the call for deregulation, although the initial measures of deregulation have often been in the form of incremental steps, with some caution evident in such steps. The national monopoly telecommunications service provider has been one of the major public-sector elements of many national economies, and in those cases, a shift of that economic activity into the private sector does have quite profound longer-term economic implications. Accordingly, the regulatory changes to effect this move typically have been incremental in nature rather than overnight shifts to a fully deregulated environment, commencing often with deregulation of the value-added service market as a precursor to complete deregulation.

Into this public policy environment, focused predominantly on deregulation of the telephone industry, entered the digital communications market in general and the explosive growth of the Internet service market in particular. The expectations of deregulation centered on a small number of large investor's making significant investments into infrastructure and service operations. The outcomes have been quite different from the policy makers' expectations. Deregulation and the Internet have worked together to see a large number of smaller investors' exploiting the low entry price of the Internet service industry to enter the market with a minimal, if any, infrastructure investment. In addition, the Internet industry now offers the promise of competition in the core voice service market, exploiting the economies and operational profile of the Internet service model to provide a significantly cheaper voice product in the long-distance and international-call markets. Consequently, this model of deregulation of the communications industry, when it has been adopted as a national policy, has had very far-reaching implications, because it has spread far beyond a simple shift of the regulatory framework surrounding operation of the telephone network into the broader area of communications services-and the Internet in particular.

When deregulation of the provider market is in force, the barriers between various sectors in the market are being broken down. The nature of the industry is changing, with the natural boundaries between various sectors of the communications industry being blurred by the digital medium. Television operators now complement their traditional programming and content dissemination with Web content. They can use digital streaming audio and video content to re-create some of the attributes of the original television medium, allowing the reuse of some of their product. The print media have created electronic papers to reach an online readership, and online electronic games have created a new industry within the entertainment market. This quite fluid environment is one in which Internet service providers (ISPs) find themselves operating today. However, the environment will continue to evolve, and the aspects of that evolution probably will be more prevalent in the areas of regulation and policy than in technology, as far as the Internet is concerned. The Internet has accelerated the pace of deregulation of the industry to an extent never thought possible, and it is now offering the potential to rewrite the economics of the service provision not only of data-based services but also of the economics of voice services. The outcomes of this process are quite unclear at this stage, and although the designation of policy on the fly may be somewhat extreme, evidence certainly exists of learning through experience across both the industry and within public policy sectors.

The Internet Policy Environment

Who governs the Internet? Where does the authority lie to set and enforce policy? The answers are far more complex than the simple nature of these questions indicates. The Internet policy environment is far-ranging and highly dynamic in nature, presenting significant challenges to policy makers. Internet policy issues cover an extremely broad area of activity, ranging through operational service quality levels, name and address distribution structures, privacy issues, connectivity requirements, content regulation, taxation, and commerce, to name but a few. Obviously, not all of these areas are amenable to strict regulation, even if strict regulation were contemplated. The stakes, however, are very high in this area of policy making:

  • First, billions of dollars of telephony revenues will be diverted into the Internet market. Some $3.5 billion is expected to be diverted by 2001.
  • Second, in the same way as efficient transport infrastructures were key components of national wealth creation in the industrial age, an efficient communications system will be a critical component of national wealth creation in the global information market. The leverage in this latter category can be estimated to lie somewhere in the trillions of dollars.

Strong pressure exists within policy making to preserve the status quo of the communication industry, and equally strong pressure is being exerted by the various operational paradigms of the Internet to reduce the relevance of such historically based policy frameworks.

In consideration of this topic, it's useful to phrase a few policy objectives for the Internet and then examine how they can be achieved. A generally accepted set would include the following set of outcomes:

  • Develop the Internet as a part of mainstream public communications.
  • Build on a structure of private investment into the Internet service industry.
  • Ensure that the Internet continues to be cost-efficient to use.
  • Ensure that the Internet continues to be useful.
  • Ensure that the Internet is ubiquitous.

Internet-Effective Public Policies

Public policies must be effective within the context of the Internet itself. For this to happen, a necessary precondition is that any such policies (1) reflect an adequate understanding of the current nature and environment of the Internet and (2) voice a coherent objective in terms of a future vision of the Internet and its role in supporting broader social objectives. Sadly, such positions of understanding and coherent vision are not visibly abundant within the Internet today, and ample evidence remains of policy positions that are more concerned with attempting to revisit previous policy issues rather than with adopting a forward-looking stance within a policy framework. In an environment that is evolving as rapidly as the Internet, it is inappropriate to create policies for the past. The policy framework must adopt a forward-looking stance.

The Changing Internet

To understand the changing requirements for policy determination, we must observe the changing characterization of the Internet. To adopt a forward-looking stance effectively necessitates a more dynamically positioned policy framework that reflects the current and likely future positioning of the Internet as it continues to grow. The Internet environment is not one that remains static on a yearly or even a monthly basis. The changes within the Internet are not only within the dimension of more participants but also within the dimension of an evolving and expanding activity environment. The policy challenges are effectively based on the likely outcomes of further rapid growth in that environment and the areas of opportunity that are presented within such a process. However, to understand such changing policy requirements, we must observe the changing characterization of the Internet up to the present and draw out a likely future scenario based on a projection on those pressures and forces.

In the late 1980s, the Internet had reached beyond a research experiment and was a utility network, serving a community of interest. Its predominant characteristic at the time was that of an academic and research community activity. Within the language of the regulatory framework of the day, the Internet was a common-interest service network, with a well-defined membership and activity scope. The characteristics of the governance of the network through the 1980s was that the Internet was available through a collection of service providers, consumers, developers, and researchers-all operating within a largely homogenous environment. The outcome of this collective process appeared to bear all of the appropriate hallmarks of a collaborative community characterization, including aspects of common policies, derived through a process of consensus seeking. The common-policy agenda was strongly concerned with technological refinement, also derived collaboratively. The common nature of the various participatory partners and their shared objective effectively ensured that a consensus that sought a collaborative policy determination process would indeed terminate quickly, with readily acceptable outcomes.

A major area of common motivation within this community was an interest in the underlying technology of the Internet. Areas of strong commonality were to be found within this area of collaborative technological development, which strengthened both the cooperative nature of the Internet community and the cohesion of the network itself. This enabled the Internet to develop as a single environment of uniform connectivity rather as fragmented islands of connectivity. Interestingly enough, one of the outcomes of the environment was technical in nature, wherein a significant number of distributed Internet control functions require some level of mutual trust in order to operate effectively.

The outcomes of the collaborative community can be characterized within the following parameters:

  • No formal regulation of the Internet as an externally imposed constraint
  • An associated position of self-moderation of the Internet by the Internet community itself
  • A high level of policy adaptability within the constraints of collaborative community expectation

Such a self-moderated, highly adaptable policy environment precisely matched the requirement of the process of technology evolution, in which the Internet assumed the roles of both a research project and a production service platform simultaneously. The collaborative nature of the community and its relatively small size facilitated rapid evolution of the environment in both technology and policy terms. In general, such highly adaptable environments are a typical feature of small, cohesive communities undertaking developmental efforts. They typically possess the inherent capability to adjust the parameters of self-moderation to suit the requirements of the day and possess suitably flexible control structures to allow policy adaptability on a similar scale.

Although such a collaborative process can operate in an extraordinarily effective manner within a small, homogenous community and indeed, although such a process is probably an optimal choice for such communities, such a process does not maintain robustness under growth. The effectiveness of this process is a catalyst for the growth of the community. This growth is readily apparent within the Internet, due in no small part to the particular openness and effectiveness of the underlying technology. The collaborative unregulated environment has made increased levels of participation easier rather than acting as an inhibitor for many. This growth in community population has, in turn, necessitated some significant changes in the community's collaborative consensus-seeking process.

The growth manifests itself in very visible ways, such as the increasing population of the Internet domain in both computer and human population counts and the amount and diversity of information and communication domains that together form the total Internet service domain. However, another metric is also an element in terms of a policy-based perspective: the increasing level of investment in Internet-based services and programs. That investment level is also increasing, when measured both in monetary terms and in terms of programs and services that are now critically reliant on functionally capable access to a coherent worldwide Internet environment. The investment becomes a major issue in assessments of whether the Internet can be seen as a migratory phase on the path to some as-yet undefined future global information and communications infrastructure or whether the Internet itself is the platform upon which the existing investment levels act as a strong attractor for further investment.

The outcomes of this intense growth factor are visible within the original collaborative academic and research sector, in which the flexibility of the refinement of the underlying technology base becomes limited by the increasing size and investment levels made by this sector. The Internet technical community often has proudly claimed that the SNMP network management protocol was developed and deployed within a period of nine months on the Internet. This same feat probably could not be performed today. Although defining new technologies as backward-compatible extensions to the existing technology base is possible, the issues of transition to incompatible technologies hinge centrally on the incremental costs, which would be borne by each user entity, and on the issue that such costs would not be readily met if the existing technology matched the service expectations of such clients.

As with technology innovation, so with policy evolution. Policy flexibility suffers similar constraints under such growth when major policy shifts within one section of the community imply a forced change in policy across the remainder of the network. The costs of such forced changes may be prohibitive. As an example of forced policy matching, one can see that if a critical mass within the ISP industry sector moved to, say, financial settlement models, then the remainder of the sector would be effectively forced to adopt similar measures in order to ensure parity of approximate peering across the network. The result of the process is that common interest within the relatively homogenous worldwide academic and research community has allowed common-policy formation to occur. Each component player now becomes reliant on the outcomes of such common policies as the means of ensuring the continuity and functionality of the total common-communications environment. The overall environment shifts from active to passive, as each player-rather than being reliant on direct and frequent involvement in a collaborative processes as the means of self-regulation-shifts to simply adopting the outcome of such processes and without any direct involvement in their operation.

When policy becomes a more static factor rather than a commonly agreed modus operandi, each ISP player within the environment must devote some time and attention to generating stable, commonly agreed policies to ensure the functional operational interaction of each component network. Without such stability of policy, the collaborative nature of the community quickly breaks down, to be replaced by an aggressive short-term, self-interest optimization pattern.

This transition of the environment appears to have largely taken place. In addition to a process of visible change within the nature of the initial collaborative community, as a reflection of the growth of the Internet within this domain, the other major feature of recent times has been the outgrowth of the Internet. That outgrowth is one in which the Internet is encompassing additional service domains in the government, corporate, public service, educational, and industrial areas. This area of growth becomes self-sustaining when a certain level of initial uptake is obtained. A strong client base allows a service operation to operate within acceptable parameters of scale and efficiency, and the presence of providers and relevant services acts as a strong attractor for more clients, as long as there are perceived areas of leverage and benefit in so doing.

The observation made within this context, however, is that the motivation of both the client base and the service providers within those areas is not a direct result of the original collaborative community's objectives and agenda. These new user domains typically regard the Internet in the same way as any other customer service product and they tend to interpret the environment of the Internet as being one with levels of stability of service. The inferred expectation of stability of the underlying technologies is-at some level of difference with the inherently more dynamic models-assumed by the academic and research collaborative community.

The Current Policy Environment

The current policy environment is best described as one of unresolved tension between four policy sectors over the very nature of the Internet and its regulatory model The four sectors are:

  • The collaborative community
  • The deregulated competitive market
  • The established communications industry
  • The regulator in the guise of public resource management

The Collaborative Community

The collaborative community still has a strong base of influence of policy within the Internet, although its level of influence over the technology of the service and the resulting Internet service environment is waning. Its major contribution remains in the aspect of a statement of ethos of collaboration and active involvement, eschewing a role as a passive consumer in an Internet-mediated, one-way content delivery network.

Public Funding versus Commercialization

The characterization of the collaborative community has been explored in the previous section looking at the evolution of the Internet environment and can be summarized as one based largely on the area of the technological base of the Internet, with a strong focus on the aspects of academic and research activities into both the Internet as a dynamic technology platform and in the use of the Internet for other academic and research pursuits.

Motivation for Common Solutions through Cooperation

The community characterization of the policy environment of the Internet within this sector is the careful construction of consensus within the community and the strong level of motivation for common-solution seeking by the academic-and research-sector members. The reasons for such common-consensus approaches are based on the understanding of the role of the Internet as a common technology base. Consensus, if achieved, allows all players, both now and in the future, equal access to the technology elements, and it effectively constructs an open technology environment that can be exploited on equal terms by all players, if they so choose.

The Deregulated Market Commodity

The deregulated competitive market is now the dominating factor in the Internet. It is strongly dominant in terms of metrics of usage, such as traffic volumes, and in terms of metrics of influence, such as investment levels. The ISP industry and the clients of their service offerings view the Internet as an open-and unregulated-marketplace in which goods and services are freely traded based on perceptions of need and demand. Here the communications environment is seen as an opportunity for exploitation by market forces in the same way as other media, such as the radio spectrum, are employed by the market.

The Deregulated Communications Environment

The Internet operates as a service layered above basic transmission elements, and within many countries it operates under the terms and conditions of a value-added reseller rather than being an intrinsic activity of a duly authorized common communications carrier. Within many countries, that area of value-added resellers is an area that is in the process of complete deregulation. The motivation for deregulation is to encourage private investment within the national communications industry and to effectively induce levels of competitive activity, which allow an open competitive market to operate. The overall intent is to stimulate levels of investment in national infrastructure and to provide consumers with a range of services that are geared to efficient and effective service operation.

Within such a perspective, the Internet operates as any other value-added service, in which service definition, pricing, policy of operation, and all other aspects of the service are defined through the operation of market forces within a competitive market. Within such a marketplace, artificial denial of service through appropriate-use policies plays no discernible role, and differential tariffing of services fulfills no role other than market penetration and competitive market acquisition.

Implicit Decision Making through Market Forces

The interesting observation to make is whether such a market-oriented view of the Internet allows integration of basic technology change into the sector's characterization of the Internet, as is the case within the collaborative community. Although deployment of new services based on technology evolution could be seen as a competitive advantage within a market, if such changes also effectively isolate existing market sectors, then it is not clear whether they would be openly embraced by the marketplace. The major observation of the open market is that policies are derived through the interplay of market pressures and client expectation, and service and infrastructure roles are derived not through common collaborative agreement but through attempts to generate both price and, more critically, service differentiation within the marketplace.

The Established Communications Industry

The established communications industry had envisioned a data environment more on terms similar to telephony, in which the characteristics of the data service were an intrinsic attribute of the network rather than the host. This model admitted many more elements of control into the network provider domain, viewing host computer platforms as simple data-processing stations. That vision was espoused within the X.25 protocols, frame relay, and asynchronous-transfer-mode virtual circuit services, which are feature-rich network services.

The requirements of the Internet are far more basic in nature. The requirement to support the Internet is for simple bit carriage services-without any service overlay. For the established communications industry, this is not a market that admits a high degree of added-value elements. For some time, the established communications industry resisted this Internet approach to supporting networking services, offering an open-system-interconnection-based network service architecture as an alternative approach to the industry. This has largely receded in importance, and the current approach from this sector is to quickly come to terms with the market, recovering from a somewhat slow response to the arrival of the Internet as a significant market force.

Motivations for the Communications Industry

The communications industry has been accused of operating in a fashion not unlike a cartel. Although investment levels were significant and the rates of financial return very low, it was necessary to take a long-term-investment position within the market and then protect that investment from short-term risks. The position of national providers as operators, with limited competitive interests and much in common, implied that significant benefits were possible in working within a common framework to protect their long-term investments and develop their respective markets. All of that is changing under the pressure of an altered technology base, in which the barriers to entry are coming down and in which alternative services threaten the revenue streams from the voice market. Widespread deregulation of the environment now implies that no national boundary exists to competition, and so this common approach to policy determination is now rapidly dwindling in this sector.

In a policy sense, the initial motivation on the part of those within this sector is to ensure that this activity does not erode their current market position or net worth; the secondary motivation is now to develop this market in a way that enhances the value of their total enterprise.

Those in this sector have not been occupying the forefront of the policy debate. Their current approach appears to be a preference to use their considerable financial capabilities to purchase strategic positions within the Internet market sector at this stage while coming to grips with the considerable changes occurring across all facets of their businesses. However, this is a major sector of any national economy. The established communications service providers represent one of the major employment groups in the service sector and one of the major areas of strong revenue performance. Massive change in the environment may be a source of threat to this sector, and the sector will use its resources to resist such change. Accordingly, although the collaborative community and the deregulated market may see continued change and evolution as positive attributes of the environment, the established communications sector may be more interested in establishing a somewhat slower pace of change in this area.

The Public Resource

A fourth area of policy tension is that of public regulation pressure. Within this area, there may be many roles for regulation to ensure that the stated social objectives are being achieved within the competitive marketplace.

Motives for Public Regulation

The first pressure is that of ensuring fair trading. Fair trading within a competitive marketplace is a balance between a market trend to aggregation of supply channels and the need to ensure that genuine open competition exists that allows market forces to exert pressure on providers so that the latter operate in an efficient fashion. Oversight by such regulators can take many forms. The specific objectives include ensuring that incumbent market dominance by any one player is not abused, that consumers are tariffed at a fair price for the service, that new entrants are not artificially excluded from participation in the market, and that the provider environment is fair and open to all players.

The second point of regulation is concerned with longer-term, social objectives. Such objectives recognize that the Internet is a nationally important resource and one that would appear to be significant to the public interest over the forthcoming years. Accordingly, public resource management measures would be imposed to ensure the efficient and effective exploitation of the resource in the common national interest. Here the precise nature of the deployed technology is irrelevant to the public resource perspective, as distinct from the central and, indeed, vital role played by technology evolution within the collaborative community. Within the public resource domain and from the perspective of public regulatory measures, the issue involves the current and likely future areas of uptake of the service and whether there is a significant proportion of the national population-or a nationally significant set of sectors-that could benefit from the service. If unacceptable risks are perceived through lack of regulation and lack of public management measures, then it is natural to expect that national public communications regulatory bodies will voice the need to apply public management policies onto the Internet.

The third such area of motivation for national public resource management regimes is concerned with taking appropriate measures to avoid outcomes that are regarded as negative from a national perspective. Such negative outcomes include (1) the assumption of an unregulated monopoly position over a strategically critical or widely used resource or the deliberate disenfranchisement of areas of the population through the deliberate actions of service providers that operate outside any national policy framework and, at times, (2) issues related to the control of a nationally strategic resource by nonnational interests. We are accustomed to active public resource management in many areas: water, electricity, air quality, and-closer to the communications industry-print media, use of the radio spectrum, and telephone service. The issue here is whether the Internet has achieved sufficient penetration of the national population to be considered as being subject to universal service obligations in any nation to date and whether the Internet has as yet achieved sufficient national strategic importance to effectively ensure the need for a public resource management role in order to achieve the objectives as stated. Within the policy area of universal service obligation lie the issues of universal equity of access to the service, uniform service coherency, quality of the service as supplied to all subscribers, and structure of the service environment. These considerations are intended to ensure that the infrastructure and services can be positioned as national assets and are uppermost within the public-resource characterization of the Internet. The role of the regulator in this guise can be summarized as that of a national public resource-manager, with the objective of ensuring the maximal positive outcome of a public commodity or service for the benefit of the nation and the benefit of the national population.

In this case, these public management questions can be posed, which are not whether more visible and stricter public management regulatory measures will ever be applied to the Internet, but when.

Internet Policy Issues

The characterization of the Internet today is therefore seen as being within an unresolved area of tension between these four major policy domains. Let's look at just one area of policy to illustrate the nature of these tensions.

Connectivity Management

Connectivity management is an area of policy consideration. Within the telephony world, we are accustomed to an environment in which the user functionality is that any telephone number is accessible from any other. The current Internet model is a more constrained model of connectivity in which connectivity is bartered within a process of ISPs' various connection policies and their competitive market position. Universal end-to-end connectivity is not an ensured outcome on the Internet.

This poses a number of questions regarding policy formulation in this domain: Is it reasonable to phrase an objective of the public process that comprehensive connectivity is a strict requirement of every ISP operating with the domain of the public policy? If so, how can such a condition be audited and enforced? Will a deregulated marketplace necessarily result in the common attribute of comprehensive connectivity? Can a collaborative approach create such an outcome in the ISP marketplace?

Here the differences between a regulated approach to the service environment and a deregulated approach are at their most visible. Within a regulated approach, the regulator has the ability to impose a number of conditions on the operators, including the requirement to implement interconnection and even going so far as setting an interconnection tariff that is a mandatory requirement for the licensing of a service operator. Such constraints by the regulator are not unknown in other service industries-for example, in banking, in which there commonly are such regulatory conditions imposed on the granting of authority to operate a banking service. Indeed, such constraints are quite consistent with the general objectives of public policy within service sectors, in which the objectives of a rational, efficient, reliable, and ubiquitous total-service environment can best be served by extensive functional interconnections between service operators.

However, the fit of such a broad policy objective to its implementation within a deregulated competitive market is not a comfortable one. Individual operators may perceive connectivity as a competitive advantage and may view their interconnection structures as business assets they would be reluctant to expose to their competitors unless commercial agreements are in place. If these commercial agreements cannot be reached, then-in a fully deregulated market-there is no underlying forcing function for connectivity arrangements to be enacted. This exposes one of the major risks in a completely deregulated market in terms of outcomes: that market size becomes a determinant in the competitive positioning of an enterprise, and the outcome of such a characteristic is typically the aggregation of the marketplace into a small number of large enterprises.

It remains a significant public policy challenge to create an environment that enforces a functional level of interconnection while not discouraging significant private investment in the sector. Indeed, it may well be the major policy issue of the next few years, because the ISP market is already coalescing into a smaller number of enterprises that do perceive connectivity agreements as business assets, so that stronger barriers to entry into the market already are becoming evident.

The Internet within the Marketplace

The assumptions being made within these areas are that the Internet will not be operated as a single entity either nationally or globally and either now or in the foreseeable future and that issues of ISP interaction and competition will continue to increase in importance within the activity of policy determination as the number and diversity of service providers continue to increase worldwide.

The underlying direction noted here is that the Internet, as a marketplace for carriage provision, has a likely future as a price-driven commodity market in packet switching and packet transmission. The fundamental shift that has occurred with the Internet as a communications environment is that service definition now occurs as a function of the end computer systems, and the communications system neither imposes any service constraints nor adds any further service value above this end-to-end service definition.

This position is one that can anticipate some resistance-from a market perspective. Basic transmission data units, or packets, are not necessarily purchased by the user in different inherent service qualities. This would tend to direct the competitive Internet market to be a price-driven market, in which each player attempts to operate profitably within parameters of the marginal cost of production of the carriage service. That marketplace is one that results in low rates of return on financial investment, and within such a marketplace, each provider attempts to introduce competitive bias and higher-value services by introducing additional differentiators. The consequent market push is evident in the attempt to differentiate on service profiles, which brings into question the transparent end-to-end service and the uniform-technology model of the Internet. Perhaps one of the best examples of this is the deployment of transparent Web caches, in which all packets directed to a remote system's port 80 are intercepted by the network and redirected to a local cache. Although such a system could offer superior performance to many users, it also disturbs any form of end-to-end security mechanisms that rely on a clear channel between the requester and the server.

Policy Directions

A number of pressures indicate that the original aspects of the collaborative community will not continue to exert the same level of policy determination as those aspects have achieved historically. The community of usage is becoming more heterogeneous, and the technical-development community also is exhibiting increasing diversity under growth. There are also the issues of (1) areas of finite capacity within the address and routing components of the Internet and (2) areas of competitive pressure for access to such resources, in which scales of demand growth differ from various user and provider sectors.

All such considerations indicate that the process of collaborative determination of consensus policies as a management technique of the Internet is being faced with increasing fragmentary pressure as the Internet continues to grow.

Agile or Inflexible?

The collaborative community does possess sufficient agility and flexibility to identify such pressures and respond productively, in terms of responses at the technical level to pressures on the underlying technology base and to pressures at the policy level both to current management practices and style. Indeed, very few management mechanisms exhibit such inherent flexibility and attuned responsiveness to the evolution of common requirements. This attribute of the collaborative community remains its central asset in validly asserting a continuing role within the Internet.

The major positive element of deregulated market self-regulation is that ability of the market to react to new information markets and new information services very quickly, and an open market can act as a powerful catalyst for national development at a very rapid pace.

Institutionalized operations tend to exhibit greater levels of inflexibility in terms of policy responses to rapidly evolving situations and tend to operate to preserve the status quo rather than to constantly impose pressure to adapt and change the mode of operation of serving the marketplace. The risk of such institutions is that their output decreases relevant to the realities of the evolving market, and without some forcing pressure that implements flexibility within the institutions, they quickly become irrelevant. This is already evident within the institutional structures that serve the common-policy instruments of the telephone world, in which their ability to encompass the policy issues of the Internet environment in a timely fashion has been visibly lacking to date.

Regulation of Service Providers

A number of areas exist in which public management practices may be applied to the Internet. Within a number of national domains are emerging conditions for the role of communications value-added reseller, which would apply specifically to ISPs. Under the constraint of a licensing system of operation, which presumably would entail a license fee as a start-up cost and allow administrative policy to determine the size and number of Internet service providers operating within the country, the opportunity exists to enumerate a number of desired conditions within the Internet operation. Such conditions may include policies concerning the carriage of offensive material, scope of market access, the service definition, potential service limitation, and even setting policies covering the domain of interprovider interactions.

The fact that regulation of the national ISP industry is an option for public policy does not necessarily make it a viable or productive course of action, and the real substance of the underlying motivations for enacting such regulation consists in a clear understanding of the social objectives that are intended through such regulation. Highly regulated markets usually inhibit private investment, which now must factor in local regulatory constraints as well as other market and business environmental issues in whether to enter a market.

Regulation can be designed to have particular business outcomes, such as the active encouragement of small businesses within the service market or the encouragement of the creation of national service operators over offshore operations that are entering the domestic market. Such an outcome could be generated by the adoption of public policies covering interconnection of service providers, by differential taxation structures related to financial investment in this sector, or by adoption of competitive regulations that encourage diversity of service operators. The questions posed by such measures are whether it is more critical in terms of the development of Internet infrastructure and market stimulation to have many service providers offering many channels into the retail marketspace and whether the costs of sustaining such a diverse service environment create a cost-inefficient market that suffers in terms of international competitiveness because of the higher service costs of hosting Internet business operations.

Regulations can be phrased with a different social objective in mind. Regulation of the service provider industry can be undertaken with the objective of providing basic consumer protection measures rather than attempting to shape the industry itself. It could encompass efficient and inexpensive channels through which consumers can raise disputes with their service provider and it could use industry funding to create a dispute resolution venue in which third-party adjudication has binding outcomes on the service provider.

Is There a Demand for Public Resource Management?

Such public management structures are invariably initiated within an environment of worthy motives, and, indeed, roles potentially need to be undertaken here that an unregulated market would find difficult to fulfill within appropriate parameters of fairness, equity, impartiality, and adequate quality of the service sector. Within such areas of policy determination, the collaborative community can voice the need for such policies, but in terms of funding requirements for such common administrative elements, it invariably falls to public management to create the framework that supports such roles.

However, such public management roles do severely test the quality of public administration, particularly when the entity being administered is relatively novel and requires a degree of care and sensitivity in terms of management programs and their desired effect. Public administration generally operates without such fine levels of graduation in the application of policy, and the quality of the administrative role-especially when there are requirements for highly user-attuned service and detailed technical knowledge-must be stated as a challenging milestone for any area of public administration.

All that can be realistically anticipated from the area of public administration is a static administrative model of the ISP sector, with a management approach that is either a model that assumes that administrative responsibility equates to overall control or a model that equates to self-regulation by deregulated market interests, with a government position of reserve powers rather than active involvement.

Accordingly, it is unlikely that the public management role will be one that is initiated by reason of popular demand, and the only realistic scenario that would see an active role for public administration is one in which communications industry regulators successfully advocate the need for an active stance or in which the incumbent monopoly telecommunications service provider invokes public resource management as a response to business leakage to the unregulated value-added reseller business. In both cases, the role of public management would be as a defensive move rather than as a move to further enable and encourage expansion of access to the common service, and it is unlikely that public resource management roles would be commonly adopted within many nations as a consequence.

Likely Directions

As each of these policy domains interact across the Internet, the question posed by this examination of policy structure remains: What is the likely near-term-policy future of the Internet? Obviously, the best I can offer here are personal views rather than fact, and the reader should be aware that predicting the future is always easy; the hard part is getting it right!

There is increasing skew between market-driven expansion and historical community objectives. The collaborative community's influence over the policy framework of the Internet will continue to wane. Already the skew between the ethos of an Internet as a community resource heavily populated with voluntary effort and the Internet as a medium for mass-marketed commerce and entertainment is readily visible. However, it is both inevitable and correct that the policy initiative of the service network shifts to those who make the investment in operating the service network.

Technical stability requires collaboration. Underlying the competitive service environment is a single communications architecture that is the technology of the Internet. Allowing the clients of a provider to conduct transactions with the clients of any other provider-hiding the underlying intricacies of network engineering such as routing policy, transit agreements, and the like-requires the adoption of common functional technology standards and the operation of stable interconnection structures. Such an environment does not readily admit the imposition of external authority models and, instead, relies strongly on peer interaction within a collaborative environment to determine what is acceptable to all as a functioning solution.

Public policy will focus on industry self-regulatory models. The issues already outlined that have to do with the likely responsiveness of public resource management within this area and the pace at which opportunities get identified and subsequently exploited are such that an active and interventionist public-regulation regime probably will not be a significant element within the Internet policy environment. Minimal levels of regulation-probably regarding trading practices, consumer protection, and investment regulation-are the major anticipated tangible public outcomes for some time yet, and the dominant policy characterization for the near-term future will be the interplay between the established collaborative community and its focus on technical standards and a self-regulatory position for the emerging open market for Internet-based services.

Barriers to entry increase. Although the number of ISPs servicing market demand rose sharply in the mid 1990s, it is a natural tendency of the incumbent service providers to set the policy structure so that the entry standards are comparable to the position of the already established operators. The overall summary of the situation is that for new Internet providers, the learning curve that new providers must master in order to establish the service and the initial investment required to meet self-determined industry service standards continue along an increasingly steep incline. This can be translated into the observation that the barriers for the Internet are getting higher rather than lower.

Outcomes: In a policy sense, this effectively indicates that, when feasible, a public-policy position that encourages private and public investment in the national communications service sector for serving the Internet service market would appear to be a highly appropriate public-policy stance, and an associated policy direction that brings a number of providers into the basic transmission services of cable and data-switching areas would allow this service-based market to be constructed above a relatively efficient transportation and carriage market.

However, the picture is by no means uniform, and many countries are entering the Internet service domain within the framework of a fragmentary picture of commercial service requirements, voiced most visibly by multinational corporate entities. Within that environment, the public regulatory position is generally structured more tightly around the national telephone service operator as a monopoly provider. Due consideration of the desire to continue to operate such a strategic service within a national entity rather than as an offshore operation of a foreign corporate entity, in addition to economic considerations of this approach, effectively precludes an openly positioned domestic communications environment. Within this more restrictive public regulatory environment, the formative ISP is faced with both a highly constrained area of local operation and a more complex Internet environment into which the domestic service has to interconnect. The consequent observation is that for these national environments, which tend to coincide with developing national economies, the task of establishing a healthy ISP industry is more daunting from a regulatory perspective.


A gulf certainly exists between the typical method of constructing a public policy framework for the communications industry and the exigencies of the Internet.

  • The Internet ethos of collaboration as the mechanism for policy formulation has failed to meet the demands of an environment of widespread deployment across many market sectors. Collaboration simply does not scale.
  • Industry self-regulation is perhaps more an expression of faith in the outcomes of the competitive market as being an efficient distributor of a public resource of service than it is a well-understood mechanism to achieve the desired objectives in all situations. Industry self-regulation is a faith, not a science.
  • The established communications industry players perceive a substantial threat to their existing mode of business within the guise of the Internet.
  • The traditional methods of policy formulation in the public sector are attuned to gradual and well-researched changes to a relatively static policy framework, and a very strong tendency exists to preserve the status quo within the process. Public policy often comes as too little, too late.

Solutions will always emerge to meet demands-in the same way as nature abhors a vacuum. In a rapidly evolving and somewhat chaotic market, opportunities will be available for the nimble, although the larger and more ponderous operators will follow behind with the weight of organization and institutionalization to convert ideas and concepts into robust ubiquitous services. This is perhaps the best that can be expected from the Internet.

This article is based on material originally published in ISP Survival Guide, by Geoff Huston (Wiley & Sons, 1998).

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