VON Europe

Comments on BERECs Draft Report on Differentiation Practices and Related Competition Issues in the Scope of Net Neutrality
July 2012 Introduction
The Voice on the Net Coalition Europe (VON) welcomes the opportunity to comment on the BERECs public consultation on its draft Report on differentiation practices and related competition issues in the scope of net neutrality (hereafter the Report). As this consultation document does not comprise specific questions, we will organise our comments by highlighting specific remarks that apply to the entirety of the Report. VON would however like to highlight some statements in this Report that we consider crucial in the net neutrality debate: In terms of the analysis of the impact of differentiation practices, VON fully agrees with the Reports analysis in paragraph 119, p. 28 that one of Internets strengths lies in network effects: each user benefits from the growing number of users, as it creates new possible connections. Differentiation practices that tend to exclude some users from the network, by limiting the proportion of services they can access, may have a chilling impact on the global community of Internet users. In terms of the impact on innovation, VON considers that this Report makes a crucial statement in paragraph 129, p. 30: On a long term perspective, the intensity of innovation could well depend on the permanence of the open platform aspects. Dividing the Internet into several separate networks, increasing entry costs, differentiating quality depending on applications, introducing innovation control or sending any signal that makes these perspectives credible may make innovation harder and result in a lower growth of new applications. Faced with such an analysis, BEREC should act urgently to set in place the required safeguards to avoid such a dire outcome. In terms of rebuttal of the free riding argument put forwards by some network operators, VON fully agrees with the Reports analysis in paragraph 61, p. 17 that: While end-users pay an ECP (on the retail broadband market) in order to access the Internet, CAPs will also buy services from an HCP on their side of the Internet in order to make their content available. That is, users at the edges of the Internet each pay for their own connections.

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VON also welcomes the fact that BEREC acknowledges in paragraph 14, p. 7 the need to differentiate between differentiation practices that are imposed on ISPs by legal requirements and the fact that this does not preclude [BEREC] from considering the way in which such requirements are implemented, since the specific techniques chosen by an operator may not be appropriate with regards to the fulfilment of the abovementioned objectives.

Specific Remarks
Terminology: End-users, CAPs and CAUs VON would like to make a first remark as regards the terminology used in this Report versus the terminology used in BERECs draft Report on an assessment of IP-interconnection in the context of net neutrality (BoR(12)33). Indeed, VON considers that BEREC has made a key point in its draft Report on IP interconnection in the context of net neutrality, namely the fact that under Art. 2 (n) FD end-user means a user not providing public communications networks or publicly available electronic communications services (BEREC BoR(12)33, p. 10). BEREC then splits up the end-user category into two sub-categories, namely Content and Application Providers (CAPs) and Content and Applications Users (CAUs).1 VON considers that this categorisation has the merit of clearly showing that both CAPs and CAUs fall under the NRAs duties to preserve and uphold the rights of end-users, and therefore encourages BEREC to adopt the same categorisation in this document, for the sake of coherence and clarity. This would entail replacing end-user in most of the Report by CAU (see notably the description of the players in the value chain as set out in par. 48, p. 14), though in some instances, the end-user terminology should be kept as both CAPs and CAUs should be covered: this would notably be the case in paragraph 111, p. 27, where BEREC states that this report aims at assessing the impact on end users of the differentiation practices described above that are or may be conducted by ISPs providing the end users with internet access. [our emphasis added] Please also note that for the purpose of our comments, we have opted to refer to access providers as ISPs, which covers both the concept of ISP and ECP set out in this Report.

For the sake of clarity, VON refers to the following concepts set forward in BERECs draft Report on an assessment of IPinterconnection in the context of net neutrality (BoR(12)33) : Content and application providers (CAPs) create and aggregate content (e.g. webpages, blogs, movies/photos) [and] applications (e.g. search engines, messaging applications (p. 11, including examples) and CAUs are both, residential (private) users and business users of a broadband/Internet access in their function of passively consuming content (p.12), read in conjunction with the clarifications provided on p.9, namely that actual players will usually perform different combinations of functionalities (e.g. content and applications users may at the same time provide content and applications) along the value chain.

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NRA Objectives & Priorities VON agrees with the Reports overview of the objectives NRAs are entrusted with under Articles 8 par 4 g, 8 par 4 f, 8 par 3 b and 8 par 2 b (p.5), and the link between infrastructure and content as set out under recital 5. Indeed, in addressing the issue of an open Internet and net neutrality, BEREC and its members should strike a careful balance between: the need of ISPs to manage their networks; the ability of CAPs to develop and innovate, including the proverbial 2 guys in a garage; the position of content providers, regardless of whether they are a citizen, an administration, or a media conglomerate; and, the role of NRAs to address the risk inherent in an ISPs ability to discriminate in the treatment of traffic based upon the ISPs control over a bottleneck and its resulting economic or other fundamental interests. VON considers this Report a definite step in the right direction even though we regret the fact that it fails to identify which practices should be prohibited and does not put forward any concrete recommendations that logically stem from its findings. Identified Differentiation Practices VON agrees with the definition of differentiation practices as set out in paragraph 11, p. 6: We define a differentiation practice as any decision of ISPs or any agreements between ISPs and CAPs or ISPs and end-users entailing that some traffic from or to some CAPs or end-users, or related to specific application or protocol, is treated differently i.e. slowed, accelerated or blocked than those of other CAPs or end-users or other applications or protocols [suggest to change end-user in this sentence to CAUs]. We consider however that the following sentence: these differentiation practices could include situations in which CAPs are charged [our emphasis added] should be amended to state: these differentiation practices could include situations in which CAPs and CAUs are charged as both cases clearly always constitute a differentiation practice. The fundamental question is then: where is the line between legitimate and harmful differentiation practices?

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Drawing the Line Between Legitimate and Harmful Differentiation Practices VON regrets that in many instances, this Report does not draw the line between legitimate and harmful differentiation practices. In his testimony before the US Senate in February 2006, Professor Lawrence Lessig2 differentiated between ISP pricing strategies that auction off lanes of broadband service by tiering access between content sources and users and ISPs who offer end users different throughput speeds or permissible volume of traffic. On the one hand, access-tiering violated Professor Lessigs sense of network neutrality, because it would weaken competition for Internet services and the potential for continuing growth by erecting additional financial barriers to entry by innovators unable to pay the surcharges demanded by major network operators. On the other, Professor Lessig considered consumer-tiering a permissible strategy by network operators to recoup infrastructure investments and to create necessary incentives for more investment even though it probably would result in changing the consumer value proposition by helping network operators extract higher revenues particularly from large volume, power users. More recently, in her June 2012 White Paper on Network Neutrality and Quality of Service: What a Non-Discrimination Rule Should Look Like,3 Barbara van Schewick develops the concept of usercontrolled Quality of Service, whereby network providers make different types of service available equally to all applications and classes of applications and where users choose whether and when to use which type of service.4 She considers this approach to be the only one that responds to what she has identified as the three guiding principles required to safeguard net neutrality and the open internet, namely: (1) application-blindness, (2) user choice and (3) innovation without permission.5

See Lessig, L. (2006) .Prepared Testimony before the Senate Committee on Commerce, Science and Transportation, Hearing on Network Neutrality. Retrieved at, http://commerce.senate.gov/pdf/lessig-020706.pdf. 3 See van Schewick, B. (2012). Network Neutrality and Quality of Service: What a Non-Discrimination Rule Should Look Like. p. iv. Retrieved at, http://cyberlaw.stanford.edu/downloads/20120611-NetworkNeutrality.pdf. 4 See van Schewick, B. (2012). Ibid. p. xiii. 5 More in detail, van Schewick points out that: First, they preserve the application-blindness of the network: The provision of Quality of Service is not dependent on which applications users are using, but on the Quality-of-Service-related choices that users make; thus, the network providers does not need to know anything about which applications are using its network in order for this scheme to work. The network provider only makes different classes of service available, but does not have any role in deciding which application gets which Quality of Service; this choice is for users to make. As a result, network providers cannot use the provision of Quality of Service as a mechanism to distort competition among applications or classes of applications. Second, since users choose when and for which applications to use which type of service (in line with the principle of user choice), they can get exactly the Quality of Service that meets their preferences, even if these preferences differ across users or (for a single user) over time. Third, in line with the principle of innovation without permission, an innovator does not need support from the network provider in order for his application to get the Quality of Service it needs. The only actors who need to be convinced that the application needs Quality of Service are the innovator, who needs to communicate this to the user, and the user, who wants to use the application. This greatly increases the chance that an application can get the type of service it needs.

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This form of differentiation is a more flexible and user-controlled version of the one set out in section 3.2.4 Differentiation of services to end-users of this Report (p. 26). VON agrees with this user-focused approach and considers that BEREC should explicitly promote and enforce the principles of application-blindness, user choice (in the real sense of the word) and innovation without permission on the Internet moving forward. In addition, VON considers that BEREC should integrate in its Report the conclusions drawn by Barbara van Schewick as regards the pros and cons of allowing various differentiation practices, and especially the risks that a like treatment approach poses: The positive stance towards forms of Quality of Service that provide like treatment is based on the assumption that discriminating among classes of applications that are not alike is socially harmless and should therefore be allowed. As this paper shows, this assumption is not correct. In many cases, discrimination among classes of applications hurts some classes of applications, even if the classes are not alike. For example, some Internet applications such as Internet telephony applications, Internet messaging applications or Internet video offerings compete with network-provider services that are sold separately from Internet access and do not run over the Internet-access portion of the network provider's access network. In these cases, discriminating against all applications in that class allows the network provider to favor its own offering without discriminating among applications within the class. Moreover, applications in a class can be harmed by differential treatment even if they do not compete directly with applications in other classes that are treated more favorably.6 As regards traffic management practices (instead of traffic shaping), such management has always taken place in the Internet and VON considers there is no issue for ISPs to fairly use network management to overcome technical challenges and maintain a high quality Internet service for their customers. However, this freedom to manage the network should not be a license for ISPs to behave in anti-competitive and other harmful ways, such as blocking legitimate content and applications or unreasonably degrading services that users have paid to access. It should also not be seen as an alternative to sustained network investment to meet large increases of capacity, which has characterised the Internet since day 1.7

6 7

See van Schewick, B. (2012). Ibid. p. xii. The Canadian CRTC has very specifically stated in its Review of the Internet traffic management practices of Internet service providers: 36. The Commission notes that investment in network capacity is a fundamental tool for dealing with network congestion and should continue to be the primary solution that ISPs employ. However, the Commission considers

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VON therefore sees traffic management for the purpose of combating spam, network security or punctual exceptional measures to alleviate congestion as useful and these have never been contested as such, as long as they remain proportional and not harmful. However, academic research shows that the security rationale is often used to justify practices that block traffic, and therefore this rationale should be divided into two categories traffic management to address traffic potentially harmful to the user versus network management techniques employed by broadband Internet access providers to address traffic harmful to the network.8 At the same time, this same research highlights that the congestion rationale is is often used to justify ISP traffic shaping on file-sharing traffic, but if the practice involves blocking without user choice this should then be classified as unreasonable.9 VON would simply add that traffic management for commercial motivations based on the exploitation of a bottleneck or discrimination between services, content, and applications of similar nature does not create consumer value, as it decreases choice and switches the control from the end-user to the access operator acting as gatekeeper. SMP, Bottlenecks and Vertical Integration For VON, if there is a merit in looking at the case of a vertically integrated and non-vertically integrated ISP, we consider the SMP status of the ISP to be less relevant. ISPs without significant market power are as likely as those with SMP to engage in harmful discrimination, as evidenced by the widespread discriminatory behaviour displayed by mobile network operators across the EU, even though mobile retail markets are not susceptible to ex-ante regulation in the Member States. Rather than an abuse of SMP, the discriminations imposed by ISPs result from their control over a bottleneck: ISPs control over the physical last-mile infrastructure necessary to access the Internet allows them to effectively determine whether end users reach the Internet at all. The problem is therefore centred on the Internet access bottleneck, and is particularly relevant in mobile markets, where only a limited number of providers exist. We therefore consider that when BEREC states in paragraph 52, p. 15 that ISPs have a particular role as a hub [our emphasis added], it would be

that investment alone does not obviate the need for certain ITMPs, which may be used to address temporary network capacity constraints and changing network conditions, as well as for service innovation.. See http://www.crtc.gc.ca/eng/archive/2009/2009-657.htm. 8 See Jordan, S. (2010). A Framework for Classification of Traffic Management Practices as Reasonable or Unreasonable. ACM Transactions on Internet Technology, 10(3), 1-23. p. 15. Retrieved at, http://www.escholarship.org/uc/item/3ng6r1fw. 9 See Jordan, S. (2010). Ibid. p. 15.

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more accurate to state bottleneck. We also consider that when BEREC states in paragraph 123, p. 29 that this question of distortion of competition between ISPs on retail broadband internet access markets is neither specific to differentiation practices nor key in the net neutrality debate, as these markets are broadly competitive in Europe and no operator is in position to extract sufficiently more value from an end-user in order to distort competition, this statement is unlikely to be accurate in a mobile context. In other words, VON believes that it is important to understand that the net neutrality issue is first and foremost an issue of (abuse of) bottlenecks, rather than one relating to the degree of competition in the retail and/or wholesale Internet access market(s). In other words, ISPs do have incentives to discriminate between players operating at the application and content layers of the OSI model, i.e. CAPs, in particular but not only when ISPs are vertically integrated into the application and/or content layers and if ISPs face limited competition at the infrastructure layer. In these obvious cases, ISPs can act as monopolists by shaping traffic in a way that departs from the CAP and CAUs interests. But ISPs also have an incentive to engage in anticompetitive and other harmful behaviour even if they have not been declared as having SMP at the physical and transmission layers, and even if they are not vertically integrated. Moreover, though vertical integration plays an important role as illustrated in the VoIP blocking, degrading or surcharging cases, one can expect that ISP interference with some websites could result from more than a wish to preserve their own business versus competitors. The Report identifies some of these incentives, but does not mention one possibility that could occur in the future, namely the wish to capture CAUs in a walled garden where the revenue from advertising would go to the ISP and not to other CAPs.10 The Limitations of SMP Assessments and Other Traditional Tools in the Context of Net Neutrality As pointed out in the Report, the EU Regulatory framework comprises different tools that can be used to preserve net neutrality and the open internet, namely: The ex ante tools relating to SMP operators, found to have dominance in a relevant market. The difficulty however in using this tool is that the market that would be concerned in case of a net neutrality breach would most likely be a retail broadband market (fixed, mobile or converged), which is not part of the markets listed in the EC Recommendation on relevant

10

With reported global advertising revenues of USD31bn for 2011 from internet advertising, this dimension should certainly not be ignored moving forward. See IAB. (2012). IAB Internet Advertising Revenue Report 2011 conducted by PricewaterhouseCoopers (PWC). Available at, www.iab.net/AdRevenueReport.

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markets susceptible to ex-ante regulation, and which was never defined or analysed by an NRA under the Article 7 procedure.
The mechanism put in place by Article 5 of the Access Directive, which does not require an

SMP finding for NRAs to impose obligations on operators to provide access on fair, reasonable and non-discriminatory terms, notably to preserve end-to-end connectivity. However, as is the case with the SMP regime, Article 5 applies to access and interconnection issues (between providers of electronic communications networks and services), which would not cover many issues faced by CAPs in terms of discriminatory or abusive behaviour by an ISP.
The consumer protection principles put in place by the Universal service Directive which cover

such principles as transparency and the possibility for NRAs to set minimum quality of service requirements.
The RTTE Directive, which prohibits under Article 7 that operators impose unjustified

restrictions of electronic communications terminal equipments to connect to their network. Competition law can also play a role, but has its own limitations, both from a substantial and a procedural point of view. From a procedural point of view, competition cases are very resourceintensive and usually take a lot of time to come to an outcome. From a substantial point of view, if blocking an application or service could fall under the competition law provisions relating to refusals to supply or deal, such refusal is only deemed against competition law in the context of a dominant operator owning an essential facility. More importantly, if an access provider degrades a service, competition law can be applied if the said operator is dominant and behaves in a discriminatory manner. But it is uncertain that, should there be two separate offerings by access operators, one of Internet access and one of managed services, that these would not be deemed to be in different markets. Should this be case, an operator could degrade the quality of service for all content, services, and applications providers on Internet access by creating a dirt road effect, which might not be covered by competition law rules, but should trigger an NRA intervention under Article 22 of the Universal Service Directive. Incentives of ISPs The reported cases and public statements in the US and Europe including in BEREC and the European Commissions recent finding from their joint investigation, reflected in their View of Traffic Management and Other Practices Resulting in Restrictions to the Open Internet in Europe,11
11

See BEREC. (2012). A View of Traffic Management and Other Practices Resulting in Restrictions to the Open Internet in Europe Findings From BERECs and the European Commissions Joint Investigation (BoR(12) 30). Retrieved at, http://erg.eu.int/doc/consult/bor_12_30_tm-i_snapshot.pdf.

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the findings of which are summarised in paragraph 215, p. 46 of this Report show that the threat to net neutrality is not hypothetical. Hence, when BEREC states that ISPs call for new approaches that raise lively debates (Report par. 69, p. 18) it would be fair to add call or put in place. VON has identified the following (non exhaustive) list of incentives for harmful discrimination on the Internet that are detrimental to both CAPs and CAUs, some of which are also identified in the Report: First, there is discrimination by ISPs that aims at favouring their own services, those of subsidiaries (in case of vertically-integrated providers) or a preferred partner, on the Internet, or that is intended to block or degrade services, content, and applications that are considered as potential competitors for their own offerings. These discriminatory practices are illustrated through the following reported cases: 2005: American Internet provider Madison River (a small US ISP) blocks the traffic of Internet telephony service Vonage. It is evident that the blocking is intended to favour its own telephony services, stifling competition. After this comes to light, the Federal Communications Commission (FCC) intervened;12 2007: UK mobile operators Vodafone and Orange remove the VoIP features from the Nokia N95 handsets;13 2009: Mobile operator Vodafone Italia puts in place Peer-to-Peer (P2P) and VoIP caps on Internet traffic, by capping this traffic on 64 Kbit/s on its mobile network from 7 AM to 10 PM;14 2009: In Germany, Deutsche Telekom announces that it will block Skype, on iPhone in particular. That same year, T-Mobile Germany announced that it will block Skype traffic on smartphones with a mobile Internet connection, and that it considers blocking Skype through its WiFi hotspots.15 Since then and due to customer reactions, T-Mobile charges its users an extra 10 euro/month for the right to use VoIP on their mobile devices. Similarly, Vodafone Germany charges an extra 5 euro/month for the right to use VoIP;

12

See Marsden, C. (2010). Net Neutrality: Towards a Co-regulatory Solution. London: Bloomsbury Academic. p. 35ff. Retrieved at, http://techrisk.se/wp-content/uploads/books/NetNeutrality.pdf. 13 See Ray, B. (2007). Orange and Vodafone cripple Nokias flagship: N95 comes with VoIP disabled. The Register. Retrieved at, http://www.theregister.co.uk/2007/04/18/n95_crippled/. 14 See Vodafone. (n.d.). Informazioni sulle condizioni di utilizzo dei servizi Internet in mobilit. Retrieved at, http://www.areaaziende.vodafone.it/190/trilogy/jsp/programView.do?tk=9610,c&channelId=8671&contentKey=48195&programId=12545&ty_key=az_uso_equo_servizio_internet_mobilita&pageTypeId=9610&ty_ski p_md=true. 15 See Handelsblatt. (2009). Telekom plant Skype-Blockade fr iPhone und Blackberry. Retrieved at, http://www.handelsblatt.com/technologie/it-tk/mobile-welt/telekom-plant-skype-blockade-fuer-iphone-undblackberry/3145006.html.

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2010: Swedish mobile operator TeliaSonera blocks VoIP and P2P-traffic, according to the advertisements on their website;16 2010: French mobile operator SFR sells iPad subscriptions without access to P2P, VoIP and newsgroups, although it is not clear whether these are only contractual or also technical restrictions;17 2010: French Internet provider Free restrict P2P, SSH and VoIP services on ADSL. According to Free, all ports and/or protocols which are not standard are blocked in the afternoon, such as SSH, streaming videos, VoIP, and P2P;18 2011: In the meantime multiple Swedish mobile operators Telenor, TeliaSonera, and Tele2 are introducing barriers to the use of VoIP applications;19 and, 2011: Mobile operator Vodafone Italia charges its users an extra 8 euro/month for the right to use VoIP applications of their choice. 20 2012: TeliaSonera announces21 its intention to release its charging structure for mobile VoIP calls in August. TeliaSoneras Spanish mobile operator, Yoigo, already piloted the model charging their subscribers 6 euros per month for 100MB of VoIP traffic. In general, we also refer you to VONs spreadsheet listing contractual and in some cases technical blockings by ISPs in the EU, as well as surcharges required to enable VoIP on mobile networks.22 Although non exhaustive, this document paints a rather grim picture in terms of VoIP availability in the EU on mobile networks. Second, an ISP can use its bottleneck power towards VoIP or other services, content, and applications to place them at a competitive disadvantage or harm them in different ways. This could result in undesirable outcomes, such as price or quality discrimination (i.e. intentional
16 17

See Telia. (n.d.). Surfa i mobilen. Retrieved at, http://www.telia.se/privat/produkter_tjanster/mobilt/surfaimobilen/. See SFR. (n.d.) Forfaits Internet pour Tablettes, iPad, Cls 3G+. Retrieved at, http://www.sfr.fr/mobile/forfaitsinternet.jspe?#onglet2. 18 See Numerama. (2010). Free briderait les protocoles SSH, VoIP ou P2P en zone non dgroupe. Retrieved at, http://www.numerama.com/magazine/15461-free-briderait-les-protocoles-ssh-voip-ou-p2p-en-zone-nondegroupee.html.; and consumer complaints at http://pastebin.com/MZ3WF8sz. 19 See Brohult, L. (2011). Operatrer frbjuder Viber och Skype. Mobile.se. Retrieved at, http://www.mobil.se/nyheter/operatorer-forbjuder-viber-och-skype-1.385105.html. 20 See this statement from the Vodafone Italy website: La promozione Mobile Internet Plus ti consente di navigare in internet sul cellulare e utilizzare applicazioni VOIP al costo di 8 euro a settimana con traffico fino a 2GB. See also iSpazio. (2011). Vodafone blocca Viber, Tango, Skype e tutte le applicazioni che permettono di effettuare chiamate VoIP su rete 3G da iPhone. Retrieved at, http://www.ispazio.net/166560/vodafone-blocca-viber-tango-skype-e-tutte-le-applicazioni-chepermettono-di-effettuare-chiamate-voip-su-rete-3g-da-iphone.; accompanied by various user complaints on Vodafone Italys forum, at http://lab.vodafone.it/forum/viewtopic.php?f=17&t=17985. 21 See TeleGeography. (2012, June 27). TeliaSonera Finalising Mobile VoIP Charging Model in August. Retrieved at, http://www.telegeography.com/products/commsupdate/articles/2012/06/27/teliasonera-finalising-mobile-voip-chargingmodel-in-august/. 22 See VON Europe. (2012, February 23). Identified Restrictions on Internet Access by Mobile Operators. Available at, http://www.scribd.com/doc/98641591/VON-Europe-Non-exhaustive-Indentification-of-Restrictions-on-Internet-Access-byMobile-Operators.

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degradation of the QoS to encourage consumers to only use the operators own services). An illustration of such harmful conduct would consist in an operator reserving part of the Internet bandwidth for their own VoIP, in order to secure a competitive advantage over their perceived rivals, or through requiring VoIP providers to purchase a specific QoS level, or by requiring CAUs to pay a surcharge for the right to use VoIP (this for example arose in the Shaw Cable dispute with Vonage in Canada, where Shaw allegedly charged CAUs an extra QoS fee to use non-Shaw VoIP services).23 Third, there is discrimination motivated from some ISPs focus, as evidenced in press statements, towards specific companies as those that make all the money from their investments in the network infrastructure. Such statements obviously forget that the infrastructure is only a means to access services, content, and applications, but not a means to an end. This results in a situation where ISPs can extort excessive rents out of their controlling position over a bottleneck. Fourth, it is also important to realise that part of the discussion behind the net neutrality debate is not only one driven by economic and financial considerations, but also by the issue of control combined with the fear of some ISPs to see infrastructure treated as a commodity by CAPs and CAUs. When taking these two factors into consideration, one can see that the potential and the incentives for abuse by ISPs are not necessarily covered by a traditional SMP analysis under telecoms rules, or as the OECD stated in its 2007 report: Anti-competitive behaviour can appear in all types of markets, even those judged to be competitive (...) Therefore, regulators cannot simply count the number of data providers in a given region and assume that the market is sufficiently competitive. Regulators may need to undertake a careful market analysis to determine whether households have effective choices for substitutable broadband Internet access. Which Internet access technologies constitute substitutable broadband will be a key issue in determining market competition.24 In light of this variety of incentives to misbehave in a net neutrality context, VON believes safeguards must hence be put in place by BEREC. Network Effect, Transparency & Easier Switching are Insufficient Deterrents Against Discrimination In different sections of this Report (see notably par.27, p. 9), it is stated that competition at retail level, consumer awareness, market transparency and low switching costs could deter ISPs from
23

See CBC News. (2006). Shaw, Vonage engage in war of words over internet phone service. Retrieved at, http://www.cbc.ca/news/business/story/2006/03/08/shaw-060308.html. 24 See OECD. (2007). Internet Traffic Prioritisation: An Overview (DSTI/ICCP/TISP(2006)4/FINAL). p. 28. Retrieved at, http://www.oecd.org/internet/interneteconomy/38405781.pdf.

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implementing differentiation practices. Moreover, some speculate that even without specific regulation, ISPs would be unlikely to block applications or virtually foreclose content from their platforms as indirect network effects ensure that the platforms value to end users increases along with the applications and content available on it. VON believes that this is a theoretical consideration that does not reflect the complexity in practice and what happens in reality, as we will demonstrate hereunder. But more importantly, VON considers that competition, transparency and ease of switching are just parts of the equation, seeing that even those markets which European regulators deem to be competitive (e.g. the mobile retail markets) do not in fact exhibit the market dynamics leading to unrestricted access to the Internet. Transparent information tells consumers about the terms and conditions of their package, but does not offer them real choice nor unrestricted Internet access if operators mimic each others behaviour as experience in Europe demonstrates. Moreover, even if operators do not mimic each others behaviour but CAUs are faced with a choice where there are only 3 operators on the market and operator 1 offers products A and B, operator 2 offers products A and C and operator C offers products B and C, that choice does not reflect the demand of the CAU that would like to benefit from A, B and C. BEREC also pointed out the limitations of transparency in its Response to the European Commissions consultation on the open Internet and net neutrality in Europe stating that: transparency, information and customer awareness are necessary conditions, since they allow customers to make informed choices, but they are not by themselves sufficient. The end-user access market must be competitive enough to enable the end-user to switch to another provider in the first instance. Second, switching must be reasonably easy. Thirdly, there has to be at least one other provider offering acceptable quality for best effort Internet access. If all of those conditions are brought together, then transparency can allow competition to become effective in practice. Therefore, in VONs view, BEREC correctly concludes that there are some limitations on the effectiveness of transparency as a measure remedying network neutrality issues,25 a point acknowledged in the April 2011 Communication issued by the Commission on Net neutrality. In her recent paper on Network Neutrality and Quality of Service: What a Non-Discrimination Rule Should Look Like, Barbara van Schewick gives a very accurate description in this regards of consumer behaviour displayed in an imperfect but closer to reality market:

25

See BEREC. (2010). Response to the European Commission's consultation on the open Internet and net neutrality in Europe. p. 10-11. Retrieved at, http://erg.eu.int/doc/berec/bor_10_42.pdf.

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Participants in the network neutrality debate often assume that the viability of disclosure rules as a substitute for substantive regulation solely depends on the amount of competition in the market for Internet access services. After all, if there is no competition, there will be no other providers that consumers can switch to in response to discriminatory conduct, making it impossible for them to discipline providers. Based on this reasoning, participants in the debate often assume that mandatory disclosure alone will be sufficient to discipline wireline providers in Europe or in countries like Canada, where the market for wireline Internet access is generally more competitive than in the US. Similar arguments are made for mobile Internet access, where users often have a choice between three or more competitors. These arguments fail to recognize that the market for Internet services is characterized by a number of factors incomplete customer information, product differentiation in the market for Internet access and for wireline and wireless bundles, and switching costs that limit the effectiveness of competition and reduce consumers willingness to switch. Rules that require network providers to disclose whether and how they interfere with applications and content on their networks reduce the problem of incomplete customer information, though only to some extent. They do not remove any of the other problems. As a result, they still leave network providers with a substantial degree of market power over their customers that enables them to restrict some applications and content on their network without losing too many Internet service customers. Disclosure rules also do not affect the cognitive biases, cognitive limitations and externality problems that lead users to underestimate the benefits of switching providers compared to what would be in the public interest. Thus, even if there is competition in the market for Internet access services, disclosure cannot replace substantive regulation as a tool to discipline providers. 26 If one adds to the analysis the additional element pointed out in paragraph 208, p. 44 of this Report, then relying on consumers sophistication/rationality and competition alone as a deterrent seems clearly insufficient: Even if there is effective competition, another possible exception could occur where end-users were rational but short-sighted and opted for prioritised services without taking into account that by doing so they and the other Internet users would be harmed (because their combined choices would deter innovation and, hence, lower the availability and quality of future services). It may be the case that ECPs also failed to take account of this dynamic effect. Therefore, they could
26

van Schewick, B. (2012), Ibid. p. iv.

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suffer i.e. in terms of reduced profits if innovation on the Internet declined and reduced the value end-users can obtain from Internet connectivity. So-called Two-sided Nature of the Market This Report also looks into the two-sided market theory and its application to the Internet in section 4.2 (p. 34 et seq.). From the perspective of the Internet ecosystem as a whole, the economic dynamics of two-sided markets need careful consideration by regulators and policy-makers, in terms of their effect on all market players. First, even large CAPs might not have the resources to sign QoS agreements with any but the larger ISPs, and CAUs would then perhaps get better access to popular services via such providers, and thus leading to consolidation in both the market for Internet access and the market for Internet services, applications and content, and weaken the position of new entrants. Secondly, only the largest online services might be able to afford such QoS packages and that would entrench their position relative to entrants that would otherwise more easily be able to contest the market. As pointed out in the Report (par. 127, p. 29), it is especially likely that non-profit content and application sources would suffer under these pricing schemes because these critical sources of Internet content have no means of paying for such costs or recouping them from users. Thirdly, if most or all CAPs feel compelled to pay, this will result in no relative increase in speed and little or no improvement in network congestion or service quality for consumers. In such an arms race scenario, CAPs on the fast lane would be left with fewer economic resources and greater investment uncertainty, and CAUs also would face unimproved service quality and diminished access to diverse content and applications. Finally, from an international perspective, a two-sided market could make it very difficult for innovators to make their content, services or applications accessible globally, as this could require negotiating multiple SLAs in every target country, something very difficult for an SME, and that is likely to divert investment from R&D into contractual negotiation costs. Moreover, in terms of the impact on innovation, the question should be asked which innovative CAP would be able to raise funds from investors for a new idea if there is no guarantee that this idea will ever be available to all end-users wishing to access it? As pointed out in this Report, Internet innovation was built around the principle that you could innovate without having to ask permission and this principle which has underpinned twenty years of global, wide-ranging productivity, growth

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gains and social progress would disappear in a context where ISPs would be allowed to turn into gatekeepers. Differentiation: Internet Access vs. Managed Services It is very important to clearly differentiate between Internet access on the one hand, and managed services on the other. The latter should not be seen as a subset of the other but as an entirely different product sold by the ISPs and the former should not be considered as a reduced version that only covers certain services (e.g. email, etc.). As pointed out in the Report, a lower quality best effort may reduce incentives of existing or new entrants to provide improved content and applications. This is critically important in the case of the Internet given the dynamic nature of innovation on the supply side (par. 203, p. 43). VON also considers that safeguards are necessary to ensure the quality of Internet access, in order to avoid a dirt road effect (referred to notably in par. 283, p. 58 of the Report), in parallel to the possibilities for ISPs to offer managed services. This point is also being raised in a recent Report from the French Parliament, which states that the quality of the public Internet could quickly degrade because of the important growth in data streams, if Internet access providers were not to invest in their networks or were to give priority to the commercialisation of managed services.27 It should therefore be made clear that operators should continue to invest in improving the infrastructure underlying Internet access, and not just the infrastructure underlying their managed services. In that context, VON would like to draw attention to Art. 22 Par. 3 of the Universal Service Directive which stipulates that in order to prevent the degradation of service and the hindering or slowing down of traffic over networks, Member States shall ensure that national regulatory authorities are able to set minimum quality of service requirements on an undertaking or undertakings providing public communications networks. [our emphasis added]. VON believes that the use of the wording prevent indicates that actions must be taken ex-ante instead of ex-post. Moreover, when looking at the tools that BEREC and its members could use to avoid net neutrality breaches, it is important to note that self-regulation efforts, as recently illustrated in Norway, do not

27

See La Raudire, L., & Erhel, C. (2011). Mission dinformation sur la neutralit de lInternet (Rapport n 3336). Available at, http://www.scribd.com/doc/52922958/Rapport-d-information-sur-la-neutralite-de-l%E2%80%99internet-et-desreseaux.

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seem sufficient to guarantee an open Internet. The following quote from a letter of the European consumer organisation BEUC to European Commissioner Neelie Kroes underscores this. The recent developments in Norway, where the biggest telecom operator has announced its intention to charge for content providers for prioritized transmission with the aim of promoting its content and that of its partners, raises serious concerns from the consumers point of view. At the same time, Norways second largest mobile services provider is publishing schemes to disallow VOIP on their networks. Developments towards that direction are extremely worrying, when considering that Norway has been among the first countries to adopt guidelines on net neutrality. However, this soft approach has proven to be ineffective in protecting consumers from discriminatory practices.28 VoIP and Peer-to-Peer specific measures The Report uses so-called traffic management practices put in place by ISPs against VoIP and Peerto-peer as case studies for its analysis of the impact of differentiation practices. VON would like to emphasise the following points: 1. As pointed out in the Report, VoIP services and applications do not consume substantial network resources (hence not justifying blocking or degradation on the basis of capacity constraints) and function today on fixed and mobile (broadband) networks around the world when left technically and contractually unrestricted. 2. There is therefore no reasonable traffic management justification to block or hinder VoIP traffic or ask for a surcharge, and hence such practices should be explicitly prohibited by Berec and its members as clear examples of distortion of competition (see par. 25 p. 9 and the demonstration of the static and dynamic harm initiated by VoIP foreclosure in par. 227 to 230, pp. 48-49). We note that instant messaging is already in line to be subjected to the same type of discriminatory treatment, as evidenced by the announced intention of WhatsApp in the Netherlands (which led to the adoption of net neutrality legislation) and statements such as the one made by AT&Ts CEO in 2012: Apple iMessage is a classic example. If youre

28

BEUC. (2011). Net Neutrality in Europe needs to be safeguarded. Letter sent to Ms Neelie Kroes, Vice-President of the European Commission. p. 2. Retrieved at, http://www.beuc.eu/BEUCNoFrame/Docs/2/IFMGGBABLLHODCMADAJPJJBLPDWY9DBYW19DW3571KM/BEUC/docs/DLS/ 2011-00115-01-E.pdf.

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using iMessage, youre not using one of our messaging services, right? Thats disruptive to our messaging revenue stream.29 3. Moreover, as VoIP is particularly sensitive to degradations in network performance (especially in terms of latency requirements), and because of its reliance on Peer-to-Peer (P2P) protocols in some cases, it can be faced with various network management impediments put in place by ISPs. Additionally, because the predominant VoIP protocols used today all generate P2P traffic (including SIP, H.323, and Skypes own P2P protocol among others), they are at risk of being blocked or degraded as a result of blanket anti-P2P measures imposed by operators, even though they do not inherently involve file transfers or intellectual property issues. For example, P2P has been used in the research and academic worlds for useful and legitimate purposes (e.g. for the Berkeley Universitys SETI project that connected the computing power of thousands of users to analyse astronomical data, or as used by the European Nuclear Research Council). VON finally strongly disagrees with the argument set out in paragraph 320, p. 63 of this Report that the more restrictive the practice, the greater effects on end-users. For example, straight blocking is more intense and, therefore, more harmful than situations where, for example, a set of offers are in the marketplace and in some cases the application is blocked but in others not. In this case, end-users have still some options to escape from blocking, normally by paying a higher price. In this situation, a closer analysis is needed because if the ECP is giving the choice to the end-user, the final aim of the ECP could be fair. For example, in the case of VoIP, higher prices of a non-restricted Internet flat rate could be the result of subsidised data tariffs by voice prices, unsustainable if the ECP cannot grant certain incomes from voice. VON considers that there is no fairness justification behind such a practice and that an ISPs cross-subsidisation model should not be to the detriment of VoIP players on the market and innovation in general. *** We thank you in advance for taking consideration of these views. Feel free to contact Herman Rucic, VON Europe, by phone (+32 (0)478 966701) or email (hrucic@voneurope.eu) should you need further information. * * *

29

Quoted at http://stopthecap.com/2012/05/07/hissyfitwatch-att-ceo-mad-at-himself-for-ever-allowing-unlimited-useplans/.

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About the VON Coalition Europe The Voice on the Net (VON) Coalition Europe was launched in December 2007 by leading Internet communications and technology companies, on the cutting edge to create an authoritative voice for the Internet-enabled communications industry. Its current members are iBasis, Google, Microsoft, Skype, Viber, Vonage, Voxbone and WeePee. The VON Coalition Europe notably focuses on educating and informing policymakers in the European Union and abroad in order to promote responsible government policies that enable innovation and the many benefits that Internet voice innovations can deliver.

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