On Wednesday, AT&T said it would spend $14 billion to boost access to its wireline and wireless networks over the next three years as it hopes to get out of running an old-school copper phone business. As Om pointed out, it’s the end of an era. But before we can move forward there are several issues that must be dealt with — from broadband and VoIP access for all to the role of the FCC, which will have to fight for relevance and regulatory power in an all-IP world.

And if you think that the world has already gone VoIP, you’re wrong. The FCC counted 192 million circuit-switched lines in 2001. By mid-2011,there were still 112 million lines. Because of the prevalence of the original network, most calls made still touch the original copper network at some point. Even your cell phone calls.

I think I was too hard on AT&T in my initial post on the topic, even though I did say I think moving off the PSTN (public switched telephone network) is the right thing to do for the company, and most of the problems associated with that move will have to be handled by the FCC. After reading its filing, talking to others in the telecommunications world and learning a bit more about some of the products it wants to offer, I think that Ma Bell is going about this in the best way possible. It has even taken proactive steps ahead of making this announcement to participate in an exchange that could become the model for how VoIP providers interconnect in the future.

VoIP versus landlines

To understand what’s at stake here it’s worth thinking about how the old voice market is different from the IP world. They are fundamentally different networks, although almost all calls (even VoIP ones) end up touching the PSTN network at some point in time. And that means the legacy of the old phone networks are still with us. Things like phone numbers, long-distance charges and even charging by minutes, which could theoretically disappear in a new all-IP world. The old voice networks are regulated by arcane rules that require all parties to connect calls and in doing so they get paid. This was beneficial for consumers because otherwise Verizon might refuse to connect a call from AT&T, leaving the two phone subscribers unable to chat, but it also led to distortions in the market.

This framework also led to the providers controlling telephone numbers (remember when you couldn’t port a telephone number, which means you may have stayed with a crappy provider for fear of having to tell everyone a new number?) and things like a minute of voice calling costing a hundred thousand times more than the cost of a minute of voice calling over IP. And as the world moved to VoIP, companies like Verizon and AT&T have to support two different networks, the IP network and the TDM network based on circuits. This is expensive, and that’s why AT&T would like to dump its obligations to operate and have a TDM network.

Meet a startup taking advantage of this transition

So how can it do this? Given that telecommunications services are tightly regulated around the world and IP services (which in the U.S. the FCC classifies as information services) aren’t, AT&T is trying to goad the FCC into taking up the issue. But it’s not stopping there. AT&T is one of three companies that are part of VCXC, a non-profit organization that is trying to create the equivalent of an internet exchange point (IXP) for the VoIP market.

Ooma handset.

It’s founder, Daniel Berninger, also founded Vongage and Free World Dialup and has said his goal is to change the voice market. He told me that so far he feels like he has failed, but with VCXC he thinks his time has come. Remember that the old-school voice market and the IP bandwidth markets are two separate markets? Well, the internet market has clusters of gear in offices and data centers around the country where different networks interconnect. These are called Internet Exchange Points, and they are a key reason that bandwidth is so cheap and  they explain the redundant nature of the web.

Berninger wants to create the equivalent of an IXP for the voice market via his non-profit that helps link the TDM and VoIP networks without getting the FCC and its rulemaking involved. Already AT&T, Bandwidth.com and Ooma, the VoIP equipment and service provider, are members of this VCXC exchange. The goal of the exchange is to establish rules and rates for VoIP interconnection, without each service provider having to negotiate with one another. The deals might look like this VoIP interconnection deal Verizon and Bandwidth.com signed last year, but would avoid the work of having to sign sperate deals with every single provider.

“We want to erase the lines between voice communications and bandwidth as much as possible,” Berninger said. “Our members will exchange as much voice traffic as possible on the exchange and protect that traffic from fees.”

The role of the FCC in a VoIP world

It also will protect that traffic from the FCC’s regulations because it can be labeled as an information service as opposed to a telecommunication service. But this is a fraught issue for the agency. As we move to an all-IP world (and the FCC says this will happen in 2018) the agency will face questions over its authority to regulate the bits making up our phone calls. For a deep dive into this issue, read this post, but the short version is that the agency has very clear authority to make rules over traffic deemed telecommunications and murky authority over IP traffic. That’s one of the primary issues that Verizon is arguing in its court challenge of the agency’s network neutrality regulations — that the FCC can’t tell Verizon or any ISP how to manage its bits because that’s not its jurisdiction.

As voice moves becomes an information service, the FCC has less say over how providers interconnect. At the same time the loss of the PSTN does create public-interest issues where the FCC should have a say. There’s the question of cell phone companies such as Sprint or t-Mobile that buy special access circuits from the carriers. It’s likely that’s rather have fatter IP-based services but in some areas they get the old-school circuits. The FCC will have to look at that.

Another example is AT&T is expanding its LTE high-speed wireless networks to cover 300 million people, and in its call yesterday its executives explained how it will use LTE to deliver voice instead of the PSTN. Verizon is also delivering an LTE-based home broadband product in rural areas. But LTE costs a lot more than a landline and can come with data caps. The FCC may have an interest in making sure those costs are comparable to the landline phone for people who have no other choice, and that those networks are reliable. It’s unlikely that any LTE solution will be as reliable as the PSTN, but there are steps carriers can take at the base stations and towers to help boost the reliability of their service.

If the FCC opens the docket on this topic as AT&T has asked, these conversations and many more will be debated as we move forward from the old analog-based calling world to our digital futures.

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And that’s how 99.5 percent of the interconnections take place between global networks work. According to a study out Monday from the OECD covering peering arrangements between providers of bandwidth around the world, most interconnections take place “on a handshake basis, with no written contract and the exchange of data happening with no money changing hands.”

This may seem pretty hippy dippy, or at least a lost source of revenue, but as several high-profile peering disputes can show us, the relatively open nature of these agreements benefits consumers and startups and helps keep costs down. What many people may not think about when considering the internet is that it’s actually a collection of networks all around the world that are joined together. And since the places where those networks join are mostly free of fees and legal drama, the cost of sending data over the internet has fallen.

In praise of peering

This new OECD report notes that the benefits of this approach to peering have brought prices for data down to 100,000 times less than that of a voice minute. Thanks to a survey of 4,300 networks, representing 140,000 direct exchanges of traffic on the internet, the study offers up evidence that less regulation on the internet is a good thing, even if it doesn’t seem initially to protect the consumer interest.

Analysys Mason chart on IXP growth.

The report also comes out in support of Internet Exchange Points (IXPs) – data centers where the networks of many providers meet and cross connect. But the real value in this report is in its warning about the threat to the current peering models from proposed regulations as well as private networks that are seeking to take these handshake deals and turn them into sources of revenue.

From the report:

“As incumbent networks adopt IP technology, there is a risk of conflict between legacy pricing and regulatory models and the more efficient internet model of traffic exchange. By drawing a “bright line” between the two models, regulatory authorities can ensure that the inefficiencies of traditional voice markets will not take hold on the internet… That these “rules of the game” are so ubiquitous and serviceable indicates a degree of public unanimity that an external regulator would be hard-pressed to create. The parties to these agreements include not only internet backbone, access, and content distribution networks, but also universities, NGOs, branches of government, individuals, businesses and enterprises of all sorts—a universality of the constituents of the internet that extends far beyond the reach of any regulatory body’s influence.”

The fall of Tier 1 networks and the rise of work-arounds

One threat to peering is the possibility of the International Telecommunication Union regulating broadband networks more in line with communications networks, a threat we’ve covered before. Other risks include governments interfering in peering disagreements or creating mandatory peering requirements that would then imply that the government would eventually interfere in a peering dispute.

According to the report, that way leads to the type of complicated settlement agreements that have played havoc in the voice markets for decades, leading to higher prices as well as business decisions that aim to optimize revenue as opposed to delivering a better or more cost-effective network. Other elements worth highlighting from the report include:

• Legacy Tier 1 networks such as AT&T, Sprint, and NTT Communications that were once seen as a threat to this form of free peering have seen their number of connections fall (in some cases costing them more money) while smaller players and CDNs peered around them to take up the slack and demand for a connection.
• The internet is still growing at a decent rate within the United States from 74 IXPs producing 118 gigabits per second of “observable” bandwidth in 2006 to 85 IXPs producing 826 gigabits per second today.
• A significant reason bandwidth prices aren’t falling is because of a lack of standards and interoperability of network gear faster than 10 gigabit per second equipment.
• Those wholesale prices for high-volume transit have remained between about $1.40 and $3 per megabit per second per month in the U.S.

The OECD report should be required reading by regulators and companies that are seeking their fortunes on the internet. Peering is an esoteric subject, but the practice has worked for decades to the benefit of the overall internet ecosystem and the consumer. It may now be under threat in some places thanks to regulations and perhaps overzealous ISPs.

Red Square image courtesy of Flickr user yeowatzup.

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Instead of massive streams of data moving back and forth across entire networks each time people request a web page, a video or a digital download, data is getting sent to a content delivery network and kept at the edge of the network. Thus, when it’s called up by a user, it doesn’t have as far to go. But there are two significant things that are changing how the internet is “shaped,” for lack of a better term.

The 1999 Internet had a hub with two fat spokes.

First, the growth of Internet Exchange Points (IXPs) and caches mean the traffic patterns look more like a river flowing downhill to a reservoir as opposed to millions if creeks spreading out to feed each user. Internet exchange points are giant data-center like buildings where different networks connect and exchange traffic. Content can be cached in local IXPs or even further out at the edge of the network in specific ISP’s central offices.

Two, the growth of broadband access in the rest of the world means that places like Latin America and Africa, which used to depend on getting most of their bandwidth served from U.S. or European providers are gradually beefing up their supply of internet exchange points. (IXPs) They get content reservoirs too.

More content but more caching as well.

This has been the case for years when it came to content such as movies and graphic-rich web pages, but as the basic delivery of bits became commoditized, players like Akamai and Limelight as well as newer companies like Edgecast and Fast.ly sprung up to deliver newer types of content. Now, even Facebook is getting in on edge caching, joining Google, which has had edge network servers for a couple of years.

In a paper released yesterday, UK analyst firm Analysys Mason estimates that 98 percent of internet traffic now consists of content that can be stored on servers. This combined with deeper penetration of IXPs and caching means that the way traffic flows across networks is changing too. The paper was written to persuade governments that the proposed ITU regulatory changes would hinder the growth of the web, but the report is well worth reading as a way of understanding how the web has changed over time.

Those conclusions are also backed up by similar analysis from Craig Labovitz, who documented that roughly 45 percent of internet traffic today is content from CDNs. That analysis emphasized, however, how few companies control web traffic, while the Analysys Mason report focused on how deeply the internet has penetrated different areas of the world.

As an example, the Analysys report takes a close look at how connectivity has changed for Africa:

While in 1999, 70% of bandwidth from Africa went to the US, by 2011 this had fallen to just a few percent, and nearly 90% went to Europe. This does not mean that over time Africans began to rely almost exclusively on European content, but rather that much of the content originally from the US began to be stored on servers in Europe as providers began to build out their networks. This shows how traffic can shift in response to changes in bandwidth costs and local conditions, as Europe liberalized its telecom networks and IXPs developed to host the content, and demonstrates how in future similar shifts could localize traffic in Africa to further reduce latency and costs.

To bolster this example, the Analysys report notes that bandwidth to the U.S. has fallen from over 90 percent of total international connectivity in 1999 to just over 40 percent in 2011. And as the internet becomes far more global and content spends much of its time at the edge, it changes the way we should think about and regulate the web.

The internet is like a cockroach.

The report is focused on the looming ITU regulations, but the key point is one that was raised time and time again during the worries over the SOPA and PIPA legislation in the U.S.– the internet has no borders, and governments must recognize that. It’s like our monetary system, our food supply and myriad other complex ecosystems we depend on for our modern life. That’s why we’re seeing a rise of treaties and international bodies attempting to create rules governing these systems, because regulating the web in the U.S. is like trying to solve a cockroach infestation by fogging a single apartment in a multitenant building.

As the internet has advanced, it’s become exactly what it was supposed to: An interconnected series of networks that have organically grown to meet demand at the edge. Like cockroaches, it can survive in hostile conditions. But unlike roaches, it’s something most people want in their lives, so news of its growing resiliency and localization should be good news.

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