Last days of the free ride? the consequences of settlement-based interconnection for the internet

During the internet's government-sponsored, 'promotional' phase, most internet service providers (ISPs) agreed to interconnect facilities at centralized locations, and to 'peer' with any ISP regardless of customer base, geographical reach and bandwidth, without any transfer payments or settlement of accounts. This article tracks the evolution of internet interconnection and charging arrangements and draws comparisons with the arrangements of telecommunication carriers. Initially characterized by text-based communication in a non-commercial environment, with wider access more imperative than profits, the internet is changing as it privatizes and matures. Although customers are currently provided with 'seamless' access to individual networks of the internet, changes are putting the status quo under pressure. Customers are suffering from network congestion caused by increased demand in the volume and bandwidth requirements of traffic. Some ISPs are financially challenged by the need to invest in upgrades, the decline in government subsidies and from an imbalance in the flow of traffic between operators. This article looks at alternative models for remedying these problems and the potential consequences. In particular it focuses on how pricing arrangements could change the nature of ISP relationships, from a peer-based to a hierarchy-based system.