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To: limtex who wrote (2549)	6/8/1998 5:52:00 AM
From: Teddy	Respond to of 11568

Wow, someone actually looking at the big picture: The Wall Street Journal -- June 8, 1998 Manager's Journal: How to Strengthen the Internet's Backbone ---- By Hal R. Varian In an attempt to appease the antitrust authorities and win approval for their proposed merger, Worldcom and MCI have offered to sell off the MCI Internet division. This sale may or may not mollify the regulators, but it wouldn't do much to address the critical problem raised by the merger, namely the issue of Internet interconnection standards. The Internet depends on "backbone providers" -- networks that link local Internet service providers. To ensure that, for example, Sprint customers can reach MCI-served Web sites, the companies' respective backbones must connect at some point to exchange data traffic. In the good old days, network engineers didn't connect with another company; they connected with another engineer whom they knew and trusted. These "peering arrangements" typically were informal agreements to exchange traffic without money changing hands. Such "settlement free" interconnect is still the norm. But as the industry matures, settlement-free interconnect does not necessarily provide appropriate incentives to the industry players. "Why should I help my competitors by giving them free access to my network?" say the suits. "But the Internet won't work unless everything is connected to everything else," say the geeks. Both are right. Interconnection is healthy for the industry as a whole, but the current business model for interconnect may easily generate incentives for individual carriers to overcharge their competitors. This problem was brought to a head by the Worldcom/MCI merger. Opponents of the merger, primarily other backbone providers, argued that the merged entity could exploit its large market share by refusing to interconnect with other Internet backbone providers, or by doing so on only extortionate terms. Such an attempt to use interconnection agreements as a strategic weapon could end up crippling the entire industry. The Justice Department and the Federal Communications Commission can help the business model for interconnection evolve by requiring Worldcom/MCI (and other backbone providers) to agree to the principle of "fair, reasonable and nondiscriminatory" terms for interconnection with other carriers. This should not mean settlement-free terms; monetary transfers may prove necessary to make interconnection agreements work. The emphasis should be on nondiscriminatory: Interconnection contracts may differ from carrier to carrier, but the contract used by a given carrier should be the same for all backbone providers with which it exchanges traffic. Thus backbone providers could not exploit their market power to the detriment of the industry or of new entrants. Of course, disputes will arise over the meaning of "fair, reasonable, and nondiscriminatory," and the rapid advance of technology will frustrate any attempt to pin down once and for all the terms of interconnect. The way to deal with this problem is to develop a dispute resolution procedure such as an industry-wide arbitration board, with knowledgeable and impartial arbitrators who can make prompt and informed decisions. This will avoid long, drawn-out court battles with technologically uninformed judges. Worldcom and MCI would likely agree to such a condition as a quid pro quo for merger approval, since, after all, it would ultimately be in the long-run interest of the industry anyway. The geeks have it right: The Internet is only valuable if everyone is interconnected. But the suits have a point too: Interconnection incentives are currently perverse, and a period of experimentation is necessary to develop better business models. The public interest is best served by ensuring these business models are fair, reasonable and nondiscriminatory. --- Mr. Varian is dean of the School of Information Management and Systems at the University of California, Berkeley. He is co-author, with Carl Shapiro, of "Information Rules: A Strategic Guide to the Network Economy," to be published this fall by Harvard Business School Press.