Ambassador Kennard Speaks on Future of the Internet at 2012 Financial Times ETNO Summit

by Guest Contributor on October 10, 2012

U.S. Ambassador to the EU William E. Kennard addressed the FT-ETNO Summit in Brussels, Belgium, on October 2, 2012. Below are his remarks, as prepared for delivery:

“Today’s internet model works. If it ain’t broke, don’t fix it.”

Good afternoon.

Thank you for inviting me to speak here today and congratulations to ETNO on its 20th year anniversary. This is not the first time that Luigi Gambardella has invited me to speak at ETNO. I was honored to be able to address this conference last year. And while I know that you don’t always agree with what I have to say, I sincerely appreciate that you’ve extended the invitation and I truly value our dialogue and our friendship. So thank you very much for that.

I have been asked to address the subject of this conference, which is the future of the Internet. I begin by saying that the best way to think about the future of the internet is to appreciate its past — to appreciate how and why the Internet has become so successful.

Understanding the sophistication of this audience, I see no need to spend time talking about the transformative value of the internet, its ability to improve virtually every element of human activity. I think that everyone here understands that very well. But I do want to talk a little bit about why the internet has been so successful, and, again, I believe that the key to the future lies in the successes of the past.

If you examine the evolution of our global data networks, the key to their success is the fact that government made some very enlightened, wise decisions over the past thirty years or so. And the theme that runs through those decisions is a sense of humility. Government had the good sense to exercise restraint. The humility to know that government cannot predict or presume to understand how business models would evolve. As a result, government policymakers did the right thing. They did the right thing in the United States and in Europe in the 1980s when policymakers decided not to regulate the application layer of the phone network that became the internet, to allow it room to grow. They did the right thing in the 1990s, for example, in making the decision—a decision that I was privileged to make as chairman of the Federal Communications Commission in the United States—not to impose common certain carrier-like obligations on nascent new applications like voice over IP. We gave those new applications room to grow, and ultimately, to flourish.

And certainly no one predicted the emergence of multi-stakeholder organizations that have evolved to create an incredibly successful system of Internet governance which benefits us all, and which evolved completely independent of government.

These multi-stakeholder organizations bring together all of the key stakeholders: engineers and scientists, civil society, business, government, academics, even the general public. They come together to solve problems. They work out new protocols for the internet.  They do it in a way that is flexible and has allowed our networks to grow. It is a system that has worked. Government has shown the good sense and humility not to presume to be able to solve all these problems, and the wisdom that—in an area as dynamic as our global data networks—it is not possible to predict where they are going. The system has worked. Frankly, it has worked better than anyone would have expected.
So with that, let me get right to the point. Time is short today.

At the upcoming WCIT meeting in December, the United States will oppose efforts to amend the ITRs to give new jurisdiction over the Internet to the ITU. This means that we will oppose the ETNO proposal to amend the ITRs.

I appreciate this opportunity to explain why we have taken this decision. But first, I want to say that this is the unanimous view of the United States government. It represents the position of the Obama Administration, the Federal Communication Commission, both houses of Congress—our Senate and our House of Representatives—and the remarkable unity of all stakeholders outside of government. Those in business and civil society have all come together, showing remarkable unanimity of support for this position. We believe that this unanimity is born of one simple fact: we believe that the current system has worked, and will continue to work for the future.

As we often say in United States, “If it ain’t broke, don’t fix it”. We believe that the current system is working; we do not want to change it. Now, that does not mean that we do not respect the work of the ITU, or that that we do not believe that there is some room for improvement in the current multi-stakeholder approach.

We do believe that the ITU has a critical role to play.  It has an indispensible role in spectrum management, in promoting development, and the area of standards. And the U.S. government also sees room for improving the way that the multi-stakeholder process works, and is acting on that belief. We feel that there are processes at ICANN that can be improved to enhance participation—particularly by governments—and we are working hard on that.

But our position is based not only on the fact that the current system is working quite well, we’ve also looked carefully at the ETNO proposal and we just don’t see how it  can work; and certainly not how it can work better than what we have today.  The reason why we don’t think that the ETNO proposal works is because we think it opens the door to a new approach to terminating traffic on the internet—a  so-called ‘sender-network pays’ approach with respect to termination—that is simply unworkable given the complexity of global data networks. As the ETNO executives in this room know better than anyone, compensation systems on the internet are complex. Collectively, the system is a cascading series of payments across thousands of networks, often among parties who have no relationship to one another at all. It is unimaginable in its complexity, and not workable for a treaty-based organization to manage.

The commercial relationships that have evolved to define this marketplace are fluid and unpredictable. They work—and will continue to work—only if left unencumbered by the inherent rigidity of government process or oversight. Ninety percent of Internet peering arrangements are made on a handshake. They’re flexible. They evolve as business models evolve and change. And we’re seeing every day in the marketplace how these commercial arrangements are evolving as new players come and go and traffic patterns change.

Now, 98% of voice traffic is terminated outside of the current ITRs. There is a reason for that. The reason is because the best way to handle these arrangements is outside the rubric of a government umbrella. The market has made this choice. The market has decided that it needs the flexibility to conclude these transactions without a regulatory framework. And consumers have benefited enormously as a result. My colleagues and I in the U.S. government have spent a lot of time with Luigi and with various ETNO members and their representatives talking about this proposal.

Again, I appreciate the time you have spent with us. We have been discussing the ETNO proposal for many months now. I believe I have gained an appreciation for the reasons that ETNO has offered this proposal. Based on what I have heard and understand, the proposal seeks to address two principal concerns.

The first concern about the specter of net neutrality regulation that may make it very difficult for network operators to ensure quality of service for their customers and to receive compensation for the delivery of high bandwidth services. And the second issue is the perceived inability of current business models to compensate incumbent providers for the termination of traffic, especially given the imbalance of data traffic between the United States and Europe.

I want to address both of these points in turn.

On net neutrality, we agree that network operators should have the flexibility to manage traffic flows on their networks.  We believe that it is fundamental that they be allowed to offer tiered pricing so that higher bandwidth users pay more. However, we also do not see the specter of a tsunami of regulations that would prevent them from doing so. It is not coming from the FCC, from the European Commission, or from the EU Member States. So we believe that—to a large extent—this is a solution in search of a problem.

On the issue of traffic imbalance, there is a structural problem here, no question about it. There is clearly an imbalance in the flows of traffic between the United States and Europe. But this is not a problem that can be fixed by regulation. Even if ETNO’s proposal were adopted, there would be any number of creative workarounds in the marketplace.

Content providers could cash content locally, or originate content locally to circumvent any new regulatory framework. We have seen this movie before. We saw it back in the 1980s and 1990s when providers used call-back, VOIP and other clever ways to circumvent high settlement rates in the circuit-switched telephone network. We believe that the only long-term solution to this structural problem is a structural solution.

That is why we support the efforts by Commissioner Kroes and others to complete the Single Digital Market, because that will create the conditions for more content generation in Europe. There is a lot of work to be done. Some of it is already ongoing to consolidate regulation in Europe and to create a pan-European system of privacy and patents. This should help to create the conditions for more investment in search and content generation here in Europe. In my view there will inevitably be more consolidation among network operators, which should also provide a more efficient platform for content generation.

But here’s the most important point I want to make today: if there are regulatory problems in Europe, why should we believe that giving more authority to another government body—in this case a treaty based organization of 193 nations—will make the problem better, or simpler, or easier to solve?

I know this industry pretty well, not only as a regulator from my days at the FCC, but also after that as an investor and owner of network businesses like telcos and cable TV systems both in Europe and in the United States. I know the challenges that network operators face.  I’ve been there. I know how much pressure you are under to invest in new infrastructure when competition is getting bigger and your margins are getting smaller. It is not easy. However, I also know from my experience that telcos have struggled over the past 20 years with the burden of legacy regulation designed for a monopoly era that no longer works in the digital age.

So why should we believe that giving new regulatory authority to an international, treaty-based organization—creating another layer of oversight—would allow regulation to keep better pace with changes in the marketplace?

There is an issue of process that I think is important here. In an environment in which governments all around the world are coming under enormous scrutiny and pressure to provide more transparency in their decision-making, why should we believe that giving government more authority at the expense of public stakeholders is a good idea?

We have all lived through the recent, painful experiences in this regard. In Europe, the European Parliament recently rejected the Anti-Counterfeiting Trade Agreement. We had a similar version of this in the United States called the Stop Online Privacy Act. That was stopped in its tracks in the United States Congress for many reasons. However, both legislations were criticized because many internet activists believed that they needed more transparency; that they wanted a more meaningful seat at the table. So in this environment, any undermining of the multi-stakeholder system of internet regulation is a threat to those who want more—and not less—inclusiveness and transparency.

There is another specter lurking out there: that some governments will seize on the ETNO proposal for all the wrong reasons, because they want more control over the internet for anti-democratic purposes. Why would you associate your businesses and your fine, iconic brands with an effort like that?
My final point is about the developing world. Today there are 2.2 billion people in the world who have access to the internet. That number is expected to grow to 3.3 billion by 2016.  Most of this growth will come from emerging markets. These markets are hungry for access.  They need the infrastructure to provide it. And it is important for all of us that they get it.

We believe that a ‘sender-network pays’ regime will make it more difficult for them to get the access that they need. High settlement rates will only make it more difficult for them to get content to fund infrastructure. Internet business models are content-driven business models. Many rely on advertiser support. They do not replicate the business models that support the public switched telephone network. As such, there is a different relationship between content generation and termination fees.
This was made clear recently in a study by UNESCO, the OECD and the Internet Society. They found that there is a relationship between local content, internet development and access prices. They found a correlation between the development of local content and more investment in infrastructure. High termination fees will not promote the development of local content, particularly in the developing world. It’s just the opposite.

As Chairman of the FCC I worked very closely with the ITU. I worked with Hamadoun Touré, the current Secretary General of the ITU. In those days he was head of ITU-D, the ITU’s development sector. We worked closely together to try to find ways to promote more internet access in the developing world. Hamadoun is man of great passion, insight and energy. I believe we have an obligation to him and the broad constituency that he represents to help him in this important mission. But we should do so in a way that is consistent with a system of internet governance and policy that we know works.

We should do so by preserving and improving the system that holds the most promise for bringing connectivity to people who need it most. Most importantly, we should not raise false hopes that there is an alternative that would work better for them. In conclusion, let us not forget that we are all stewards of a global network that touches us all of us, each and every day. We are all users. We are all beneficiaries. This network is vitally important to our economies; to the welfare of the people here in Europe, in the United States, and everywhere in the world.

Quite simply, we do not believe that the case has been made to abandon the system that has served us well for decades; which holds the most promise for ensuring that the internet of tomorrow is as robust and successful as the one that we enjoy today.

Thank you.

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