"Operating agencies shall negotiate commercial agreements to achieve a sustainable system of fair compensation for telecommunications services and, where appropriate, respecting the principle of sending party network pays."

That's the input that a number of former monopoly, European telecoms sent to the member states of the United Nation's International Telecommunication Union (ITU). Why? Because, for the first time since 1988, the ITU will be negotiating new international telecom regulations from December 3 to 14 in Dubai. And that meeting will mark the first opportunity for the ITU to bring Internet issues under its umbrella.

Don't be fooled by the opaque wording above. If that request was put into practice, service providers get to prioritize certain types of Internet traffic and "the sending party"—a network generating content, like Netflix, Youtube, and maybe even Google or Ars—has to pay for the privilege of reaching consumers. Although opinions differ on whether free, unregulated markets are the universal solution to all problems, it's hard to argue against the success of this model in the case of the Internet. Even in places with limited broadband competition, the amount of bandwidth users get for their money has increased at rates far beyond those of any other industry.

A sine qua non for this success has been the fact that interconnection between different Internet networks is largely handled as a technical matter. It typically happens without money changing hands—and often without even signing a contract. This is the direct opposite of the phone world, where interconnection between networks is heavily regulated and the party sending the data does, in fact, pay.

Bringing interconnection between ISPs under the same regulatory regime as interconnection between phone networks would cause enormous harm. Even having such an interconnection pricing model for a new, better quality service would create strong incentives for ISPs to let their current service get worse than it is today. Think about how crappy service in economy class helps sell upgrades to business class in the airline world (theoretically of course).

Free riding leaves no capacity to invest

The European Telecommunications Operators' Association, or ETNO, is interested in creating a "sender party pays" system for Internet interconnection. This way, the big European ISPs organized in ETNO hope to open up a new source of revenue that will allow them to invest in their networks, avoid raising prices for consumers, and skip suffering in the market place.

In a CNET story, ETNO's Luigi Gambardella explains they want to keep the current Internet the way it is today, but they want to be able to provide higher quality service for a higher price. According to Gambardella, this higher price would be paid by the sender of the content.

Better quality of service makes all kinds of sense to people used to managing phone networks. Of course you need quality of service delivery; voice communication doesn't work if the digital audio samples don't arrive within a reasonable amount of time. You wouldn't want emergency calls to get a busy signal because telemarketers are tying up all the lines, right? (What about analog, you say? There's no such thing as end-to-end analog telephony. The phone network has been going digital for half a century now.)

Big ISPs have been grumbling about how the likes of Google and Netflix get a " free ride" for some time. ETNO's position is more subtle than that, but basically boils down to the same thing with some net neutrality issues thrown in for good measure. And it's not inconceivable that some developing countries—which have enjoyed a significant influx of foreign currency as a result of the "sending party pays" model in telephony—may want to extend this model to the Internet.

Let's figure out whether there are really any free rides to be had, and what the consequences of "sending party pays" would be. In order to do that, we need to understand how data interconnections work in the phone world as opposed to the Internet then dig down into some of the details of “peering.”

Interconnection in the phone world

Obviously, customers of network A want to be able to reach customers of network B, so all networks must interconnect in some way. In phone networks, when a call gets made from a customer of one phone company to a customer of another, the calling party pays. As the phone call traverses the network, so does (some of) the money. If Andy, a customer of AT&T's, calls Vicky, who is a Verizon customer, then Andy pays AT&T, and AT&T pays a little to Verizon for their efforts in connecting the call. This is "sending party network pays." It's a natural fit to the way phone networks work.

The "sending party pays" model allowed for the system in the US where there were local and long distance phone companies. Long distance telcos charge users for long distance calls, then pay a termination fee to the local telco of the person being called. In most places the importance of these termination fees has declined, but there are two main exceptions. In Europe, mobile networks charge steep termination fees. In some developing countries, areas receive a lot of incoming calls but don't have very many outgoing ones, so termination fees make for a nice bit of foreign currency.

Interconnection in the Internet world

Very little of this applies to the IP world. First of all, there are no "calls." Yes, most applications use TCP (Transmission Control Protocol) sessions, which are like phone calls in the sense that they have a start, and end, and information flows in between. TCP takes data from applications, puts it in packets, and transmits those individual packets across the network, retransmitting lost packets as needed. The majority of traffic across the Internet is TCP.

When a TCP session is idle, it doesn't actually use any capacity in the network. In fact, the big routers in the core of the Internet don't even know about TCP sessions; they just look at the individual IP packets. Also, users don't have that much control over the TCP sessions and IP packets their computers generate as the system and applications may communicate under their own authority. One thing is still the same: users of network A want to be able to talk to users of network B. In the case of small networks, this is simple: those pay wholesale "carriers" to transport their packets to and from remote places around the world. This is called transit service. Both content networks and ISPs pay for transit service.

Peering

The exchange of traffic between Internet networks of similar size typically happens with no money changing hands. This is called "peering." With Internet service, it's not just the party that initiates the TCP session or sends the packets that pays, but the party that receives them also pays. For instance, if you have a 2GB data cap, that can be 0.1GB up and 1.9GB down, 1GB up and 1GB down, or even 1.9GB up and 0.1GB down.

Back to peering. If Andy, customer of carrier A, sends 29Mbps to customer Bob of carrier B, then—assuming there's no other traffic—both Andy and Bob pay for 29Mbps. Because carriers A and B already get paid by their respective customers, there's no need to make life more complex by charging each other money for the interconnection. This nicely sidesteps the issue of whether A should pay B or B should pay A. This system keeps the bean counters out of the loop.

99.5 percent handshakes

The OECD (Organization for Economic Co-operation and Development) is an international organization "founded in 1961 to stimulate economic progress and world trade." It just released the report "Internet traffic exchange: market developments and policy challenges." In the report, the OECD marvels at the fact 99.5 percent of peering happens without a formal contract, based on nothing but a handshake. I can attest to this, having set up a peering session or two back in the day after nothing more than exchanging a few e-mails.

For small- and medium-sized networks, traffic exchanged over peering means money saved on transit service, so engineers are encouraged to set up peerings. For larger networks this is different, because those prefer to sell transit service to smaller networks rather than engage in peering for free.